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Brexit was a crisis long in the making

The Brexit vote was the reaping of years of deepening inequality, sown by the neoliberal policy programmes of successive governments.

Desmond Cohen
8 August 2016
 / PA Wire/Press Association Images. All rights reserved

Margaret Thatcher meets the president of the European Commission. Photo: / PA Wire/Press Association Images. All rights reservedWhat is surprising about the result of the referendum is that so many of us were surprised – astonished may be closer to the truth. If we had thought a bit more deeply about the state of Britain  and placed the referendum within a framework of the policy history of the country over the past 4 decades – since the 1980s- then all would have been predictable. What has happened – a narrow majority decision to leave the EU- has more or less nothing to do with the failings of the EU and everything to do with the state of the country. Those who voted to leave – and those who voted to stay- were both responding to economic and social forces that were not in any way inevitable but were the outcome of policy choices of both Labour and Tory governments.

Possibly the most significant factor has been the welcome given to neoliberal economic ideas and their embodiment in national policy. Fundamental to this ideology is the proposition that markets are self equilibrating: that if left to themselves with the minimum of government regulation all would be well and everyone would be better off. Of course, the conditions required for such an outcome are in practice not present in the real world, where there is risk and uncertainty and concentration of ownership and control. But the neoliberals were canny in their shifting of the policy window so that policies that no one would formerly have thought feasible became the new norm. 

policies that no one would formerly have thought feasible became the new norm.

Despite the evident failure of this doctrine in 2008 with the global financial crisis these ideas still had traction and the generalised acceptance of ‘austerity’ was yet further evidence that nothing had changed. Bailing out the banks and other financial institutions was a costly business and the way it was conducted a great mistake. In order to protect the interests of the rich and powerful national budgets were destabilised with inevitable consequences. The UK budget was in reasonable balance with a small and easily fundable deficit and with a debt/GDP ratio that was not a problem. After the financial crisis everything changed – the deficit ballooned- and the neoliberals saw the chance to destroy the state. Even the IMF subsequently admitted that the financial position of the UK government was perfectly sound prior to the crisis of 2008 and that its de-stabilisation was due to the need to bail out the banks. 

Nothing was done to effectively curb the greed of the banks and the so-called shadow financial sector and indeed monetary policy was set so as to provide them with additional deposits more or less costlessly through the operations of the Bank of England The key recommendations of the Vickers Commission were eviscerated by the Treasury under Osborne and the financial system is if anything even more unstable now and more unregulated than it was in 2008. And the out-of sight bonuses continued to be paid only everyone was now aware of how totally unreasonable these payments were during a time of so-called austerity. These outcomes reflected policy choices by the Tory government, aided and abetted by the Lib Dems during the coalition. 

What have these failings of fiscal and monetary policy got to do with the referendum? There have been generalised and effective cuts in welfare spending which have significantly reduced the standard of living of the poorest in the general population – and concentrated in the North and West of the country and East Anglia. Most egregious has been the bedroom tax which was levied on families who in most cases had no option but to pay the additional charge since no alternative social housing was available. The cuts in welfare support have hit hard, and this is reflected in the massive expansion of food banks and the numbers who are homeless and sleeping on the streets. There are now 3.9 million children living in poverty – a jump of 200,000 in 2014/15 compared with the previous year.

There are now 3.9 million children living in poverty 

Since Thatcher we have seen a deliberate attack on social housing with the forced sales by Local Authorities who were given no choice in the matter and were required to sell irrespective of the housing needs in their area. Furthermore they were prevented from using the receipts from sales to build substitute housing so that inevitably the stock of social housing has been decimated. The sales were subsidised significantly at a cost to the public finances and inevitably most of the former social housing is now part of the buy to let market – at massively inflated prices compared with the former council rents. 

At the same time as social housing was contracting in quantity, becoming more expensive and incomes of tenants contracting under the impact of changes in welfare and housing policies the needs were increasing due to population growth and in part also as a result of immigration. Immigration of labour that was concentrated in precisely those areas where the social housing stock was contracting and not being replaced. 

Not surprisingly under these conditions the rents of private housing have also risen sharply and again government has exacerbated the situation by changes [reductions] in rent subsidies. While the quantity and cost of social housing was worsening as a result of government policies the process of quantitative easing by the Bank of England has shovelled money and credit into a private housing market where the stock has increased by only a small %. This excessive pressure on the private housing sector has been aided and abetted by various forms of subsidies, many of them favouring the better-off, that have simply added to housing demand. Inevitably house prices have skyrocketed and rents gone through the roof. Tenants feel and are worse off and landlords have gained. Young people aiming to buy have been priced out of the housing market and social housing tenants have been increasingly impoverished by falling levels of welfare support, higher rents and rising housing charges. 

