We're All Living On Fantasy Island!
The UK has enjoyed more than a dozen years of growth. However, according to expert economists, the next decade is going to be very painful.
According to the authors of Fantasy Island (published in May 2007), Britain faces terribly tough times in the years ahead.
Unusually for Cassandra-like warnings, Fantasy Island was written by two influential pundits, Larry Elliott and Dan Atkinson. Elliott is economics editor of the Guardian and Atkinson is his opposite number at the Mail on Sunday. Hence, this book unites both ends of the political spectrum to bring a stark warning to sleep-walking Brits.
Elliott and Atkinson's book is primarily a review of the Blair Years -- the decade from 1997 onwards when, following a massive electoral victory by New Labour, Britain looked forward to a brighter future. However, the Blair Years were also a decade of spin and paradoxes which have left the UK teetering on the brink of a serious downturn.
The premise of this book is that, far from "never having it so good", Britain has been living in a dreamworld over the past decade. Its title, Fantasy Island, indicates that we Brits are in cloud-cuckoo land, especially when it comes to our personal and national finances.
Then again, Fantasy Island isn't merely one long criticism of the Blair legacy. Indeed, in the first chapter, Forever Summer, Elliott and Atkinson applaud the government for improvements in five key areas. They praise increased the government for increasing spending on education and welfare, giving independence to the Bank of England, its military intervention in areas such as Kosovo and Sierra Leone, its constitutional reforms, and various social-policy improvements.
Now for the bad news! Elliott and Atkinson warn that the past decade has been one of spin and paradoxes. By refusing to tackle major issues, both social and economic, the government has pushed these problems into the future and, in doing so, caused them to grow far greater.
(At this point, I should point out that this review isn't my personal political attack on this government. Indeed, although I'm one of the most left-leaning Fools at TMF Towers, I feel obliged to "tell it as I see it".)
Elliott and Atkinson have divided our fantasy into seven main elements, beginning and ending with what they see as the two greatest problems. Here they are:
1. The ever-louder tick of the debt timebomb
Elliott and Atkinson warn that an economy built on debt -- both personal and national -- courts future disaster. For example, at the time of Labour's first election victory, personal debt totalled under £500 billion. Today, the figure stands at around £1.4 trillion, so our debt burden has nearly tripled since 1997. Also, partly due to changes to insolvency and bankruptcy rules, debt blowouts have soared, with 10,000 people a month becoming insolvent or bankrupt.
Likewise, government borrowing has climbed steeply in recent years. However, by changing the rules and using Enron-style `off balance-sheet' accounting, the treasury appears to have met its self-imposed Golden Rule and kept national debt under two-fifths (40%) of Britain's gross domestic product. Of course, ever-higher government spending has to be financed somehow, which explains the vast number of `stealth' taxes introduced in the past decade.
Alas, Elliott and Atkinson are ultra-gloomy on this issue and predict that a blinding hangover will follow Britain's biggest-ever borrowing binge. The outcome will be lower investment, reduced economic activity and consumer spending and, inevitably, a massive recession. Given my own dark warnings on the dangers of debt, I completely agree with this prediction.
2. The myth of the `creative economy'
The collapse of Britain's industrial base and the resulting plunge in manufacturing jobs has left a hole in Britain's job market. In theory, this is to be filled by jobs in two areas of British success: financial services and the `knowledge economy'. In reality, our creative industries -- film, television and music -- are struggling, leading Elliott and Atkinson to dub us "Bullsh** Britain"!
3. Falling prices versus rising incomes
Elliott and Atkinson argue that the battle against inflation is far from being won. Given that one man's pay rise means another man's price rise, how can our living standards continue to rise, yet inflation remain permanently low? The authors warn that cheap imports from the likes of China can only suppress UK inflation for so long before this bubble bursts as well.
4. The crisis in the public sector
The disastrous commercialisation of the public sector is described by Elliott and Atkinson in `The Tottering Empire State'. Vast increases in spending on the NHS and education have not been accompanied by similar rises in productivity and efficiency, sending money down the drain.
5. Problems in the labour market
Although employment is at an all-time high, many of the jobs created in the past decade have been in low-skilled positions in the service sector. However, there are still millions of people in Britain of working age who aren't in employment, including two million `economically inactive' people who say they want to work, plus 2.5 million people claiming sickness benefits of various kinds.
Furthermore, many of the jobs created in the past decade have been in the public sector, which serves to push up government spending yet further. Mass hiring of your own population is no way for a government to manage employment imbalances!
6. Britain as a military superpower
Events in Iraq and Afghanistan have shown that Britain's Armed Forces have become dangerously over-stretched. The fantasy of Britain as a military superpower, standing alongside America as the `world's policeman', is also put to the sword in chapter eight.
7. The risk of environmental catastrophe
Finally, Elliott and Atkinson end with the second of their two major fears: the damage that we are inflicting on our own environment. Rising prosperity and consumer demand creates greater demand for natural resources, increased pollution and the consequent damage to our climate. Despite political parties' efforts to `out-green' each other, the simple fact is that the UK cannot indefinitely support an ever-increasing population with ever-greater consumer desires. Something has got to give, which means slower (or negative) growth or the risk of environmental catastrophe caused by climate change.
So, there you have it: perhaps the gloomiest predictions ever made on the Fool! Then again, apart from the twin nightmares of debt and the environment, most of the other problems can be resolved. Things have a habit of turning out better than expected, so I'm not as pessimistic as Elliott and Atkinson. Still, thanks to the credit crunch, I expect next year to be the toughest year since the recession of the early Nineties, so we'll just have to wait and see what unfolds...
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