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The Dual Blow of COVID-19 and BREXIT Part TwoThe UK Must Retain Links with Europe to Avert a Catastrophic Economic Crash
Mike Buckley argues that the UK may have the freedom Brexiters promised, but no idea what is in its best economic interests
Read Part One of Mike Buckley’s analysis below
The dual impact of Coronavirus and Brexit would matter less if the UK was in an economically strong position. In reality, 2010-2020 was the worst decade for the UK economy for generations.
GDP growth averaged 2.5% in the 2000s but fell to 1.1% in the 2010s. Output per hour was 18% below the average for the rest of the G7 – the largest seven economies in the world. Wages fell by 10% in real terms in the eight years to 2016; yet elsewhere in the OECD – an economic alliance of 37 nations – wages grew by an average of 6.7%.
The current account deficit – the difference between Britain’s imports and exports with the rest of the world – hit £96.2 billion or 5.2% of GDP in 2015, the widest since records began in 1948.
The UK relies on foreign investors to plug the shortfall. We do not yet know what proportion of this inward investment was dependent on the country’s presence in the EU, combined with free movement and the attractiveness of an English-speaking capital with its financial, political and business hubs concentrated in a single city – but we are certainly about to find out.
We do know that the Brexit vote has impacted the economy – exclusively in a negative way. By mid-2019, foreign investment had fallen to its lowest level in six years, suggesting that uncertainty over the UK’s future trading arrangements with the EU and the rest of the world was holding back investment. And this trend wasn’t common across the EU. A fall in foreign investment to the UK was matched by an increase in the 27 member states of the EU.
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Reduced investment has in turn impacted the jobs market, with a 29% decrease in jobs created in the year ending in March, compared with the previous year. As ever, poorer regions fared worst. While London saw a 14% drop in jobs created, in Yorkshire and the Humber job creation more than halved in the year ending March 2019.
An Aging Nation
Adding to its challenges, the UK faces several structural problems that will make staging a recovery even harder.
Britain’s aging population will begin to have serious economic effects over the next decade. By 2039, there will be six million more pensioners in Britain than in 2016; comprising 23% of the population. This will add between 1% and 2% to national health costs every year, not factoring in lower wages or the increased costs of new drugs. The next 20 years will require dramatic increases in NHS and social care spending.
As the Government ends free movement and heavily restricts immigration, this will merely compound the problem – reducing the number of working-age people able to pay for this health spending. In turn, the UK will also lose skills and talent – indeed the loss of academics to other countries has already begun.
Brexit and Levelling Up
Observer journalist William Keegan recently wrote that if Johnson “goes on in the direction he and his frightful lieutenant Dominic Cummings are heading, he will go down as having run the most disastrous government most of us can remember. Moreover, he will be forgiven by neither this generation nor the next”.
Keegan adds that “no-deal Brexit and Johnson’s ‘FDR’ ambitions are irreconcilable” – referring to Johnson’s grandiose claims that he will mimic former US President Franklin Roosevelt and invest his way out of the crisis to prevent a jobs catastrophe. It is a pledge hardly backed up by policy announcements thus far.
Keegan is right. Levelling up and preventing a jobs catastrophe are incompatible with a ‘no deal’ Brexit or the thin, almost meaningless, deal that is the alternative given Johnson’s red lines. But here the economics and politics collide.
Johnson and the Conservatives are convinced that victory in 2024 depends on being able to say that they “got Brexit done” and that it was the real thing – not a halfway house that would leave the UK subject to EU law or regulations.
As former Conservative Cabinet Minister David Gauke wrote recently, the “nature of the coalition of support created in 2019 on the basis of ‘getting Brexit done’ and successfully capturing large numbers of northern and midland low-income Labour voters means that a return to a traditional, liberal, middle-class Conservatism would doom dozens of newly elected MPs”.
Johnson will not take that chance, though his belief that ‘Red Wall’ voters all supported him on the basis of getting Brexit done is misplaced. For many voters, his pledges on the NHS and police were far more consequential – pledges they will judge him harshly for, if he fails to deliver.
Learning from Past Failures
Chancellor Rishi Sunak must not make the same mistakes as his predecessors. National debt and the deficit are again huge, the debt alone larger than the whole economy for the first time since 1963.
