State Capitalism in Britain

By James Heartfield, 24 June 2009
Image: All images by Anja Kirschner

Despite the State being the main investor in the UK's national economy, the official rhetoric of private sector productivity is alive and well. James Heartfield takes a look at New Labour's failed strategy of privatising public services and the rise of ‘corporate welfare'

Two very contradictory stories about British capitalism are told today. The first is that the State is eating up more and more of the private sector. The sudden increase of public shares in the major banks and the falling of the railways into receivership is evidence of a return to the nationalisations of the 1970s. Some on the left even take heart from this, and urge the government to go the whole way and nationalise the banks. The Sunday Times runs stories warning of ‘Soviet Britain', to show that in many towns in Britain (and especially in Scotland and Northern Ireland) state spending is a majority of output.

The other story is that the British government has inherited its predecessor's mania for privatisation. More and more of our public services are contracted out to sharks who are only interested in short-term gains. Prisons, parts of our health services and even parts of the military are being privatised. Public Private Finance Initiatives (PFIs) are eating up more and more of government.

How is it possible to reconcile these two accounts? Is the State being privatised in Britain, or is it taking over the private sector? The answer is that both are true, and neither. What we have is not a new private sector boom, but a growing state-dependent economy of concessions. Companies like Qinetiq and Capita only exist because of the way the State contracts out its services. Government's loss of faith in its own ability to organise production leads to an astonishing abandonment of its authority to chaotic and destructive shell companies.

At the same time as it abandons responsibility for delivering public goods, the State penetrates more and more of private life. The regulation of working class families under the coalescence of education and social services is extensive. The massive increase in families registered ‘at risk' shows a growth in oppressive intrusion.

All the time the established boundary between ‘state' and ‘civil society', between ‘public goods and private benefits', is being redrawn, or broken down altogether. What emerges is neither an enhanced private sector, nor coherent state provision, but rather a hybrid, dependent on public finances to survive, and increasingly operating according to a mixture of political, administrative and business models that makes little sense.

‘Soviet Britain'

The Centre for Economic and Business Research highlighted the growth in state spending that The Sunday Times called ‘Soviet Britain'. In the UK state spending represents 49 percent of all output and one in five UK workers is employed in the public sector.1 Though the number of state sector workers has grown from 5.1 million to 5.7 million between 1997 and 2008, it has not grown to the same extent as state spending which has nearly doubled from £318.3 billion in 1997 to a projected £631.3 billion in 2009.2


According to the CEBR, state activity has grown so much that some regions of the United Kingdom are overwhelmingly taken up with government activity. In Wales, state spending takes up 71.6 percent of all output, 56 percent in Scotland, in Northern Ireland the figure is as high as 77.6 per cent, in the north east of England it is 66.4 percent.3 State sector employment is high in these regions, too, but not as high as spending: 28.7 percent in Northern Ireland, 22.9 percent in the north east, 22.5 percent in Scotland, 23.6 percent in Wales.4

Of course, the share that state spending takes in output is the dependent not the independent variable. When capitalist output is growing, increased state spending is no problem - as former Prime Minister Tony Blair saw it, ten years of economic growth that underwrote his government's success was ‘down to luck'.5 It is only when growth falters that state spending becomes a political issue.

The massive growth in state spending is free market capitalism's guilty secret. The ethos of the free market says that state activity ought to be kept to a minimum, but in fact it has taken a greater share of output since the creation of the warfare and welfare states in the early 20th century. In the postwar reconstruction period, Marshall Aid from the US financed a massive boom in state investment that outstripped private investment in Britain and France.6 In the 1970s, European governments' counter- crisis measures saw failing private sector companies like Rolls Royce and British Leyland brought into public ownership. Capitalism's ideologues, like Frederick Hayek and Milton Friedman, tried to pretend that the growth of ‘big government' was an alien imposition upon the free market that crowded out growth. In truth it was the declining profitability of private industry that was the problem.

On Hayek and Friedman's advice the neoliberal governments of the 1980s promised to cut back public sector spending to set the private sector free. Under Mrs Thatcher, UK public spending grew from 44 to 47.5 percent of GDP between 1979 and 1983.7 The problem, it turned out, was not the state sector at all but that Britain's moribund private industry just did not have the strength to take up the slack - a demonstration of Marx's dictum that ‘the barrier to capital accumulation is capital itself'. Spending on unemployment, defence and the police rocketed, just as education and health were held down. Even Thatcher's government could not avoid the costs of maintaining social stability, trapping millions in benefit-dependent misery.

