*Just one-third of the UK voting age population voted for Brexit and it was crazy that David Cameron, prime minister 2010-2016, did not put a higher approval threshold for the hugely significant decision to leave the European Union that had been Britain's main trading partner for 43 years. Since the June 23, 2016 decision, the complexity of untangling regulations and agreements has been daunting.
George Macartney (1737-1806), a native of Antrim and graduate of Trinity College Dublin, in 1773 wrote a book on his period in office as chief secretary of Ireland — he was the second highest official in the British administration of Ireland. Macartney was a member of both the Irish and British parliaments and he made it clear that Ireland formed part of “a vast empire on which the sun never sets and whose bounds nature has not yet ascertained."
Out of 193 countries that are currently UN member states, the British had invaded or had some control over or fought conflicts in the territory of something like 171. That's almost 90% for an island in Western Europe.
However, the competence, guile and skill, that built an empire and made Britain the "workshop of the world" (Benjamin Disraeli, a future prime minister, had coined the phrase in the House of Commons in 1838) in the early decades of the 19th century, are lacking today when Britain is facing huge economic challenges.
The aftermath of the Brexit vote has been chaos in both the government and the Labour opposition.
Allister Heath, editor of the Brexit supporting Sunday Telegraph says: "What is wrong with this government? Its incompetence in its handling of the greatest question of our times is now so extraordinary, so mind-boggling, that it is at times hard to believe that any of this is actually happening. Did we all drop off to sleep the day after the referendum, and have yet to awaken?"
The Economist reports on a paper by Cambridge University economists which suggests: "More than 100,000 British businesses export goods to the EU each year. At present, they enjoy tariff-free trade with the country’s biggest export market. But all face uncertainty as Britain negotiates a new trading relationship with Brussels. Some fear disaster if the talks break down. British carmakers could face a 10% tariff to export to the EU market. Dairies might have to pay tariffs of more than 30%. These extra costs could make exporting uneconomic."
The Week That Broke Brexit: A Telegraph documentary on how Britain got a Remain prime minister after a Boris Johnson cricket match and a boozy barbecue with an insipid Michael Gove, egged on by his wife to seize the big prize.
On December 5, 1962, Dean Acheson, former United States secretary of state (1949-1953), asserted that Britain's role as an independent power was "about played out."
Acheson said at a conference on American affairs at the West Point Military Academy that “Great Britain had lost an empire and had not yet found a role.” He added:
Britain's attempt to play a separate power role — that is, a role apart from Europe, a role based on a 'special relationship' with the United States, a role based on being the head of a Commonwealth which has no political structure or unity or strength and enjoys a fragile and precarious economic relationship — this role is about played out…Great Britain, attempting to work alone and to be a broker between the United States and Russia, has seemed to conduct a policy as weak as its military power."
The blunt comments from a key architect of the postwar Western Alliance triggered consternation in London.
Acheson was President Kennedy's special adviser on NATO affairs and in his speech he said that Britain's application for membership of the Common Market (the European Economic Community, which was later renamed the European Union) was a "decisive turning point." Should Britain join the Six (then six member countries), "another step forward of vast importance will have been taken."
Charles De Gaulle, the French president, first vetoed the British application for membership of the EEC in 1963, commenting "l'Angleterre, ce n'est plus grand chose" ("England is not much anymore") and again in 1967. Eventually on January 1, 1973, Britain, Denmark and Ireland, became members.
Organisation of Economic Cooperation and Development (OECD) data for 1973 using constant 2010 dollars, adjusted for price differences (PPS), show that Denmark’s GDP per capita at $24,800 was on top in the EEC compared with Ireland’s $12,200 — the Republic was the poorest country in Western Europe.
West Germany and France were at $20,600 and $20,300, Italy had a level of $19,200 while the UK was at $18,800. Greece’s GDP per capita was $17,600 — compared with Japan’s $17,000.
The Conservative Party in power in 1970-1974 had negotiated entry to the EEC and the Labour Party which returned to government in two general elections in 1974, promised an internal vote on a referendum on membership of the EEC as the party was split with the significant Left, including Jeremy Corbyn, the current leader, in his mid-20s, viewing the Community as a capitalist conspiracy.
