If the PM loses his bottle now, he will pay for it later
In these uncertain times, the Tories should beware of preferring short-term gains over long-term reforms
The economic and international backdrop make this a hair-raising time to be hurtling towards WTO trading terms
If there is a rule of politics, it is that politicians don’t get to pick the issues that will consume their time in office. David Cameron came to power promising not to “bang on about Europe”. Theresa May tried, with ever greater futility, to talk about “burning injustices”. And Boris Johnson promises “stability and certainty and optimism and an explosion of global trade”. Hmm.
Like much of the country, I began this year with a feeling of optimism. The political deadlock has been broken, the Corbynistas are in total disarray and the country feels more united than it has in years, with the Tories polling at an astonishing 49 per cent. Mr Johnson should enjoy it while it lasts. On the economic front, there are clouds gathering.
The most noxious is the coronavirus, which is quickly on its way to becoming both a human catastrophe and an economic bomb. Neither Beijing nor global disease experts are anywhere near understanding or managing it. The UK is about as prepared as any other advanced country – perhaps more, in many ways – but a pandemic is an inherently unmanageable thing. China now has to keep food and medical supplies running for at least 50 million people in quarantine, when it was already dealing with a slow-motion credit crunch and a swine fever epidemic. The shutdown of major internal transport, sea ports and air travel are not what Beijing had in mind for 2020.
The spillover into Europe is going to be felt very soon. Mercifully, we have so far been spared a surge in cases, suggesting the virus is not yet deadly enough to take many people into hospital. The freeze in Chinese trade is going to whack its major trading partner, Germany, very hard, at a time when its economy was already slowing and its politics are fracturing. That in turn bodes ill for the rest of the eurozone, whose nascent recovery has already evaporated. That might give some Britons a smug feeling as Brussels racks up increasingly absurd demands, but it is bad news for us too. Our economy stagnated at the end of last year and when our biggest trading partner suffers, we suffer too.
Meanwhile, the US looks buoyant, on the face of it. But as in most of the rest of the world, its trend growth rate of GDP and productivity are in decline. The Federal Reserve appears to have avoided a recession by cutting rates from already low levels to really, really low levels, but companies aren’t making enough investment or profits despite deregulation and tax cuts. What’s more, the US, like everyone, is straining under an ever-increasing debt burden that just isn’t generating enough growth any more. For a third of all the bonds that exist globally, borrowers are actually being paid to borrow, yet growth rates are still feeble. Central banks are loudly warning that they have run out of tools to help for the next recession.
In Geneva this week, our newly reinstated ambassador to the World Trade Organisation, Julian Braithwaite, finally took up Britain’s seat as an independent nation once more. Yet the WTO is in bad shape. Its highest court is currently unable to function because the US will not allow any new judges to be appointed to replace those who have retired until its demands for reform are met. All in all, the economic and institutional backdrop make this a rather hair-raising time to find ourselves hurtling towards WTO trading terms with most of the world. Yet if the EU will not moderate its increasingly ridiculous demands for everlasting legal vassalage, it may be necessary to take that risk.
Well, here is the good news. Whatever the short-term tumult coming our way, the UK’S ability to prosper is ultimately down to us. What the Government must not do is panic and start to prioritise shortterm, economic inertia over reform. Unfortunately, there are some worrying signs that that is exactly what Mr Johnson may end up doing.
Externally, there is an obvious pressure to do so from the EU. Brussels is determined to raise the cost of our economic freedom higher and higher. There is a limit to what it can do, but the limit may be uncomfortably high, especially in the short term. Trade can be as smooth or as rough as governments like, for example. The technology exists to make ultra-low-friction trade possible at Dover and Calais, but it will take two to three years to get it up and running, and it is only possible if France and Germany decide to switch from punishment mode to cooperation. So the pressure to “align” forever will grow. Our Government is right not to budge, but it is no good bluffing. Our bluff may well be called.
On domestic policy, the signs so far have not been hugely encouraging. The decision to let Huawei into our 5G network because it’s cheap, pump the housing market back up with a “first home” discount, and announce a ban on hybrid cars before detailing the infrastructure changes that will make it practical, suggest a government on autopilot, trying to keep the show on the road. If the Prime Minister’s next move is to pack his Cabinet with uninspiring loyalists, overturn Heathrow expansion and agree a budget that does little but increase day-to-day public service spending, then we will be in trouble.
He could still go the other way. What’s needed is a wholesale reform of the credit system to get money flowing out of the broken, unproductive housing market and into risk-taking businesses, a complete overhaul of science and university funding policy, a revamp of government procurement to encourage healthy UK supply chain growth and a package of infrastructure plans that prioritise long-term, productive investment over economic sugar rushes. These policies involve creating winners and losers. Universities will howl, banks and homeowners may grumble and economists will scream for immediate, short-term stimulus. If the Tories shy away from change now, however, they will be punished for it later.
The Government is enjoying a bounteous political honeymoon. But it won’t last. It was elected with a mandate for major change. Voters are not stupid or delusional and they know change can mean some pain. Mr Johnson’s promise of “stability and certainty” sits uneasily alongside “an explosion in trade”. His task is to turn the country’s tentative optimism into a sense of purpose. With a storm heading this way, the worst thing we can do is drift.