Where she did succeed was in defeating the political challenge to the free market, neutering trade unions, and laying the basis for a boom in low wage employment that - ironically - carried her New Labour heirs through to success.

The conditions of the economic recovery of the 1990s were more low wage, service sector jobs (whose poor wages were offset by the greater availability of credit), the growth of the financial sector (buoyant not just on the growth in consumer credit, but also on the greatly expanded market in international financial trade), and the economic boom in the Far East that was supplementing the shortfall in western manufactured goods, as well as extending the credit that was keeping the consumer boom in the West going. Plainly, these were solutions that would turn into problems later on but, from 1997 to 2005, they masked the weak basis of the New Labour government, and its own ‘third way' between the free market and the welfare state.

Concession State

The curious thing about Tony Blair and Gordon Brown's government is that they were committed on the one hand to ‘counter-cyclical' state spending as a boost to flagging capital accumulation, but on the other had wholly bought the argument that government could not be trusted to deliver resources. To sell their economic competence to the City of London, Brown and Blair had promised to keep to Tory spending targets - a promise they were happy to make because it also gave them an excuse to sideline traditional Labour commitments.


The government instrument that allowed them to square the circle of boosting growth while observing spending limits was the Private Finance Initiative. With PFIs government could raise funds for service provision without borrowing money. For financing these welfare goods, private consortia got a claim on future tax revenues:

The clear political advantage was that the public spending commitments created under these agreements, unlike the government borrowing that would have traditionally have been required for such investment, would not count as public debt.8

PFI was a magic solution that exemplified the ‘third way' between state socialism and free market capitalism. Other reforms, begun under the previous conservative government like the ‘internal market' in the National Health Service, Housing Associations and Local Management of Schools all had the character of a half-way house between the free market and big government. Public sector workers whose jobs and working conditions were threatened by these reforms naturally objected to ‘privatisation'. But the truth was that these reforms had as much to do with private enterprise as South Sea Cargo Cults have with international trade - aping the rituals of the market is not the real thing.

By September 2005, 725 PFI deals worth £46 billion were signed, committing the treasury to future payments of £106 billion.9 The departments told to boost spending through PFI were Education, Health and the Ministry of Defence - in line with New Labour's election pledges.

PFI is supposed to look like private business taking over the provision of public services, but that is far from what is happening. The companies that take on PFI are often shell companies created for the express purpose of milking the government contract. Often their directors are senior officers from the government department whose work they are supplementing. Some larger firms, like Capita, and the IT company Qinetiq have specialised in PFI contracts. Qiniteq is the privatised IT sector of the Ministry of Defence. Capita began life as a project in the Chartered Institute of Public Finance and Accountancy, and now takes £2.441 billion a year, largely from the public sector.10

The original claim for PFI was that it would raise finance that government could not - except that government discovered that contractors could not be found to accept the deals unless the risk was borne by the state and not them. Committed to making PFI work, Gordon Brown had no alternative but to agree terms that saw ‘capitalists' lay claim to future revenues without risking any investment. In March the government announced a £2 billion bailout plan for PFI construction projects - in case you are confused, that is public support for private sector provision of public services - like widening the M25 and the Greater Manchester waste project.11 These are companies that would not exist but for the public sector - in fact they are not private companies at all, but state sinecures whose nominal investment is underwritten by government.

Another group of businesses that have taken advantage of the contracting out of public sector activities are the business consultancies. The extent to which the big consultancies (Price Waterhouse Cooper, [the late] Arthur Andersen Consulting, and McKinsey) have siphoned off public funds is indeed eye-watering: £70 billion by their 2006 estimate. The successive failures of those projects, from the £30bn NHS records computerisation, the collapse of the Child Support Agency processes, the failure of the Tax Credit computerisation, the paralysis of the Criminal Records Bureau, all seem to reinforce the image of a venal debauching of the public purse.12

Worse still, the consultancies' employed senior politicians and civil servants - Dawn Primarolo, Geoffrey Robinson, Harriet Harman, Liam Byrne (Andersen Consulting) and John Birt (McKinsey, which even organised a policy unit at Number Ten) - raises serious problems when these same politicians and civil servants are contracting those consultants.