A one-day Labour conference in April 1975 voted by almost 2-1 to leave the European Economic Community. Most of the 3.7m votes came from the two biggest unions, the Transport Workers, and the Engineering Workers.
Margaret Thatcher, leader of the Conservative Party, told the House of Commons on April 8, 1975:
When we went in we knew exactly what we were going into. If we were now to withdraw, it would be a leap in the dark. We should not have any idea of the trading conditions into which we were coming out, or of the effect on sterling. It is not a genuine alternative. A genuine alternative would be to have two sets of negotiations and choose between them; but that would not be possible. We knew what we were going into because of the careful negotiations. If we withdraw we have no idea of what alternative trading arrangements we shall be able to secure…We are already a member of the free trade area by virtue of being a member of the Common Market; and if we were out every EFTA (European Free Trade Agreement) country would have to secure EEC permission because of the free trade agreements. Secondly, we would be a market of only 40m, which is hardly comparable to a market of 200m in the EEC. Thirdly, agreements on EFTA are particularly tough on rules of origin, and those in themselves, in the way they operate, could have an adverse effect on some of our trade, particularly in motorcar components. Having been through some 60 pages of the rules of origin one understands the difficulties associated with them. As honourable Members will know, there are provisions covering certain sensitive products in EFTA agreements under which tariff barriers have gone down, particularly in textiles, with the EEC. Those barriers would be erected again. So even if we could get into EFTA, that would be no answer to our problems. A second alternative would be to have a free trade agreement with the Community. The first thing that occurs to one on this is that a time when one has just broken a treaty is not, frankly, the best time to ask for another, particularly when one is a country of a similar size to other countries in the Common Market and one's products are such that one competes with many of the others."
The national referendum was held on June 5, 1975, with more than 67% supporting continued membership. 47.5% of Labour supporters voted to leave the EEC; 85% of Conservative supporters voted to remain.
In the Brexit referendum of June 2016, according to YouGov, the polling firm, Conservatives voted to leave, 61% to 39%. Labour voters (65%) and Liberal Democrats (68%) largely voted for remain but significant minorities went for leave. Only UKIP, where 95% voted for leave, and the Greens, where 80% voted for remain, avoided significant internal divisions on the vote.
The UK economy
The Financial Times has reported that Britain joined what was then the European Economic Community in 1973 as the sick man of Europe. By the late 1960s, France, West Germany and Italy — the three founder members closest in size to the UK — produced more per person than it did and the gap grew larger every year. Between 1958, when the EEC was set up, and Britain’s entry in 1973, gross domestic product per head rose 95% in these three countries compared with only 50% in Britain.
After becoming an EEC member, Britain slowly began to catch up. Gross domestic product per person has grown faster than Italy, Germany, and France in the years to 2016. By 2013, Britain became more prosperous than the average of the three other large European economies for the first time since 1965.
Britain today faces economic challenges after Brexit reflecting existing fragilities in the economy.
The biggest UK goods exporters are foreign-controlled car firms while the biggest services exporters are American-controlled financial services firms.
This is a perilous situation for a country leaving its biggest market, for a dubious hope that the rest of the world will embrace it.
Trade and deficits
Since 1948, the UK has recorded a trade surplus (meaning the value of exports exceeded the value of imports) 18 times. The longest period of trade surpluses was the 9 years in 1977-1985; the remaining 9 related to between 1956-58, 1969-71 and 1995-97.
Britain is not a significant exporter and while it has strength in services, it is weak in goods exports, which is a liability when seeking to expand business with emerging economies.
The UK has had 6 surpluses in trade in goods since 1948 – in 1956, 1958, 1971 and 1980-82. In contrast, the UK has posted a trade surplus in services every year since 1966, and in all but five years since 1948.
Exports as a percentage of GDP were at 30% of GDP in 2017 with goods accounting for 17% — France's ratio was at 31%, compared with 47% for German exports.
In 2017, the UK’s exports of goods and services amounted to £616bn and imports were valued at £642n. The EU accounted for 44% of UK exports of goods and services (£274bn) and 53% of imports in 2017. Services accounted for 32% of the UK’s exports to the EU in 2017.
