Sunday, October 02, 2022

Brexit returns UK to status of a sick man of Europe

Bloomberg commented "Nothing illustrates it better than the slide in the pound. It’s fallen from a high of more than $2 in 2007, just before the financial crisis, to $1.50 at the time of the Brexit referendum, and is now on the brink of parity with the dollar." In 1945, about half the world’s trade was still transacted in sterling. IMF data show that sterling accounts for 5% of global foreign reserves, which is above the currencies of Switzerland, Australia and Canada. It's also ahead of the Chinese renminbi which is close to 3%. The current value of the UK is 3% of global GDP. The Euro Area's equivalent numbers are 15% and almost 21%.

The economic dunces that sit in numbers 10 and 11 Downing Street, London, thought that giving big tax breaks to the mainly wealthy would turbocharge the British economy. Meanwhile, mortgage rates will rise for many people following expected high interest rate changes from the Bank of England.

The first decision of Kwasi Kwarteng, the chancellor, was to sack the civil service head of the Treasury. He rejected involving the public body, the Office for Budget Responsibility (OBR), in forecasting economic growth and with the support of Liz Truss, the prime minister, he plucked the annual growth target of 2.5% from the air.

The Office for National Statistics said in August 2022 that it had revised down annual volume GDP growth in 2020 by 1.7 percentage points, meaning that it fell by 11%, the largest in more than 300 years and the worst recorded among G7 countries ((US; Japan; Germany; France; UK; Italy and Canada). 2021 growth was 7.44%; 1.67% in 2019 (pre-pandemic) and 1.65% in 2018.

A recent analysis by Oxford Economics for the Tony Blair Institute concluded that aggregate UK output might be cumulatively 0.4% higher five years hence.

Truss talks of economic growth while deriding an “anti-growth coalition.” But of course, she ignores the biggest drag on growth: Brexit.

In Kwarteng's mini-Budget on September 23rd, he proposed the biggest tax cuts since 1972. The unfunded £45bn cost would be added to the deficit and 5% of households would get almost 50% of the benefit, according to the Resolution Foundation, a think tank. In addition, £60bn+ would be spent on energy subsidies.

Update: The British government on Monday, October 3rd, U-turned on plans to scrap the top 45p rate of income tax, the chancellor confirmed at the Conservative Party Conference. This would have benefited people earning more than £150,000 at a cost of just£3bn of the£45bn mini-Budget. The Resolution Foundation said that despite Monday’s U-turn, the richest households would still gain almost 40 times as much as poorer families from policies announced in the mini-Budget.

More U-turns are expected as the new government searches for savings if any on public services while at the same time seeking the support of the majority of Tory MPs that did not support Liz Truss for prime minister (the final ballot of MPs had 137 votes for Sunak, 113 for Truss.)

In October 1980 Margaret Thatcher, then prime minister, in her speech to the Conservative Party Conference, said "To those waiting with bated breath for that favourite media catchphrase the 'U-turn,' I have only one thing to say: You turn if you want to: The Lady’s not for turning."

Brexit damage

In 2021 goods exports between the UK and the EU fell 25% compared with 2019 while Eurostat data showed a fall in services exports by 7% in 2021 compared with 2019. This category includes everything from financial services to professional services such as architecture, marketing and accounting.

Maroš Šefčovič, the European Commission vice-president and Brexit negotiator, commented “Brexit has increased red tape, not decreased it. It is no longer as frictionless and dynamic as before. This holds true for both goods and services.”

The Office for Budget Responsibility (OBR) commented in March 2022 "While additional trade with other counties could offset some of the decline in trade with the EU, none of the agreements concluded to date are of a sufficient scale to have a material impact on our forecast.

The government’s own estimate of the economic impact of the free-trade agreement with Australia, the first to be concluded with a country that does not have a similar arrangement with the EU, is that it would raise total UK exports by 0.4%, imports by 0.4% and the level of GDP by only 0.1% over 15 years."

The OBR effectively called out the Brexit advocates like Johnson, Gove, Rees-Mogg, and their foolish fellow travellers.

In 2021 UK goods exports to the EU fell 25% from 2019

In a June 2022 a report by John Springford of the Centre for European Reform (CER) estimated that in the final quarter of 2021, GDP (gross domestic product) was 5.2% smaller, investment 13.7% lower, and goods trade 13.6% lower than what they would have been had the UK remained in the EU.

He added that tax rises imposed by Boris Johnson's then-government " would not have been needed if the UK had stayed in the EU (or in the single market and customs union)."

"In 2016, Britain's economy was 90% the size of Germany's. Now it is less than 70%. And that's before today [September 23, 2022, when the disastrous mini-Budget was announced]" — Mark Carney, former governor of the Bank of England, in the FT.

The Economist called Liz Truss the Iceberg Lady: "She blew up her own government with a package of unfunded tax cuts and energy-price guarantees on September 23rd. Take away the ten days of mourning after the death of Queen Elizabeth II, and she had seven days in control. That is roughly the shelf-life of a lettuce."

The UK as a sick man of Europe again

In 1853 Tsar Nicholas I of Russia described the Ottoman Empire as "the sick man of Europe." It was a label for the British economy following a big devaluation of the pound sterling in 1967 and it was also a factor in joining the European Economic Community (EEC) in 1973.