Contracting Out Authority

At the center of the case for what was called the New Public Administration was a crushing loss of faith in the role of government. Ministers reinforced those fears, telling civil servants that they were part of the problem not part of the solution. One MP on the Public Accounts Committee commented that ‘the public sector has lost its self-confidence at least in relation to these kinds of projects'.13


But it was not only government that is paralysed by doubts, the private sector, too is in the grip of an existential fear of change.14 Today's Managerial Class are not used to confrontation:

CEOs have an average age of 50 in Europe meaning that their earliest experience of working life (1980, if they started age 22) was dominated by recession, whereas their career development would have taken place in an era of boom, from age 34 to 50.15

Cowardly managers of bloated businesses usually call in the consultants to make the difficult and unpopular decisions about which divisions to close down, and which to develop. The same consultancies that leach off the public sector developed their methods preying on corporate managerial doubts: ‘Like a cult, advisors encourage a cult of mystique and exploit the fears and power-jealousy of nervous and insecure executives'.16

Of course capitalist ideology tells us that entrepreneurs embrace risk. But the real record of British business is the opposite. According to the DTI, British Business is ‘relatively risk averse' and business investment in research and development has been running at around 1.8 percent of output for the last seven years, but fell off a cliff in 2008.17

Risk aversion among business leaders is their reaction to the industrial conflicts of the 1980s. The capitalist class' historic mission to revolutionise production belongs to another era. These days they prefer stability to change. It is not that entrepreneurs have given up on the pursuit of profit, just that chasing profit is an activity that is increasingly divorced from material innovation.18 Rather than generating new wealth through innovation, Britain's capitalists are increasingly involved in desperate rent-seeking activities, plundering the public sector or living off the commissions earned on financial intermediation in the City of London.

The two dominant trends in contemporary British capitalism - the growth of the financial sector and the growth of state expenditure - are both indicative of the retreat from production that has seen UK industry and manufacturing stagnate.

Corporate Welfare

 If state expenditure has grown a lot more quickly than state sector employment, the reason is not hard to fathom. The old-model welfare state did spread the resources around (though even then, the middle classes always got more, from schools, colleges, and in employment). The new welfare system rewards not the poor, but the wealthy. Craig and Brooks estimate that NHS PFI deals of £5 billion would earn £2 billion straight profit for the advisers that brokered them. A young lawyer working on the Crossrail plans told me that he was embarrassed at the millions grabbed by consultants before even one sod of earth had been turned. Wherever government priorities are, clouds of greedy lawyers and accountants are already picking over the carcass before a penny trickles down to its supposed beneficiaries.


In 2001, the privatised company Railtrack was absorbing between two and three billion every year - before it was ‘nationalised' in 2002. UBS Warburg earned £45 million floating Railtrack, and then a further undisclosed sum handling the £9 billion bond issue for its successor. The government's advisor on the nationalisation was Shriti Vadera, on secondment from UBS Warburg. Railtrack was a private company in name only - the prices it charged rail operators were fixed by the regulator and its ‘bankruptcy' was engineered by Vadera and Stephen Byers.19 The ‘nationalisation' was simply a means to transfer the call on future revenues from a widely dispersed group of investors to a smaller group of banks - it was also a way of formalising the principle that government, not investors, would bear the risk of failure.

In 2008, corporate welfare reached new heights when the government bailed out the failing banks, Northern Rock, Bradford & Bingley, Lloyds and the Royal Bank of Scotland through the Bank Recapitalisation Fund supported by £500 billion of government money - in fact the fund is making payments to many more banks, but secretly to avoid panicking markets. In effect, much of Britain's financial sector, once the poster boy for deregulated free market capitalism, is now a nationalised industry.

When government bought majority shareholdings in those banks their liabilities became the government's, pushing public debt up by £1.5 trillion. While the government money was going in the front door, it was leaching out of the back door in bonuses, golden handshakes and pension deals that the failing bank executives agreed to pay each other from the public purse. RBS chief executive Fred Goodwin walked away from the bank he ruined with a pension worth £11.9 million.

The government's generosity to the banks is not surprising. When Gordon Brown recruited advisors from big business, most were bankers, reflecting the extraordinary growth of the financial sector in Britain. Outraged Britons demanded to know why the money given to the banks was not passed on in the form of commercial loans and mortgages. They forgot that banks do not exist to lend money, but to make it. The government did not bail out the banks to help the struggling indebted masses, but the indebted banks.