Not surprisingly people have attributed their worsening standard of living and especially the deterioration in access to decent housing to government policies. They are right to do so given the failure to expand the stock of both social and affordable housing in the face of significant increases in housing need. These welfare policies that have nothing to do with the problems of financing government but have everything to do with a political dogma that wants to roll back the state – the neoliberal economic policies of the Tories since the 1980s. Central to this model were cuts in taxation for the rich even though their share of national income had risen sharply. 

These welfare policies that have nothing to do with the problems of financing government but have everything to do with a political dogma that wants to roll back the state

 But there are other factors at work that also have their origins in government policies. Greater income and wealth inequality is not confined to the UK and in part this is attributable to underlying economic factors including globalisation. But Government has also contributed to the increase in inequality since the 1980s. Again this has been a part of the neo-liberal set of objectives –  to create conditions in which those who are rich have greater opportunities to add to their wealth on the basis of a the spurious argument that economic growth would trickle-down so that everyone gains. In practice as Piketty has shown most of the growth in factor productivity due largely to improved technology has accrued to the owners of capital. Labour incomes in the UK have on average shown little real increase since the 1970s and the post war shift towards more equal income and wealth was reversed in the past 4 decades – rapidly under Tory governments and rather less so under Labour. Personal disposable income actually fell by 60% [2005-2014] and incomes in general were either flat or falling during these years for 70% of workers. The IFS has estimated that by the time of the Labour government (2004-5) that the richest 47,000 had incomes that were 30 times greater than those on the average income in the UK. Since then the distribution of income has worsened further under the Coalition and Cameron governments.

The result is that much of the population did not gain from the economic growth that occurred in the UK – and those that did were concentrated in London and the South East with growing regional inequality. Even the IMF has now concluded that more a more equal income and wealth distribution would be beneficial for economic growth and for high levels of employment. That these trends in income and employment were not inevitable is shown by the experience of Sweden where an interventionist government protected jobs and ensured that everyone managed to preserve their real incomes – over the period 2005-2014 disposable incomes actually rose by 2%. 

much of the population did not gain from the economic growth that occurred in the UK

 It needs scarcely to be noted that governments have relentlessly followed tax policies that shifted the burden onto the rest of the population and in favour of the 1%.Thus the balance of direct and indirect taxation was shifted sharply in favour of the latter with substantial regressive effects – the poorer you were the higher the tax burden. One of the reasons that wage and regional inequality has grown is because of the attack on labour organisations [trade unions] since Thatcher. UK has now one of the most penal systems of laws affecting trade unions of any of the major industrial countries and membership of unions has plummeted over the last 4 decades. The all-time peak in union membership in the UK was 37 years ago when there were 13 million members whereas now there are only 6 million. These laws were not reversed under the Labour government and the Tories in May of this year have enacted even more restrictive conditions that reduce further the effectiveness of unions.  

It is unsurprising in these circumstances where unions are weaker against a background of negative shifts in industrial employment that many people feel and are impoverished.  Real wages in the UK actually fell by more than 10% in the period 2007-15 and apart from Greece this was the worst performance of all of the OECD countries. There's a distinct concentration of high unemployment and lower wages in regions and cities where patterns of employment have sharply deteriorated. Governments chose to dismantle those regional policies that aimed to maximise regional employment balance and simply left events to unfold. 

There were other forces at work aided and abetted by government policies. One of these was globalisation, which in practice has meant that traditional high wage employment was left to the forces of international competition in particular from South Asian economies. Whereas in the past governments pursued policies which ensured that the adjustment of output, and employment in the face of international competition was managed so as to avoid social and economic distress, recent British governments  did nothing. So decent jobs were lost and with it the cultural and social capital that existed in former industrial cities and towns. Why would communities vote for the EU if it has been associated with their loss of decent employment and with cultural and social disintegration - even if the EU wasn’t the cause?

 AP/Press Association Images. All rights reserved

Margaret Thatcher meets the president of the European Commission. Photo: AP/Press Association Images. All rights reservedWhat was clearly missing during Tory and Labour governments were any strategic industrial and employment policies apart from the empty slogan of a ‘Northern Powerhouse’. It is clear enough where UK’s comparative advantage lies – in industries dependent on high levels of education and skills. Yet government rolled back development in Further Education Colleges through cuts in their funding despite the fact that this is where skills are created especially for young people. They totally failed to expand cultural institutions where UK has real competitive advantages and through their funding of Higher Education has dramatically undermined its quality. At the same time Tory and Labour governments have shifted the costs of university education onto students to a level unknown anywhere else in Europe and thus further worsening the inter-generational distribution of income against young people. 

