Britain’s economic slump: Does the fault lie with Brexit?
With its economy in tatters, England is not having its finest hour. It is a time of transition for the United Kingdom, with a new monarch and a new prime minister. Not since Churchill took office in the dark days of May 1940 has a British prime minister faced so much uncertainty in the opening days of an administration.
No sooner had the official period of mourning for Queen Elizabeth II come to a close than the announcement of Prime Minister Liz Truss’s economic plan, known as “Trussonomics,” sent stock markets reeling, interest rates soaring and the pound tumbling to a record low against the dollar.
If you are planning a trip to London, now is the time to go.
England is today in economic doldrums — a renewed slump in consumer spending amid soaring living costs. While the inflation rate slowed slightly in August to 9.9 percent, the fastest pace in 40 years, inflation has been projected to reach 11 percent before the end of the year.
The Bank of England says it will not hesitate to increase interest rates. But it has hesitated on an emergency rate hike lest it plummet the country into recession. To right the sinking ship, the Bank just waded into the financial markets, buying up to 5 billion pounds a day of “gilts” or long-term British treasuries, in order to restore stability. The move doubtless saved the nation’s pension funds from certain disaster.
Former Chancellor of the Exchequer Rishi Sunak claimed the government’s economic plan will lead to 7 percent interest rates and “tip millions of people into misery,” as the Bank of England’s efforts to curb inflation are incoherently at odds with the government’s tax and spend economic plan calling for the heftiest unfunded tax cuts in a generation, as well as energy subsidies.
Economists say Britain is drifting towards a lengthy recession. Some attribute this dismal state of affairs to geopolitical forces, the price of oil, COVID-19 or supply shortages.
Others to Brexit, when the relationship between the Bank of England and Treasury first soured. You may remember that in 2016 a majority of the British public (52 percent), voted to withdraw from the European Union. It took four years, but Britain finally did so at the end of 2020. Brexit, it has been argued, was a bet on globalization. But globalization was hardly a panacea for decoupling from China, the Ukraine war and worldwide protectionist sentiment, especially dramatic events for a middle power trying to go it alone.
What has been the outcome of Brexit?
The government’s 2018 analysis showed that British economic growth under Brexit would be stunted by 2 to 8 percent over the next 15 years. And recent studies have argued that Brexit has exacerbated Britain’s cost of living crisis.
What is to be done? The government puts the hat on Kwasi Kwarteng, the beleaguered chancellor of the Exchequer. On his first day in office, Kwarteng took the apparently reckless step of firing the seasoned first permanent secretary, Tom Scholar, leaving the top two civil service posts vacant.
This “shock and awe” approach in the face of a frail economy left many concerned about Kwarteng’s leadership, which violates the maxim that a “good plowman doesn’t butcher his ox.” While the prime minister is likely to stand behind the chancellor so early in her administration, many members of parliament are saying his head is on the block, and have predicted his imminent resignation.
The swirl of controversy around Kwarteng reminds him that he has set out how the Growth Plan will be delivered, rolling out supply-side reforms next month and publishing the medium-term debt-cutting fiscal plan on Nov. 23, which many see as courting disaster.
Most likely, the fiscal picture is the last thing the chancellor wishes to be reminded of.
But it all comes back to Brexit. As Robert Shrimsley writes in the Financial Times: “what was once an economic slow puncture is now an audible hiss.” Was Brexit a huge mistake? Will it ultimately cause Scotland to secede from the United Kingdom? It last decided to remain in a referendum accomplished eight years ago by a 55-45 percent vote.
And what of Northern Ireland, which at the moment in effect remains part of the EU, and where Catholics outnumber Protestants for the first time? Under the post-Brexit Northern Ireland Protocol, there is no hard border between it and its neighbor, the EU member Republic of Ireland. This permits goods to flow to and from Northern Ireland and the Republic of Ireland, as well as the rest of the EU.
Nonetheless, Britain must still pay a tariff on goods, such as steel, sent from the Port Talbot steelworks in Wales to Northern Ireland shipyards. Negotiations are needed for an all-points-of-the-compass deal that will enable Northern Ireland to remain part of the United Kingdom, eliminate tariff barriers with Britain and trade freely with the Republic of Ireland.
What Brexit gained for Britain in the way of sovereignty, autonomy and the ability to chart its own economic course without having to go to Europe with hat in hand, it lost in terms of a standing free trade agreement with its largest trading partner. Former Bank of England economist Peter Doyle has said: “The really big self-harm inflicted by the UK on itself was the decision to do Brexit.”
What is the way forward? And what is to be done about the current economic slide? Can Scotland and Northern Ireland remain part of the United Kingdom? Boris Johnson got Brexit done. Ms. Truss has the much harder task of making it work. She realistically has a year to turn things around, at which point the next general election, which must be held no later than January 2025, will already be looming.
James D. Zirin is a member of the Council on Foreign Relations.