The current account of the Balance of Payments, which comprises investment income and transfers as well as trade, was in a deficit of £79bn in 2017, compared with £103bn in 2016. The current account deficit was 3.9% of GDP in 2017 compared with 5.2% in 2016.
A deficit of £137bn on trade in goods was partially offset by a surplus of £112bn on trade in services in 2017. The overall trade deficit was £26bn in 2017.
The UK had a trade deficit with the EU of -£67bn in 2017 and a trade surplus of £41bn with non-EU countries. The overall trade deficit with the EU was made up of a surplus of £28bn on trade in services which was outweighed by a deficit of £95bn on trade in goods.
Britain has had a Balance of Payments current account deficit every year since 1984.
PwC, the Big 4 accountancy firm, has said that in the 8 years from 2009 to 2016, the sterling Effective Exchange Rate was about 17% below its value in the decade before the Global Financial Crisis (1998-2007). However, UK export volume growth — both goods and services — has been the lowest of the G7 industrialised economies on average since 2010.
Discussion of trade performance tends to focus on exports and imports of goods – especially manufactures. But if we are looking for the reasons for relatively poor UK export performance over the recovery period since the crisis, we need to focus more on the services side of the account. Services exports are particularly important for the UK economy: in 2016, services exports were 45% of total overseas sales and accounted for 12.5% of UK GDP. This is a much bigger contribution to national output than for other G7 economies – the equivalent figures for Germany and France are around 8% and for the US only 4%
PwC adds that UK services exports have increased by just 2.7% per annum in volume terms compared with 4.3% annual growth in goods exports. The equivalent figures for the long expansion that started in the early 1990s and came to an end in 2008, were 7.4% and 4.5% respectively, as Figure 4.6 shows. The rate of growth of UK goods exports in this recovery has been very similar to that seen in the economic upswing before the Global Financial Crisis, but services exports have grown at only just over a third of their pre-crisis rate. It is, therefore, the relatively disappointing performance of services exports that explains most of the UK’s lacklustre trade performance over this recovery period.
Bruegel, the Brussels think-tank suggests that there is no services exports bonanza for Britain in Asia. It says net services exports to China account for only 2.5% of the UK’s total services trade surplus while in Europe, Denmark and Germany have the closest services trade relationships with China, but the size of this trade is in general very limited: only about 3% of Danish and German services exports are sold to China.
The UK Institute of Fiscal Studies says that international supply chains play a particularly important role in UK-EU trade. Not only is the EU the UK’s largest source of imports (accounting for 54% of the total in 2016), but a majority of these imports now take the form of intermediate goods and services. These are goods or services that add to the value of a product which firms then sell either for further processing or for final consumption. Tin used to produce a can is an intermediate good. A tin of beans sold to a supermarket for sale to consumers is not.
Supply chains rely on having materials transported with ease across borders.
Nearly 70% of the UK’s exports to the EU take the form of intermediate inputs to the production of other goods and services. The relative importance of the EU in the UK’s trade thus largely reflects the role UK industries play in EU-wide supply chains."
According to the UK government in 2016, an estimates 8% of UK SMEs (small and medium-sized firms) export to the EU and a further 15% are in the supply chains of other businesses that export to the EU.
UK trade with Ireland
The Office for National Statistics Pink Book 2018 and the HMRC trade database show:
1) In 2017, UK exports to Ireland were worth £34.0bn; imports from Ireland were £21.8bn, resulting in a trade surplus of £12.2bn;
2) The UK had a surplus with Ireland in both goods and services;
3) Ireland accounted for 5.5% of UK exports and 3.4% of all UK imports;
4) Ireland was the UK’s 5th largest export market and the 9th largest source of imports;
5) The UK has recorded a trade surplus with Ireland every year between 1999 and 2017 while there were both persistent overall trade goods and services deficits in that period.
According to the House of Commons Library, the UK’s trade surplus with Ireland was £12.2bn in 2017. This was the UK’s second highest trade surplus, after the surplus with the United States. Ireland was one of four EU states the UK had a trade surplus with, in 2017 — the other three were with Luxembourg, Sweden, and Denmark.
