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- sean@seanrickardltd.co.uk
Britain’s companies and households need to accept that they are now poorer, says Huw Pill, the Bank of England’s chief economist, acknowledging that wages in Britain’s poorly performing companies cannot keep pace with rising prices. Britain’s headline inflation rate of 10.1 per cent compares with an average of 6.9 and 5 per cent respectively in the euro zone and US. Honesty is refreshing but we need the same frankness when it comes to analysing why. Current inflation reflects supply restraints emanating from the Covid-pandemic followed by soaring energy and food prices, post Russia’s invasion of Ukraine. But additional factors have contributed to the UK’s rate; namely, the Bank’s months of inaction as inflation started to rise and Brexit. The inflation rate will decline this year as last year’s hike in energy prices falls out of the calculation, but the effects of Brexit will remain and worsen.
Britain’s economic woes cannot all be blamed on Brexit, but it was the last straw in a succession of policy failures regarding the productivity and competitiveness of British industries. The lack of both government and business investment has been the Achilles heel of the UK economy for decades. Rather than investing in the future, the Thatcher governments of the 1980s used North Sea oil revenues to cut taxes and finance unemployment. Post the financial crash, Cameron and Osborne presided over a sustained and savage period of austerity which again, inhibited investment. To a degree membership of the single market provided some offset in the form of inward investment and trading opportunities, but the game was up with Cameron’s disastrous referendum. Following its announcement, the pound fell 17 per cent against the euro – where it remains – as the financial markets adjusted to the reality that Britain would be economically weaker outside the EU. The lasting effect of the deterioration in the Britain’s ‘terms of trade’ – the prices of its imports relative to the prices of exports – has been to reduce workers’ real incomes including exacerbating the impact of the Russian war on energy prices.
Business investment has stalled since the Brexit referendum so that it is now some 20 per cent below the level economic experts estimate it would have been in the absence of Brexit. The latest ONS trade statistics reveal a disastrous export performance with the volume of exports falling 9 per cent below the pre-pandemic average in the fourth quarter of 2022 – the weakest export performance in the G7. The UK’s worrying trade performance emanates from supply chain disruptions, low business sentiment and the stagnation of business investment, all to a greater or lesser degree consequences of Brexit. Hardly surprising that the IMF predict that the UK economy will be the worst performing in the G7 in 2023.
Looking ahead the UK is posed to suffer another Brexit cost. In 2019 the EU set out a Green Deal for members comprising finance streams totalling €1 trillion. Originally focused on helping the EU to adjust to climate change, it became a lifeline for helping EU businesses recover from the Covid-pandemic. Now responding to the US Inflation Reduction Act’s $369 of subsidies and tax credits for clean energy investments, the EU is further augmenting its Green Deal. In a radical change in policy it will for the first time support large-scale public funding for green projects if similar incentives are offered outside Europe. The effect will be to allow EU members to pump billions of euros into the production of solar panels, batteries, wind turbines and heat pumps, to match US subsidies.
Post Brexit Britain has put in place the Subsidy Control Act but it is no match for the enormous sums that will be available to enterprises in the US and EU. Outside the EU, the UK is now in a position it persistently sought to avoid; namely, a costly subsidy race with the EU which it can never win. Companies in highly competitive and capital-intensive production are being tempted to relocate, at least part of their operations, to the EU or US. The latest is the car component company Unipart whose CEO observed that located in Britain Unipart would not be competing on a ‘level playing field’. Hence, the UK’s dismal investment performance is likely to deteriorate further as it fails to match EU and US largess.
What is the response of the zealots to the unfolding disaster of Brexit? Attempts to blame the UK’s weaking economic performance on Covid and Russia’s war are now untenable and true to form, those who once promised sunny uplands are changing their story. Those of us who point to the longer-term deterioration in Britain’s relative wealth and reputation are told to ‘get over it’ while their claim that Brexit was never about economics, only sovereignty, is a scurrilous abdication of truth and responsibility. But even the notion of unshared sovereignty was never feasible. Liz Truss tested to destruction the hypothesis that outside the EU we could slash taxes with impunity. Setting our own standards and regulations will, as businesses are frantically telling the government, further frustrate the UK’s ability to sell goods and services to the EU – lest anyone forgets, the world’s largest trading bloc on our doorstep. Outside the EU, Britain’s control of its borders is weakened as we now seek the cooperation of others e.g., France. And the emerging geopolitical landscape has forced the government to admit it is necessary to ‘reinvigorate’ the UK’s historical ties across Europe.
Against this deteriorating outlook what is Labour’s response? It is the pathetic and disingenuous slogan ‘make Brexit work’ despite the PM’s admission that outside the single market Britain is at a disadvantage. Polling evidence commissioned by the Constitutional Society suggests that if Labour were to argue, on the basis of facts and figures, that Brexit was a mistake, its share of the vote would actually increase. It is time for Labour to offer voters a real choice by putting clear blue water between the Tories’ refuge in flags and fantasises and the honesty of facts and figures.