From the perspective of Britain's entrenched elite, with its freakish specialisation in financial intermediation, there was no alternative: without government guarantees, Britain's financial services would have lost all credibility in the world market. But saving the banks is a disaster for the British economy in the long run - all that the bailout has done has been to shore up the same parasitic financial sector (increasing the ‘moral hazard' that comes when investors are shielded from their own risks) that was the problem.

Management by Inefficiency

 The ‘third sector' is a grey area that has grown up where the division between public and private has broken down and many of the laws of classical market competition are inverted. Connecting for Health is an ‘arms length body' created to computerise the NHS. Its funds come in part from government directly, but mostly from the NHS Trusts that ‘contract' CfH to provide IT services. Except that the Trusts have no choice over whether to contract the service and the terms of the contract are secret even from those sitting on Trust boards. The ‘prices' follow no market laws, because CfH has to work, for political reasons.

Much of CfH's work is outsourced to consultancies. Not surprisingly, costs spiraled, while computerisation was painfully slow and inefficient. The ‘Choose and Book' system is estimated to cost £12 billion over the next ten years.20 Although it was formally launched last year, 90 percent of GPs' surgeries are not yet connected, and CfH admitted that hundreds of patients had to be turned back from appointments that were not properly recorded.21

The original ‘arms length body', the BBC, was subjected to a major overhaul under John Birt, who contracted McKinsey to reorganise and retrain the organisation. In one exercise, staff cut up paper frogs and sold them to each other. The training budget was rising to £15 million a year. McKinsey, who had their own office in the BBC, and other consultants were soaking up £22 million of the BBC's £2.2 billion budget. They reorganised departments as ‘business units' and claimed to be operating an ‘internal market'; reforms commonly known as ‘Birtspeak'. Even today staff are chasing the ‘window of competition' that they abbreviate to WOC. Perhaps one reason McKinsey did so well was that John Birt was a paid McKinsey associate while he was Director General.22

The impact of the reforms was to undermine the BBC's overall performance. Rather than organise resources efficiently, the new structures only persuaded managers to bypass problems; a strategy that was clearly evident in the staffing of the BBC. BBC staff who did not have a project to work on were left on ‘downtime' or ‘gardening leave', as it was called. As many as one in eight were off work at one point around 2005. The reason for the waste was that management found it easier to avoid decisions than organise their staff. Over the last two years, cash shortages have been used to justify between 2-3000 redundancies. The difficulty for the BBC's employees is that the long periods when their managers could find no work for them would be hard to explain when they started sacking people on the basis of performance reviews. What was in fact the management's inability to organise its resources would show up on the individual's record as a failure to meet the BBC's programme making criteria or other operations.

Building Schools for the Future (BSF) programme is one of the main areas of PFI spending. Since 1997, the government has invested £17.5 billion in rebuilding the country's schools - on the claim that this would improve teaching. But when the Department for Education and Employment got accountants Price Waterhouse Cooper to find out the ‘additional effect in terms of pupil attainment of every £1 invested in schools capital', the answer was ‘the relationship was not positive in all cases, nor was it always statistically significant'.23 This research, though, was buried under government claims that the building programme was raising pupil performance.

Plainly, the Building for Schools programme was a substitute for positive change in education. The government had promised to make education a priority. But as long as working class prospects are worsening, rather than improving, schools are unlikely to do much to reverse those expectations. Even the new schools paid for by the Building for Schools programme were painfully slow in appearing.24


Government never did invest in schools for the good of working class children. In the early 19th century, Spitalfields' weavers organised their own schools, teaching their children such subjects as Ricardian political economy. School Inspector Edmond Holmes explained:

whatever the weavers did in the way of self-education and rational recreation, they did for themselves. There was no one to help them. There was no Board of Education to provide them in their early years with schools and teachers. There were no earnest philanthropists to guide them.25

It was out of fear of this self-education that the first legislated school provision, two hours a day of religious education under the 1833 Factory Act, was brought in. As Madame Tlank has previously explained in Mute, contemporary state sector expansion in health and social services has more to do with regulating working class life than welfare.26 The Building for Schools programme put a shiny new brand on a service that was still failing its students, but most of all, put money into the pockets of the advisers and consultants that brokered the deals.

