How Not To Rule Britannia
Nothing went as expected after the Brexit referendum
Economic uncertainty has clouded the British business environment ever since the people of the United Kingdom voted to leave the European Union in 2016, trailing political uncertainty in its wake. This has accelerated in recent weeks and now reached an unprecedented peak. Prime Ministers are going down like ninepins and the Conservative party is hitting rock bottom in the popularity stakes, even when it still has a healthy lead of 161 MPs in Parliament.
Nothing went as expected after the Brexit referendum. Parliament floundered and botched the modalities of exiting the common market till Boris Johnson forced the issue back to the people and sought a fresh mandate in 2019.
Less than four months into the task, however, all plans had to be put on hold when the global pandemic forced Britain and the world to lock down. Growth plummeted, while the UK, like most countries, began to live far beyond its means so that it could provide emergency medical care and protect citizens from the effects of recession.
The British furlough program was probably the most generous stimulus package offered by any government during lockdown. It certainly made Chancellor Rishi Sunak the darling of the masses.
The day of reckoning-spiralling debt and runaway inflation-has now arrived and Britain is reeling from the effects. Putin's adventure in Ukraine has been a body blow to European countries, which were struggling to recover from the spending excesses of the pandemic.
The costs of military aid to Ukraine and a mounting energy crisis have now been added to the list of the UK's economic woes. International confidence in the British economy is at its nadir, the pound has crashed and interest rates on sovereign debt have risen to unsustainable levels. Crisis management with no ending in sight is all that can be foreseen for the immediate future.
The cousins across the Atlantic seem to be doing much better. A comparison between the two economies might help to identify where the shoe pinches for the UK. The Covid stimulus was less generous in America than in Britain, but Biden has come through with student debt relief, payments to families under the American Rescue Plan and a handsome Infrastructure, Investment and Jobs Act.
Since the dollar is the dominant reserve currency of the world, the US, unlike other countries, can always run a high debt-to-GDP ratio and get it financed by the rest of the world. Nonetheless, every indicator shows that recovery is well on its way in America-after an initial spike, inflation is under control, jobs are being created and growth looking up. Investment is flowing in and the dollar is strengthening.
The British business environment and the entrepreneurial ability of its businessmen are just as encouraging (even if we factor in the disincentive effects of the furlough scheme on the propensity to work). It's everything else that is falling apart.
There are at least three areas in which the British government is hamstrung, as the US government is not. There are supply chain blockages in both countries and non-availability of qualified applicants for job openings.
In the UK, Brexit was meant to take back control of the country's immigration policy from the EU. Instead of open borders for European nationals, Britain planned to lay down its own policy for the intake of migrants like any independent nation, (Australia or the US, for example), to meet the needs of domestic businesses to fill up jobs for which citizens were not available.
But, that's easier said than done. Post-Brexit visa and customs procedures have thrown border control measures into disarray and aggravated transport deadlocks in the absence of truckers from EU countries. Even before the dust settled on such issues, Prime Minister Liz Truss, trying to quickly sign fresh Free Trade Agreements with Commonwealth countries, had a public spat with Home Secretary Suella Braverman over relaxing visa rules for Indian visitors.
How much immigration would Tory voters in red wall areas (diehard Labour constituencies which shifted to the Tories in the 2019 election) accept and on what conditions? The math is yet to be done.
The UK is far more constrained on the energy front than the US, which has successfully weaned itself from OPEC oil after the nineteen nineties. Biden is blowing hot and cold with Saudi Arabia mainly to hold international oil prices (which trigger inflation all around) steady, not because the US cannot manage without imported oil.
The UK has fewer choices: hard core environmentalists have blocked fracking, windmills are considered ugly and nuclear plants are still a no-no. Eco-nuts demand an immediate shift to renewable energy, but also want prices to be capped and their homes lighted and warmed at no additional cost. The budget is sagging under such pressures.
As for the government-run National Health Service, which provides universal medical care in the UK, post-pandemic waiting lists have lengthened but there are no avenues for additional funding. The budgetary burden of Medicaid and Obamacare is far more manageable in the US. All in all, the Americans seem to have more capitalist choices than the British and far greater leeway to run budget deficits.
The structural constraints that pin down the British economy call for urgent reform, but this cannot happen overnight. Austerity is not a popular message at any time and never when it is given by an erstwhile Chancellor (even one who had been feted during the pandemic like Sunak), who himself enjoys a huge (honestly-earned) personal fortune.
This is what enabled Liz Truss to pip him to the post in the Prime Ministerial stakes. Chancellor Kwasi Karteng and Truss offered only one bracing message: There's a rough ride ahead, but in the medium term, business will be back on its feet, jobs created and inflation tamed.
The Tories trusted her. Unfortunately, number-crunchers in the markets did not. Her cardinal fault in their eyes was to focus on the future, without drawing a clear path to get there. She had not dotted her I s or crossed the T s.
She did not even run the figures past the Office for Budget Responsibility before putting her mini-budget before Parliament. The backlash was instantaneous and hugely damaging. The Pound collapsed and mortgage rates soared, hurting new and prospective homeowners. Debt servicing costs rose making the massive budget deficit even bigger.
To achieve her aims, the PM could not close the gap in any of the conventional ways. Increase in NHS expenditure was left unfunded. Corporation tax had to be cut to promote businesses. A windfall tax on energy companies who had benefited from the oil price spike was ruled out, since they needed inducements to invest in clean energy projects.
Yes, debt would balloon, but it would be serviced when the economy rebounded and tax revenues recovered. Liz, like Tinker Bell, was flying on hope, faith and a sprinkling of pixie dust.
Following Margaret Thatcher and Reagan, she believed that the Laffer curve-lower tax rates yielding higher revenues-would take over, when the right climate is created to release the potential and resilience of the British entrepreneur. But, those who manage spreadsheets for the markets did not let her peddle her brand of "snake oil".
Experience shows, however, that professional economists and conventional Chancellors are not infallible. They are wrong perhaps as often as politicians. The uncertainty factor in their differential equations is today so huge that facile forecasts may be almost impossible.
Markets have limited imaginations, unlike elected leaders, who face voters and must take credit and blame. Markets have noses to the ground and smell immediate profits; they are not trained to notice the evolving future.
After all, there has been no wholesale post-Brexit exodus of businesses from Britain as they had predicted. A PM who could "stiffen up the sinews and summon up the blood" is as likely to be successful as any routine forecaster. British business, battered by uncertainty for over six years, deserves such a Prime Minister.