The Economy of Great Britain

The Economy of Great Britain

The Economy of Great Britain

Little more than a century ago, Britain was 'the workshop of

the world'. It had as many merchant ships as the rest of the world

put together and it led the world in most manufacturing

industries. This did not last long. By 1885 one analysis

reported, "We have come to occupy a position In which we are no

longer progressing, but even falling bock.... We find other

nations able to compete with us to such an extent as we have never

before experienced." Early in the twentieth century Britain was

overtaken economically by the United States and Germany. After two

world. wars and the rapid loss of its empire, Britain found it

increasingly difficult to maintain its position even in Europe.

Britain struggled to find a balance between government

intervention in the economy and an almost completely free-market

economy such as existed in the United States. Neither system

seemed to fit Britain's needs. The former seemed compromised

between two different objectives: planned economic prosperity and

the means of ensuring full employment, while the latter promised

greater economic prosperity at the cost of poverty and

unemployment for the less able in society. Neither Labour nor the

Conservatives doubted the need to find a system that suited

Britain's needs, but neither seemed able to break from the

consensus based on Keynesian economics .

People seemed complacent about Britain's decline, reluctant

to make the painful adjustments that might be necessary to reverse

it. Prosperity Increased during the late 1950s and in the 1960s,

diverting attention from Britain's decline relative to its main

competitors. In 1973" the Conservative Prime Minister Edward Heath

warned, "The alternative to expansion is not, as some occasionally

seem to suppose, an England of quiet market towns linked only by

steam trains puffing slowly and peacefully through green meadows.

The alternative is slums, dangerous roads, old factories, cramped

schools, stunted lives." But in the years of world-wide recession,

1974-79, Britain seemed unable to improve its performance.

By the mid 1970s both Labour and Conservative economists

were beginning to recognise the need to move away from Keynesian

economics, based upon stimulating demand by Injecting money into

the economy. But, as described in the Introduction, it was the

Conservatives who decided to break with the old economic formula

completely. Returning to power in 1979, they were determined to

lower taxes as an incentive to individuals and businesses to

Increase productivity; to leave the labour force to regulate

itself either by pricing itself out of employment or by working

within the amount of money employers could afford; and, finally,

to limit government spending levels and use money supply (the

amount of money in circulation at any one time) as a way of

controlling inflation. As Prime Minister Margaret Thatcher argued

in the Commons, "If our objective is to have a prosperous and

expanding economy, we must recognise that high public spending, as

a proportion of GNP gross national product;, very quickly kills

growth.... We have to remember that governments have no money at

all. Every penny they take is from the productive sector of the

economy in order to transfer it to the unproductive part of it."

She had a point: between 1961 and 1975 employment outside Industry

increased by over 40 per cent relative to employment in industry.

During the 1980s the Conservatives put their new

ideas into practice, income tax was reduced from a basic rate of

33 pet cent to 25 per cent. (For higher income groups the

reduction was greater, at the top rate from S3 per cent to 40 per

cent.) This did not lead to any loss in revenue, since at the

lower rates fewer people tried to avoid tax. At the same time,

however, the government doubled Value Added Tax (VAT) on goods and

services to 15 per cent.

The most notable success of 'Thatcherism' was the

privatisation of previously wholly or partly government-owned

enterprises. Indeed, other countries, for example Canada, France,

Italy, Japan, Malaysia and West Germany, followed the British

example. The government believed that privatisation would increase

efficiency, reduce government borrowing, increase economic

freedom, and encourage wide share ownership. By 1990 20 per cent

of the adult population were share owners, a higher proportion

than in any other Western industrialised country. There was no

question of taking these enterprises back into public ownership,

even by a Labour government.

Despite such changes, however, by 1990 Britain's economic

problems seemed as difficult as ever. The government found that

reducing public expenditure was far harder than expected and that

by 1990 it still consumed about the same proportion of the GNP as

it had ten years earlier. Inflation, temporarily controlled, rose

to over 10 per cent and was only checked from rising further by

high interest rotes which also had the side effect of discouraging

economic growth. In spite of reducing the power or the trade

unions, wage demands (most notably senior management salaries)

rose faster than prices, indicating that a free labour market did

not necessarily solve the wages problem. By 1990 the manufacturing

Industry had barely recovered from the major shrinkage in the

early 1980s. It was more efficient. but in the meantime Britain's

share of world trade In manufactured goods had shrunk from 8 per

cent in 1979 to 6.5 per cent ten years later. Britain's balance of

payments was unhealthy too. In 1985 it had enjoyed a small surplus

of Ј3.5 billion, but in 1990 this had changed to a deficit of

Ј20.4 billion.

Many small businesses fail to survive, mainly as a result

of poor management, but also because, compared with almost every

other European Community member, Britain offers the least

encouraging conditions. But such small businesses are important

not only because large businesses grow from small ones, hut also

because over half the new jobs in Britain are created by firms

employing fewer than 100 staff.

It is not as if Britain is without industrial strength. It

is one of the world leaders in the production of microprocessors.

Without greater investment and government encouragement it is

doubtful whether Britain will hold on to its lead in this area.

However, it has already led to the creation of 'hi-tech'

industries in three main areas, west of London along the M4

motorway or 'Golden Corridor', the lowlands between Edinburgh and

Dundee, nicknamed 'Silicon Glen', and the area between London and

Cambridge. In the mid 1980s Silicon Glen was producing 70 per cent

of British silicon wafers containing the microchips essential for

the new information technology- The Cambridge Science Park,

symbolised by its Modernist Schlumberger Building, is the flagship

of hi-tech Britain. Beginning in 1969, by 1986 the Park contained

322 hi-tech companies. In the words of a consultant, "The

Cambridge phenomenon... represents one of the very few spontaneous

growth centres in a national economy that has been depressed for

all of a decade."