The state we're in

30 Sep 11
The coalition talk might be all about small government. But in the real world, the unprecedented shocks to the UK - banking crises, terrorist attacks, riots - show we rely on the state more than ever
By Tony Travers | 1 October 2011

The coalition talk might be all about small government. But in the real world, the unprecedented shocks to the UK – banking crises, terrorist attacks, riots – show we rely on the state more than ever
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Britain has witnessed a series of ­existential challenges to its political and economic system in the past six years.

The suicide bombings in London in 2005 were the deadliest peacetime attack on British soil in modern times. The banking crisis, during the autumn of 2008, was catastrophic and unexpected. It, in turn, triggered the deepest recession since 1945. During the spring of 2009, the parliamentary expenses furore broke, denting already damaged trust in MPs. In the summer of 2011, the media and the police were exposed to dreadful publicity as the result of the News International hacking scandal. Most recently, in early August, the worst outbreak of urban riots in contemporary history swept through London and other English cities. The eurozone financial system currently ­totters on the brink of catastrophe.

Any one of these happenings could have been expected to shock members of the public and, over time, affect the way people respond to key establishment institutions. But the impact of five or more serious events of this kind within such a short period of time will undoubtedly affect people’s attitudes to the state, government, banks, the economy, taxation, wealth, inequality and much else besides. The miracle is that, thus far, people have ‘kept calm and carried on’. But in the longer term there are bound to be impacts on our approach to major institutions and the way we think about key aspects of public life.

The July 7 suicide bombings in 2005 caused terror in the capital and beyond. By attacking the public transport system, the terrorists aimed their murderous message not at the powerful but at ordinary people. This was precisely the same logic used by Al-Qa’eda in its attacks on the World Trade Centre in 2001 and on countless other civilian targets ever since. Successive governments have refocused and tightened the security services. The police have had to tackle local terrorist cells.

Overall, we have come to rely far more than previously on the skills of MI5, MI6 and the police to protect us from attack. A number of commentators believe the ‘politics of fear’ have empowered the government to go too far in the removal of civil liberties. However, even the most strident of critics would concede that we all need the security services and the police to protect us from terrorist attack.
The collapse of the Northern Rock bank in August 2007 was a leading indicator of what has proved to be more than four years of massive turbulence for the British political and economic system. As queues snaked down high streets, the government was forced to act. In particular, the deposit scheme for personal savers had to be reinforced and guaranteed. Just over a year later, a vastly bigger banking crisis hit Britain and many other countries. The collapse of Lehman Brothers, the fourth largest US investment bank, triggered chaos in both banks and stock markets.

It is worth remembering the kind of conversations that took place in October 2008. People admitted to taking large sums of money out of their bank ‘just in case’ cash dispensers were switched off. The Treasury had to work day and night to put together a rescue package for the Royal Bank of Scotland and HBOS, effectively nationalising both. Many Britons switched cash from banks to National Savings. There were even worries that it might be necessary to ‘stop’ the world economy and then restart it with assets and liabilities ­massively redistributed.

All of this proved disturbing. The events of that autumn went well beyond the normal weft and weave of politics or economic affairs. Ordinary people, particularly those with Icelandic savings accounts, thought they were about to lose all their savings and/or that food might be rationed in supermarkets. Former chancellor Alistair Darling’s recent memoirs provide a clear picture of just how bad things were at the time.

With both Northern Rock and the continuing banking and finance crisis, people expected the government to sort things out. Only the state, with its access to taxation and its blue-chip reputation for repaying debt, could command the resources to buy up bankrupt banks and to guarantee frightened savers. Whatever critics have said about Gordon Brown and his government, they did manage to avert the serious risk that catastrophic damage would be done to the UK economy. It is, of course, true that we have subsequently seen a recession that led to a 6% drop in gross domestic product, but without the government’s action this fall would have been far greater.

As the Vickers report on the future of the banking system has recently reminded us, it was only a few years back that headlines about the moral hazard of bailing out failing banks were the order of the day. Few people really believe this now. Indeed, the scale and intensity of the chaos in the eurozone means most policy makers have fewer and fewer choices other than keeping the global financial system functioning on a day-to-day basis. The threat is ongoing.

More recently and in very different circumstances, we have seen once again how much we rely on the institutions of the state to preserve our way of life. The urban riots this August led to a near breakdown of law and order in parts of a number of cities. People once again found themselves afraid, although this time it was not because of the threat to their savings but as the result of looting and violence in the streets of London, ­Birmingham, Manchester and Nottingham.

