THE British economic crisis is a prolonged one. In effect, there has never been any sustained recovery from the effects of the Global Financial Crisis in 2008 and the austerity that followed in 2020 ensured any significant increase in general living standards was ruled out.

But the question remains, what is the progressive or socialist analysis of the causes of the crisis, and how can we end it?

We cannot end the crisis now, as that would require political leadership, and no-one in government is likely to take advice offered in these pages, at least not in the near future.

But, if we can provide an objective analysis of the crisis then we can at least begin to map a way out of it, which can be a guide to an alternative to the current policy debacle.

This is a matter of urgency, as the economic crisis is providing the backdrop to a political crisis which is dominated by an unprecedented rise of the far right.

There should be no doubt that the economic crisis is grave. The British economy is in a mild stagflation trap, with the economy close to stagnation and barely growing above 1 per cent a year in real terms (after adjusting for inflation) while inflation remains stubbornly high.

The economy had slowed close to little more than 1 per cent growth in the two years before the pandemic. In the five and a half years since it has grown by less than 1 per cent a year. The combination of population growth and businesses trying to claim more of national income for profits means that average real living standards are falling.  

This in turn has other negative consequences, not least for public finances and for public services, which are both under strain because of weak growth.

This is the primary cause of the crisis in public finances, as economic weakness depresses the growth in all types of taxation revenues.

By contrast, government outlays tend to grow with steady predictability, unless there is a sudden surge in unemployment or similar shock.

Currently, there is a “shock” coming as well, in the form of a surge in military spending, at Donald Trump’s insistence.

If this government meets Trump’s demands a further 2.7 per cent of GDP will be wasted on military spending, amounting to approximately £75 billion a year and rising.

If this government persists with these plans, the funds must come from cuts to spending elsewhere and/or higher taxes.

Public borrowing matters. In the last financial year public borrowing totalled £76 billion, and seem to be on course to exceed £90bn in the current financial year ending in April 2026. This will have to be met by extra borrowing.

The interest payable on total government debt reached £82bn in the last financial year and could be on target to reach £100bn in the current year.

To give some idea of how damaging this is, interest payments would become almost as large as the education budget and will amount to over £3,000 for every person in this country.

Since the onset of the crisis in 2008 there has been the growth in wishful thinking about government debt, that it does not really matter, or that it can simply all be bought up by the Bank of England or similarly comforting fairy tales.

In fact, the British economy has been kept afloat by oversized government debt for many decades. Right-wing governments have no problem with this as the interest on that debt is overwhelmingly paid by workers and the poor, mainly through income tax and VAT.

The City of London, domestic and international money managers get rich from what they skim off the top, the fees for their “expertise.”

But it is real money, not at all fake, and these managers hold the vast majority of the outstanding debt. And if these same financial wizards believe they are not going to receive their interest, or that it will be worth much less because of inflation, they will simply dump their holdings of British government debt. This used to be familiar to many people through regular balance of payments crises.

Now, we use the shorthand of the Liz Truss premiership, which proved conclusively you cannot simply borrow without limit.

The response of all governments since 2010 has been austerity. Austerity is a class issue. It transfers incomes and wealth from poor to rich and from labour to capital.

From Osborne/Cameron onwards to the present day, the supporters of austerity are not stupid. They are serving a class interest.

Yet there is an alternative.

Economic weakness is the cause of the crisis in public finances and public services. Therefore, it is this root cause that should be tackled, which is the chronic weakness of private investment.

This requires a real growth plan based on public-sector investment in housing, transportation, infrastructure and communications.

The government’s reliance on wishful thinking about the animal spirits of the private sector, which now means it will miss its own housebuilding targets, should be junked.

Governments can borrow large sums for their own investment because, by definition, there is a return on that investment. This satisfies the bondholders, and government funds improve as the returns on investment accumulate.

The real cost of medium-term (10 years) government borrowing is now under 1 per cent.

That is not a high hurdle for investment returns. But spending on public services and welfare are also vital. They contribute to wellbeing in both the short- and long-term.

These should be funded from taxation, which means increasing taxes on big business and the rich, who have been sheltered from austerity.

This can preserve and defend public services and social spending, and the deficit will taper down as the economy improves.

Wealth taxes have been widely discussed. Taxing unearned income (capital gains) at the same rate as income from work would be another progressive to harvest tens of billions without damaging private investment, as would removing unnecessary subsidies and tax breaks for big business.

Taxing ordinary workers and the poor should be ruled out.

Finally, there is the issue of military spending itself. The projected rise in military spending is simply unaffordable and has virtually no economic benefit whatsoever. As the Alternative Defence Review authors have shown, the claims that military spending is “jobs-rich” is completely false, and the idea was recently rejected by a clear majority at the TUC conference.

The planned increase in military spending should be rejected by anyone concerned with the state of the British economy, its public finances or its public services. There are far greater priorities that will provide real benefits.