The dislocation of the world economy in 2008 revealed Britain's underlying weakness. The boom in financial services and the retail sector that kept the British economy afloat was dependent on specific conditions - China's manufacturing surplus, the growth in worldwide financial intermediation. As the country with the largest financial services sector among any of the advanced economies, Britain is the most exposed when world finance contracts. Worse, its manufacturing sector, while still important worldwide, has shrunk markedly to 11 percent of the economy.

State jobs have taken up the slack in hollowed out industrial districts, but these jobs are now in the firing line. The quality of Britain's social sector is sadly overstated: inefficiency and corruption are hallmarks of the new public management. The ‘third sector' of public/private partnership has steadily expanded, behind our backs, filling the void left by a declining productive capitalism. This amounts to the absorption and waste of real human creativity on make-work schemes and rent-seeking ‘investments'. The ‘third sector' combines all the bureaucratic inefficiencies of the state sector, with all the blind egotism of private enterprise. It will not be easy to restructure British industry on more productive lines, still less to make sure that working people are not made to pay the price for the grotesque failures of their rulers.


James Heartfield <Heartfield AT> is the author of Green Capitalism, (OpenMute, 2008) Let's Build! Why we need five million new homes in the next 10 years, (Audacity, 2006), The Creativity Gap, (Blueprint, 2005) and The ‘Death of the Subject' Explained (Sheffield Hallam U., 2002). He lives in Archway, north London, and is currently based at the Centre for the Study of Democracy, University of Westminster. See,


1Public Sector Employment, National Statistics,

2 Abul Taher, ‘Soviet Britain swells amid the recession', The Sunday Times, 25 January 2009, and

3Taher, op. cit.; Jason Allardyce and Julia Belgutay, ‘Welcome to the People's Republic of Scotland', 11 January 2009,

4 Andrew Barnard, ‘Regional Analysis of Public Sector Employment', Economic & Labour Market Review, Vol 2, No 7, July 2008,

5 The Daily Telegraph, 1 January 2009.

6 Research and Planning Division, Economic Commission for Europe, Economic Survey of Europe in 1949, Geneva: United Nations, Department of Economic Affairs, 1950, p.47,

7 Simon Jenkins, Accountable to None, London: Hamish Hamilton, 1995, p.224.

8 David Craig and Richard Brooks, Plundering the Public Sector, London: Constable, 2006 p.133.

9 Ibid, p.151-2.

10 See,

11 Alex Hawkes, ‘Treasury unveils £2bn PFI bailout', Construction News, 5 June 2009,

12 David Craig and Richard Brooks, op. cit., p.1.

13 Ibid, p.114.

14 Benjamin Hunt, The Timid Corporation, London: John Wiley, 2003; Daniel Ben Ami, Cowardly Capitalism, London: John Wiley, 2001.

15 Martin Perks and Richard Sedley, Winners and Losers in a Troubled Economy, London, cScape, p.15.

16 David Craig and Richard Brooks, op. cit., p.119.

17 UK Competitiveness Indicators: Second Edition, Department of Trade and Industry, p 69, and UK Gross Investment in Research and Development, 30 January 2009, ; OECD, Policy Responses to the Economic Crisis: Investing in Innovation for Long Term Growth, 10 June 2009, at ; and see James Woudhuysen, ‘The Barriers to Innovation',

18 James Heartfield, Green Capitalism: Manufacturing Scarcity in an Age of Abundance, London: OpenMute, 2008

19 Simon Jenkins, ‘Railtrack shares trial exposes ministers with a license to steal', The Sunday Times, 17 July, 2005,

20 ‘Choose and Book', BBC, 28 January 2007,

21 ‘The patient choice con', The Daily Mail, 25 May 2009,

22 David Craig and Richard Brooks, op. cit., p 120

23 Department for Education and Employment, ED461980 - Building Performance: An Empirical Assessment of the Relationship between Schools Capital Investment and Pupil Performance, Education Resources Information Centre, 2001, p.43,

24 David Craig and Richard Brooks, op. cit., p.152.

25 ‘The Spitalfields Weavers', Modern English Essays, London: J.M. Dent, 1922, p.188.

26 Madame Tlank, ‘The Battle of all* Mothers (or: No Unorthorised Reproduction)', Mute, 14 May 2008,