After Brexit there is no one Britain can blame for this mess but itself
The closing lines of John of Gaunt’s speech in Shakespeare’s Richard
II spring to mind: “That England, that was wont to conquer others, hath made a shameful conquest of itself.” Where now for this once sceptered isle?
As an economic strategy, Liz Truss’s mini-Budget was doomed from the start. Some elements of its “supply side” growth agenda seemed promising, but in the round it was always going to be torpedoed by the incontinence of its fiscal expansionism. This was neither the time nor the place for it.
Even so, with its smaller state, lower tax, deregulatory ambitions, it was at least some kind of an attempt to articulate what a post-Brexit economy might look like. With its demise we are once again left floundering around wondering what was the point of Brexit in the first place.
All the economic downsides of leaving the European Union are still with us – not least, thanks to the deeply flawed nature of Boris Johnson’s Withdrawal Agreement, seriously impaired trade with our near neighbours – but with little if any countervailing economic benefits.
Even among die-hard Brexit supporters, the disillusionment is palpable. After six years, just what have we got to show for it? Seemingly nothing beyond economic, fiscal and financial chaos. We’ve known for a long time now what holds the UK back, and frankly, it never had much to do with the European Union, which in this regard at least was little more than an irritating irrelevance. Britain’s malaise has much deeper roots.
It’s to do with poor productivity; lack of investment; too much consumption and not enough saving; oppressive planning laws; the absence of coherent, bipartisan industrial policy; and a deficient educational system that fails to produce the skills needed for a growing economy.
Brexit could have been a galvanising force that obliged the country finally to address these failings, but actually it has only highlighted an awkward truth: having taken back control, we can’t agree how to use it.
As it is, the main barrier to economic progress comes not from the European Union, but our own democratic politics, which seem to render the country virtually ungovernable.
Surprise! It turns out that there is no yearning among British voters or MPs for Singapore on Thames, the very idea of which is in any case a trope, based as it is on a complete misunderstanding of what Singapore is all about.
Yes, Singapore is a low-tax, smallstate jurisdiction, but it is also run by one of the most interventionist governments on the planet, and is essentially an exercise in social engineering quite at odds with the libertarian ambitions of Truss and her devotees. It provides no kind of a model for a mature, liberal democracy such as the UK, with its legacy National Health Service and extensive social safety net.
One thing is for sure: never would you see Singapore, which consistently runs budget surpluses, indulge in the kind of unfunded tax cuts of last month’s mini-Budget.
The great irony, as Britain and much of the rest of Europe dive inescapably back into recession, is that we could do with a little bit of mitigating fiscal stimulus right now. Instead, Britain is being forced into precisely the reverse – a deadening, pro-cyclical form of fiscal austerity.
Universally known as the “Doctor Doom” of economics, Nouriel Roubini recently told me that any remaining hopes of a soft landing were fantasy, and that the coming downturn would be “nasty, brutish and long”. I hope he’s wrong, but as things stand, you’d struggle to disagree.
As in most stagflations, we face a toxic combination of fiscal consolidation and money destruction; protracted balance sheet contraction at both the Bank of England and in the commercial banking sector are now hardwired into prospects, the one in pursuit of “quantitative tightening” to clamp down on inflation and the other as a result of reduced lending and mushrooming bad debt experience.
The charitable view of all this is that we are just the hapless victims of global forces beyond our control – the carnage of lockdown and an unprecedented energy crisis exacerbated by Vladimir Putin’s war in Ukraine.
There is plainly some truth in this explanation; without these shocks, we would not be in the mess we are today. Never mind the toll on lives, pandemics are almost always economically destructive events. Today’s inflation and its accompanying acute labour shortages have echoes of the 14th century Black Death, which also caused major economic dislocation and subsequent price instability.
In terms of its fiscal costs and the disruption to global supply, lockdown has been similar to the impact of a major war. Shock on shock, we now have an actual war, which though far off has through energy prices inflicted much the same degree of hardship and cost as if directly involved.
Globally, we are indeed all in the same boat in this regard. Yet Britain finds itself in an almost uniquely dire position, having also shot itself in the foot over Brexit. A double dose of fiscal discipline is the price markets demand for righting the boat and continuing to provide access on reasonable terms to international money.
These strictures have little, if anything, to do with unjustified prejudice against Brexit Britain, or even, as fancifully suggested in some quarters, an outbreak of cancel culture wokery among those who trade government bonds. As it happens, bond traders are as a species among the least woke on the planet. If they dared set foot on a university campus, they would be cancelled themselves. Rather it is about a hard-headed calculation on where investors’ money is safest and provides the best rate of return. Unforgivably, the mini-Budget broke the trust previously vested in British creditworthiness.
To understand why, consider “Britaly”, a term much in vogue last week to depict the lows to which Britain has seemingly sunk. Supposedly, we are now as much of an economic basket case as Italy, which has scarcely grown for two decades now. Yet, if anything, the comparison is unfair on Italy, which may be economically becalmed but until the pandemic, at least, had for years consistently run both a primary budget surplus (that is before debt servicing costs) and a current account surplus, signalling greater exports than imports. This is not true of Britain.
Call it living beyond the country’s means. Without immediate remedial action, the national debt would soon have been up at Italian-style levels.
No doubt poor messaging by the Bank of England on its bond buying/ selling intentions played some small part in the financial turbulence that brought the Prime Minister down.
And no doubt also that Office for Budget Responsibility “orthodoxy” is making it harder for the Government to demonstrate fiscal sustainability than it might have been. Yet, in the end, it was mainly arrogance and incompetence that sank the ship. Now we are out of the European Union, there is no one to blame but ourselves.
‘Supposedly, we are now as much of an economic basket case as Italy. Yet, if anything, the comparison is unfair on Italy’