Former Chancellor George Osborne’s error was to see debt as the primary metric of a healthy economy. The UK can borrow money at incredibly low rates currently and, if necessary, print its own. The scaremongering of 10 years ago, that the UK could become like Greece or Italy which as members of the Euro have no such flexibility, was just that. A crisis necessitates government borrowing; to do anything else would be catastrophic.
Osborne’s decision to cut public spending came with a huge social cost. In Government departments other than health, the Home Office and foreign aid – which have seen modest increases – cuts have been deep, from 3% in the Foreign Office to a mammoth 69% in work and pensions and 77% in local government. And lost spending has not been restored – cuts instituted from 2010 remain in place.
These cuts matter both for economic and public health. Germany long ago invested in a public health system with active test and trace capabilities. During the Coronavirus pandemic, this has been scaled up – reducing their death rate and allowing a faster return to something approaching economic normality.
It is not as if the pandemic was an unforeseeable event. It has been top of the Government’s risk register for years. Had it taken the risk both to life and economy seriously, it would have invested in public health instead of cutting funding over the past decade.
Tax rises also offer limited prospects. Revaluing council tax or a full wealth tax could bring in significant amounts of money, but are unlikely from this Government. Adding a penny to all of income tax, national insurance and VAT would bring in around £15 billion – money worth having but of limited value when the deficit is already £103.7 billion. Instead of short-term rises, a tax cut to National Insurance would incentivise companies to hire and have more impact on jobless levels.
How to Fix the Economy
The brutal truth remains that all of this is tinkering. The economy is in trouble not because council tax needs reform but because it has been mismanaged for a decade; because the pandemic is going to devastate it; and because the Government is choosing to rip up the economic model that has guaranteed prosperity since 1973.
If Boris Johnson had an alternative model in mind, it was to turn the UK into a small state, low-tax imitation of the US – but public opinion and trading realities are likely to prevent that happening.
The British public will not accept the loss of the NHS or further social care costs. 80% of the public do not want to reduce food standards or other public protections, yet doing so would be essential to any US trade deal. Regardless of the Brexit deal agreed, UK manufacturers will need to produce to EU standards if they want to sell into the Single Market, making the right to diverge entirely pointless.
Britain’s tragedy is that it has Johnson as Prime Minister when it needs a Gordon Brown, who led the UK’s recovery during the 2008 financial crash. Brown has expressed despair at the Government’s lack of action to protect the economy and stimulate growth.
“For Britain, there is nothing ahead like the expansionist plans now under discussion in the United States, which would turbocharge growth and create millions of jobs without significant increases in long-term debt,” he writes. “When nations such as France, Germany, China and Singapore are seizing the opportunity to ‘build back better’ the UK is once more left behind.”
The former Labour Prime Minister suggests that a new industrial policy should be based on investment in innovation, skills and regional economic hubs. Productivity growth could be based on continued affiliation to the EU’s Horizon science programme, the Erasmus student scheme and joint infrastructure ventures with the European Investment Bank – all of which are still open to UK participation even outside the EU.
The scale of Brown’s ambition puts Sunak’s cheap meals out deal and Johnson’s reannouncement of previously agreed infrastructure projects into perspective. Brown has a plan to reboot the economy while Sunak and Johnson are merely chasing headlines.
The next few years could take the UK back to 1970. The end of Empire left the UK isolated and without a viable economic model; the end of the transition period will leave it in the same position.
The country will have the freedom Brexiters have promised. No foreign power will tell the UK Government what laws it can and cannot change. The UK will be free to import chlorinated chicken or allow employers to fire staff at will. But, like the teenager who runs away from home, it may find that freedom comes with consequences that cannot be borne for long.
Jean Monnet, one of the architects of the European Coal and Steel Community – the forerunner of the EU – once said: “I never understood why the British did not join. I came to the conclusion that it must have been because it was the price of victory – the illusion that you could maintain what you had, without change.”
Seventy years on, the UK is repeating the process. Last time, it took 20 years for the country to come to its senses and join its European partners to engender security and prosperity for all. May it not be so long this time.
Mike Buckley is director of the campaign group ‘Labour for a European Future’