Overall, UK exports to Ireland represented 5.5% of all UK exports and 12.4% of all UK exports to the EU. UK imports from Ireland represented 3.4% of all UK imports and 6.4% of all UK imports from the EU.
Looking at trade in goods only, the UK exported £20.3bn to Ireland in 2017, a record high. UK imports of goods from Ireland were £14.5bn, also a record high resulting in a trade surplus of £5.8bn in trade in goods.
The UK had a surplus of £6.4bn on trade in services with Ireland in 2017, exporting £13.7bn of services to Ireland and importing £7.3bn. UK imports of services from Ireland reached a record high in 2017 and have now grown every year since 2000.
In cash terms, UK exports to Ireland have increased from £16.0bn in 1999; imports from Ireland have increased from £12.3bn.
Annual budget outturns and public debt
Annual budget surpluses have been achieved in only 12 years since 1948 and only five years since 1971-72.
In April it was reported that the UK’s public finances have registered their first current budget surplus in 16 years (reflecting the difference between current spending and tax receipts), showing the progress made by the government on this measure of deficit repair since the last recession.
The Office for National Statistics (ONS) reported that public sector borrowing was just £1.35bn in March, the final month of the 2017-18 fiscal year. Public sector net borrowing (excluding public sector banks) over the 12 months was £42.6bn; that was, £3.5bn less than in the previous financial year (April 2016 to March 2017)
The overall annual budget including net investment will continue in deficit through the next decade.
Public sector net debt (excluding public sector banks) was £1,798.0bn at the end of March 2018, equivalent to 86.3% of gross domestic product (GDP), an increase of £71.2 billion (or 1.0 percentage point as a ratio of GDP) on March 2017.
The Office for Budget Responsibility (OBR) in a January 2017 report said that to return the debt-to-GDP ratio to its pre-crisis level of around 40% of GDP in 2066-67, would require a permanent increase in taxes and/or cut in spending of 4.3% of GDP (£84bn in 2017 terms) in 2022-23. The OBR acknowledged that such fiscal moves are unrealistic.
Stagnant wages
The UK had the biggest fall in real wages (inflation-adjusted) of any other advanced country apart from Greece, since the financial crisis began in 2007, 2016 research showed. Germany had the biggest rise of the advanced countries.
A report by the UK’s Trades Union Congress, showed that real earnings had dipped more than 10% in the period 2007-2015, leaving the UK equal bottom of the wage growth league table with Greece, while the UK, Greece, and Portugal were the only three OECD countries that saw real wages fall over the eight-year period.
By contrast, over the same period, real wages grew in Poland by 23%, in Germany by 14%, and in France by 11%. Across the OECD, real wages increased by an average of 6.7%. Ireland had a rise of 1.6%.
After a brief recovery, real wages have been below the nominal Office for National Statistics (ONS) index in the period Jan 2016-2018.
In effect average real earnings in the UK in April 2018 were at 101.4 compared with the ONS index of 100 for 2005.
Employment and output per British worker
In March 2018 the UK's employment rate — the percentage of the population of 15-64-year-olds working — was 74.7% compared with Germany's 75.6% and Ireland's 68.1% (Dec 2017).
In May 2018, the UK's headline unemployment rate was 4.1% compared with Germany's 3.4%.
According to Eurostat in 2016, every three people in employment in Greece was self-employed in 2016 (29%), and around one in five in Italy (21%) and Poland (18%). At the opposite end of the scale, the self- employed accounted for less than 10% of total employment in Denmark (8%), Germany, Estonia, Luxembourg and Sweden (all 9%).
The UK was at the EU average of 14% and Ireland was at 15%. During the recession in the UK, there was a jump in self-employment without employees and 83% of the British employed are employees compared with 89% in Germany according to the OECD.
According to the ONS, in 2011 output per worker in the UK trailed 21% behind the rest of the G7. In effect what this means is that a British worker must work for 21% as much time in order to produce exactly the same amount of goods as his or her equivalent in France or Germany.
Last April the ONS reported that the UK's long-running nominal productivity gap with the other six G7 economies (US, Germany, Japan, France, Italy and Canada) was broadly unchanged in 2016: falling from 16.4% in 2015 to 16.3% in 2016 in output per hour worked terms.
