How to get the UK out of its economic hole
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The job of Rachel Reeves, chancellor of the exchequer, when presenting her second Budget this week is to reveal a path to a more robust fiscal position and faster economic growth. The difficulty is delivering either, let alone both. In recent columns, I showed how hard this will be. Alas, the government has made so many mistakes, with its pre-election tax pledges above all, that it may be impossible.
Yet she has to try. A reason for this is that if Labour continues to fail, its likely successor is Reform UK’s Nigel Farage. We already know the most important thing about this man: he is a policy calamity. But he is also a talented demagogue. This made him much the most important protagonist of Brexit. He created the campaign that persuaded David Cameron to offer the 2016 referendum, which led to Brexit. Farage has already changed the UK (for the worse) more than any other living politician. What might the country look like after a period with him in office?
The adverse judgment on Brexit is not a forecast. It is a reality. “The Economic Impact of Brexit”, whose authors include Stanford’s Nicholas Bloom, recently published by the US National Bureau of Economic Research, delivers the verdict: its estimates “suggest that by 2025, Brexit had reduced UK GDP by 6 per cent to 8 per cent . . . We estimate that investment was reduced by between 12 per cent and 18 per cent, employment by 3 per cent to 4 per cent and productivity by 3 per cent to 4 per cent.” If this is even roughly correct, Brexit has been nothing short of an economic disaster.
As a thought-provoking paper “Getting Britain out of the hole: A plan for the economy” by Andrew Sissons of the innovation agency Nesta and John Springford of the Centre for European Reform argues, the UK’s biggest error has been to make war on its own strengths. Brexit is, arguably, the most striking example of this. As the paper notes, “The things the UK excels at — finance and business services, tech and the creative economy, various advanced manufacturing niches — depend on openness: to trade, to ideas, to skilled workers.”
The UK economy has to be open if it is to prosper. Yet, given its location, Europe is the UK’s natural economic partner. Trade with Europe is also the foundation for the UK’s competitiveness in goods with the rest of the world. Not surprisingly, then, the UK’s openness to trade in goods has declined sharply relative to that of large EU countries since Brexit. This has not been true for services, where the UK’s comparative advantage is stronger. But, depressingly, real gross value added per hour worked in finance has shrunk by 35 per cent since 2017.
Dreams of “global Britain” are an even greater delusion than they were in 2016. The UK’s security has always depended on what happens in its continent. Today, given a protectionist and isolationist US and a mercantilist China, a closer economic relationship with the EU has become even more essential. Rejoining the single market is a priority.
Remedying the worst aspects of the Brexit delusion is indeed urgent. But the Springford and Sissons paper makes other important points. Fundamentally, the UK has too few “successful, productive, international” industries and companies. To counter this, the country needs a first-class enabling environment: excellent infrastructure, first-class universities, cities able to operate as knowledge hubs, a flexible labour market, the ability to import talented individuals from all over the world and an enabling financial system.
There are problems in each of these areas and many are, alas, getting worse. To take just one example, the proposed 6 per cent tax on international student fees is a dagger aimed at one of the UK’s most successful export industries.
Another is “the failure to expand successful places and regenerate struggling ones”. The hit to manufacturing from Brexit makes the latter challenge bigger. Labour mobility has been declining. This reflects the failure to expand more successful places, which locks too many people into where they live. The paper also considers energy policy, stickiness of inflation and rising pressures on public finances from ageing and the threatening security environment.
No wonder so many people think Farage cannot be worse than what they have been experiencing. This is a forlorn hope: populists always make things worse. But orthodox politicians have been doing so poorly that it is indeed a perfectly natural temptation.
So, what do I hope for from Wednesday’s Budget? Some sight of a workable and coherent long-term economic strategy. I do not expect it. It may already be too late. But, without that, it is hard to be optimistic about the UK’s future.
Follow Martin Wolf with myFT and on Twitter
Letters in response to this column:
‘Doppelgänger’ economies don’t capture Brexit reality / From Patrick Minford, Professor of Economics, Cardiff Business School, Cardiff University, Wales, UK
Comments