The two main political parties struggled with inflation and strikes in the 1970s. The consumer inflation rate hit 24.5% in September 1975 and in the following year, the International Monetary Fund (IMF) arrived with a bailout.

The so-called Winter of Discontent in 1978/79 resulted in 29m worker strike days, in 1979 (also in that year there were 1.47m working days lost due to industrial action in Ireland the highest amount since 1937.)

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 launched, and Britain’s entry in 1973, gross domestic product per head rose 95% in these three countries compared with only 50% in Britain.

After EEC membership, Britain slowly began to catch up. Gross domestic product per person grew faster than Italy, Germany, and France in the years to 2016 — the year of the Brexit referendum.

By 2013, Britain had become more prosperous than the average of the three other large European economies for the first time since 1965.

Prof Nicholas Crafts, a leading British economic historian, has said that the big problem in the 1960s was very weak competition. "The retreat from competition in the British economy was triggered by the 1930s crisis but was not fully reversed until the 1980s. Early postwar Britain was notable for cartelisation, nationalisation, weak competition policy, and protectionism. ...Table 2 reports the relatively slow reduction in trade costs for the UK compared with founder members of the European Economic Community and not until the late 1970s was something approaching free trade restored."

John Burn-Murdoch, chief data reporter of the FT, says that the number of working-age people in Britain reporting multiple serious health conditions had been declining before Covid-19, but it has since rocketed by 735,000 in just two years. Chronic pain and mental health problems have pushed huge numbers out of the workforce since the pandemic. The World Health Organization says that it's known how to prevent such ill health, and about 60% of the main chronic illnesses (diabetes, cancer, heart attacks and strokes) can be prevented by addressing major risk factors such as smoking, what people eat and drink and physical inactivity. The UK has the highest level of obesity in Europe. A report from the House of Commons health select committee last July concluded that the NHS and the social care system are facing their greatest workforce crises in their history, with around 100,000 vacancies being advertised in each at the end of 2021. It predicted that the NHS and social care service will require an extra 475,000 and 490,000 employees by the early 2030s, but highlighted that the government has no credible plan to meet that need.

Prof Crafts added in his working paper, "Of course, competition, or the lack of it, is by no means the whole story with regard to British relative economic decline. For example, education, taxation, macroeconomic policy are all deserving of attention. Shortfalls in human and physical capital per hour worked, which reflect investment decisions made over the decades for many other reasons, played a major part."

A June 2022 report from the Resolution Foundation notes that "there are some uncertainties inherent in the impact of Brexit to date, not least because the pandemic has also had a profound impact on trade flows during the same period. However, we should expect the lasting impact of reduced openness to be substantial and widespread productivity and real income shocks – much of which has already taken place. We do not expect deep shifts to the UK’s industrial structure or trade specialisation, but policymakers should be aware of the widespread real wage impacts and the implications on the competitiveness and productivity of the UK."

The UK has a poor record of investment in health facilities compared with peer countries

Britain today faces serious economic challenges after Brexit and the dreams of sunlit uplands have evaporated.

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 downgrading its biggest market — with a dubious hope that the rest of the world will embrace it.

Martin Wolf of the FT commented this week on Kwarteng's mini-Budget "this huge increase in the fiscal deficit occurs in a country that ran a current account deficit of 8.3% of GDP in the second quarter of 2022 and has a tumbling exchange rate, low unemployment and already high inflation.

Who could seriously regard this huge fiscal loosening as responsible? The Bank of England will be forced to tighten sharply. The government might then pour blame upon it for the results of its own decisions.

In sum, this mini-Budget will do nigh on nothing to raise medium-term growth but risks serious macroeconomic instability. The failure to ask the Office for Budget Responsibility to assess its impact is simply scandalous. This government may be indifferent to painful reality. But reality usually wins in the end."

CNN reported "There was good news and bad in Friday’s revised data about the UK economy. It grew — marginally — in the second quarter of the year, rather than shrinking as previously estimated.

But the latest update from the Office for National Statistics also showed that the United Kingdom is the only G7 economy that has not recovered fully from the pandemic, with GDP still 0.2% smaller than at the start of 2020. And, according to the Bank of England, the economy is most likely already shrinking again, with inflation heading to 11%."

Martin Wolf wrote in another column, "The only sort of leader more dangerous than the rogue the UK used to have is the zealot it has now. The dominant characteristic of zealots is their conviction that reality must adapt to their desires, rather than the other way around. If this attitude to life is adopted by an individual, it can do great damage to those close to them. In political leaders, the result may be a disaster for the country."

Unbalanced economics

London and the Southeast region account for 38% of GDP with 27% of the population.

The wealthiest 10% of households held 43% of all the wealth in Great Britain in the latest period; in comparison, the bottom 50% held only 9%.

The richest 1% of households were those whose total wealth was more than £3.6m. The least wealthy 10% of households had wealth of £15,400 or less.

Employment in UK manufacturing was 7.5% in 2021 compared with 19% of the workforce in Germany.

In 2019 the FT reported "Regional inequality in the UK has become the worst of any comparable developed country and is growing, a left-leaning think-tank has concluded in its annual State of the North report. Only countries such as the much larger US, once-Communist Romania and South Korea — which developed very quickly, are more polarised in areas like health, jobs, disposable income and productivity, IPPR North said in its study of the north-south divide."