McKinsey, the consultancy, says:
For every hour worked by a British worker, a German worker produces 36% more. Much of this gap is due to the drag created by Britain’s large cohort of low-performing companies. Two-thirds of UK employees work for companies whose productivity is below average, adjusted for industry and size of company. The productivity challenge is also a geographic one. There is a wide variation in productivity among different regions in the United Kingdom, and also within them."
McKinsey: Solving the Productivity Puzzle
The Financial Times has written :
"Most people believe they are more effective than they really are. In research, 87% of MBA students at Stanford University rated their academic performance as better than the median. More than nine out of 10 American drivers think they drive better than average. And 95% of employees in the UK think they are at least as productive as their colleagues."
Sarah O'Connor wrote in The Financial Times on Sept 14, 2018 in 'Workers have right to gig economy that delivers for 21st century — Flexible working is touted as the future but too often resembles an exploitative past'
"But the future is not the problem — the problem is that a chunk of our economy has been retreating into the past. You need only look as far as Cambridge to see that the UK has cutting edge technology and science hubs as well as some of the best universities in the world. In cities from Leeds to Manchester and London, the economy has been churning out good jobs in professional services and the creative industries. Meanwhile, in the low-paid economy that sits alongside — and often services — the higher-paid workforce, new technology has enabled the return of some very old ways of working. The courier companies that shuttle documents between London’s banks and law firms, for example, disperse the work available to couriers who they pay on a piece rate.
. ..The effect of these employment models has been to make humans a cheap and flexible resource in the UK’s low-paid sectors. No wonder these industries have become particularly labour-intensive, with relatively little investment in machines and technology. The UK’s low-paid sectors are 20 to 57% less productive on average than the same sectors in Belgium, France, Germany and the Netherlands. Take the low-productivity activities that have recently been “reshored” to the UK, from manufacturing screws to stitching £7 dresses. A developed economy that finds itself sliding back down the global value chain is an economy where something is going awry."
Britain leads in business dynamism
One area in which Britain leads is in employer firm business startup rates while 2017 was a record year for UK foreign investment outflows, with a 35% increase in UK businesses investing into Europe "When 450 global investors were asked ‘where is the most attractive place to invest in the future’, they favoured Germany (1st), with France (2nd) overtaking the UK placed 3rd. France has seen a surge in FDI projects by 31% in 2017, supported by the so-called 'Macron effect'."
Although reliable cross-country data is scarce, and Softbank of Japan acquired the UK's top homegrown tech firm ARM Holdings — the chip designer — in 2016, the UK is viewed as the Digital Capital of Europe. Enda Kenny, then taoiseach, made that an aspiration for Ireland in 2011 but with about half the Irish ICT sector comprising admin staff, coupled with a low level of national innovation (despite international metrics polluted by tax avoidance distortions), the goal was as credible as the 2006 target for Ireland to be a world-class knowledge economy by 2013.
The Institute for Policy Research says that a total of £6.7bn was invested in UK tech firms in 2016 — more than any other European country.
See Economist Intelligence Unity survey on the digital environments in 45 global cites here: London and Madrid lead Europe while Berlin was last of the 45 cities.
The UK's overall startup rate is the best among the advanced countries:
Finfacts 2018: Ireland has very low employer firm startup rate- the UK is 4 times bigger
The Economist 2018: American tech giants are making life tough for startups
Harvard Business Review 2014: With Fewer New Firms, the High-Tech Sector is Losing its Dynamism
Third of UK adults voted for Brexit
*The UK Office for National Statistics has reported that the adult UK population (over 18 years) at June 30, 2016, was 51.8m ("We...publish population estimates which show that on 30 June 2016 there were estimated to be 757,787 people aged 17 and a total population of people aged 18 and over of 51,767,543.")
The chart below from the London Independent/Indy100 (the data was sourced from the Electoral Commission) is misleading as it relates to the total UK population of 64.6m, including teens and children.
We calculate 5.3m adults who were not on the register and adding to the 13.0m on the register that didn't vote gives a total of 18.3m or 35.3%. In effect, 33.6% of the adult population voted for Brexit — less than the number of adults who didn't vote.