Finally, there is the whole question of what Guy Standing has branded ‘the precariat’: those in employment that is unstable, badly paid, increasingly low skilled and exploitative. This is what has been increasingly on offer in labour markets in the UK and this is precisely what the neo-liberal ideology has wanted. It is the Amazons of the world who have pushed for zero hours contracts without what used to be the usual conditions relating to sickness, holidays, maternity leave and so on. But these labour conditions wouldn’t have been available without the active compliance of governments – both Labour and Tory. It is all part of a pattern. Here we come to the factor that above all else seems to have determined how the leavers voted in the referendum:  the issue of immigration. Now the UK has had immigration throughout the postwar period with changes in its sources and against a background until the 1970s of reasonably full employment.  But under Thatcher, the management of the economy changed and full employment has subsequently disappeared from the set of policy objectives. Governments in the last 40 years have more or less not made much effort to secure high employment and they have followed polices that have encouraged inflows of labour from overseas.  

full employment has subsequently disappeared from the set of policy objective

So the NHS, to take a prime example has for decades been dependent on recruitment of doctors, nurses and other public health specialists from overseas because it has been less costly than developing domestic training. Similarly with other skills where industrial training boards disappeared and recruitment was focussed overseas. Key sectors such as health, social care, construction, road transport and agriculture have become dependent on labour from overseas and especially from the EU. It is estimated that road haulage firms have recruited some 60,000 drivers mainly from Eastern Europe to meet shortages of HGV workers rather than meet the costs of training nationals. Studies have shown that the impact of migration on average wages has been extremely  small and more than outweighed by other factors. With some studies showing small positive effects on wages and others small negative impacts in part depending on the period of time analysed. In the case of specific occupations- both non-skilled and unskilled- the negative effect on average wages is estimated to have been as small as 0.5% [1997-2006]. With most of the impact concentrated on workers who themselves were often immigrants given that skills were relatively easily substitutable between recent and new arrivals.

Migrant labour flows as noted above may have helped to keep down wages to a small degree in some low skilled and unskilled occupations and this impact will have been concentrated in those regions where employment conditions have been undermined by changes in employment practices. Thus the so called ‘flexible markets’ pursued by all British governments in recent years have attracted immigrants prepared to work under worse conditions and lower wages than local workers. Being part of the EU has made this possible given the requirement of membership that there be free movement of labour and this together with immigration from the rest of the world has had relatively small adverse impacts in the short term on some unskilled and low skilled parts of the labour force. 

In general immigration – especially from the EU where almost 100% say they came to UK seeking work- has had positive and beneficial impacts.  Taxes paid by immigrants more than covered the costs they imposed on social services and other demands on the welfare system. And their contribution to the economy in many sectors has been critical in meeting labour skills that were in desperately short supply. Their vitality and youth has added immensely to the social capital of the UK and their presence needs to be applauded rather than the reverse. 

Immigration has added to the pressures in the housing market and in social services such as health and schooling, in some areas more than others, and where there was already significant underfunding. Under Thatcher and Major the NHS was massively underfunded and this was reversed under Blair. But after years of Cameron we now have an NHS that is estimated to need a minimum of an  extra £20billion between  now and 2020, and with an additional £2billion needed now for social care. In the most recent fiscal year, the NHS has the largest deficit in its history – 1.85billion- and was desperately trying to meet health needs and to a degree failing to do so. It is perhaps unsurprising that many people couldn’t conceive of things being worse outside the EU. 

It is perhaps unsurprising that many people couldn’t conceive of things being worse outside the EU. 

Of course an active government could have ameliorated the impact on social services and housing and prevented the erosion of wages and worsening labour conditions but British governments chose to do more or less nothing. What it did do made things worse such as the abolition of the wages councils for agricultural workers and encouraging the recruitment of agency workers which have affected  employment levels and put some pressure on wages in certain sectors of agricultural production and road transport.  After all if the aim is to shift income and wealth towards the rich then government need not be proactive and interventionist – just leave it to the market and all will be well.

But is always a price to pay for this kind of deepening inequality. In this case, it was a leave vote in the referendum which has left the UK stranded in a never-never land where the political elites are at a total loss as to what to do. Our political class should not be let off the hook and we need a clean sweep of both leadership and their failed socio-economic policies. What we do not need to do is leave the EU although as an arrangement it surely is in need of root and branch reform so that it is no longer a happy hunting ground for lobbyists and large corporations. 

The democratic deficit of the EU [always there from its origins] needs to be reversed and policies be focussed on sustainable development in the interests of all of the peoples of Europe. It is self evident that many issues such as climate change and the environment generally together with asylum seeking refugees cannot be dealt with by individual nations. The voters who voted to remain seem to have had a more realistic picture of where the future for Britain lies and it is crucial that policies be implemented that secure close and continuing collaboration with the EU.  Nothing else makes any sense at all. 

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