Politicians rushed home from their holidays to demand an aggressive police crackdown. Soon, 16,000 officers were patrolling the capital’s streets. Order was almost immediately restored. Although there was then an unseemly public argument between the home secretary and the head of the Association of Chief Police Officers about who had stopped the rioting, there can be no doubt that the government, the mayor of London, the police and the courts all played a part. That is, the formal institutions of the state took charge and removed the source of fear.

Just before the riots, the government had announced a series of inquiries into the News of the World phone hacking scandal, which had gripped the media for several weeks. This issue was rather different from the banking/credit problems and the riots, in that parts of the state machine – notably the police – were implicated in wrongdoing. Nevertheless, it required the prime minister and the authority of government to start off the inquiries that will determine what happened. Once again, it was the state that has had to move to put right a wrong, albeit not one with the potential to induce fear among the wider population.

Ironically, set against all these occasions when our reliance on state institutions has been clearly demonstrated, there is a continuing collapse of public trust in the politicians who control such institutions. In particular, the MPs’ expenses scandal that rolled through the press during 2009 caused an extraordinary explosion of public anger. Looking back, it is clear the strength of the reaction was so great as to suggest that resentment against the political class had been brewing for many years. Falling general election turnouts are a good indicator of the growing disenchantment felt by many voters. Efforts by both parties to reconnect with the public, including the growing interest in more locally controlled public services, have had only patchy success.

Our reliance on the power and legitimacy of government to minimise the risk from terrorism, handle international banking problems and ensure civil order is obvious. Moreover, all three of these challenges continue to demonstrate the need for the state to act effectively in our defence. But there is a problem: the people who, by their election to office, are responsible for delivering that power and legitimacy are themselves held in low esteem by the public.

To make things more complex, politicians are increasingly uncertain about how they can use power. The use of independent outsiders to chair inquiries, take on ministerial responsibilities and run regulatory bodies is not new. But it is evident that whenever an issue that is particularly controversial or difficult comes up, elected politicians are more likely than in the past to hand over the decision-making (or at least advice) to the trusted and non-aligned. Even efforts to transfer power to local communities and neighbourhoods can be seen in this light.

Politicians are less confident than they once were: if anyone doubts this, just consider the logic of ‘nudge’ policies, where people have to be encouraged to change their behaviour by soft incentives and invisible pressures. Viewed the other way round, ‘nudge’ can be seen as clear evidence of a loss of confidence by ­politicians in their capacity to get people to do things.

In the coming years, it is almost certain that the extraordinary events outlined above will change the way people think about a number of issues that matter to politics and politicians. Five or ten years of public spending austerity will surely affect attitudes to the state, with citizens coming to expect less of government. For itself, the current government is explicitly attempting to shift power towards localities. If it is successful in empowering local communities, public provision and decision-making might become more fragmented, with more ‘postcode lotteries’.

Taxation will remain a challenge for governments. For many years, ­competitive politics has offered us higher public spending with unchanged or lower taxes – an unsustainable objective. Now the economic bubble has burst, we will face higher taxes for lower spending. This latter path might well generate longer-term pressures for further tax cuts. If that happens, there will be little room for increasing public expenditure as and when the economy returns to trend growth.

Attitudes to wealth and inequality have been affected by reactions to the bankers’ bizarre bonuses (and those of some chief executives) and also by the struggle over who should ‘pay’ for the consequences of the recession. Having said this, suggestions of radical changes to the taxation of housing or of inheritance have generally seen politicians run a mile. It will be a test of just how much attitudes have changed if a government were to feel sufficiently brave to attempt a major assault on the rich-poor gap.
Every now and again, British attitudes are modified by a political intervention. The socially liberal reforms of the Labour government in the late-1960s have altered how we think about an array of ‘conscience’ issues. Similarly, the Thatcher government’s economic policies changed the way most Britons think about money and enterprise. Taken together, these two sets of reforms explain much about the country today. The impact of terrorism, the banking crisis, the MPs’ expenses scandal and the riots will be real enough, even if it is currently difficult to predict what it will be.

We are still reliant on the government to steer Britain through an apparently continuous economic and political storm. However much the political mood and economic necessity says we need to cut back the state, reality dictates that in practice we probably need it more than ever, even if it is to shrink.
In this sense the state really is too big (in terms of its importance to our lives) to fail.

Tony Travers is the director of the Greater London Group at the London School of EconomicsTransparent

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