UK prime minister Boris Johnson’s talent for glib bombast — last year’s “get Brexit done” and “unleash Britain’s potential” followed the brilliant 2016 slogan “take back control” — is about to meet the reality of an economy and country confronting large challenges and subject to tight constraints. So what happens now?
The Conservatives’ ability to persuade constituencies that had long been loyal to Labour to vote for them in the December election was a remarkable success. But making these new areas of support feel they have benefited from the switch is another matter.
Government investment decisions will now be based on new rules intended to shift their focus towards improving the wellbeing of people living in poorer areas and narrowing the productivity gap between regions. But British governments have been trying to rebalance the regions economically for decades, notably under the last Labour government. Mainly, they failed, for powerful reasons. These divisions are deep.
As Oxford university’s Paul Collier has explained, in The Future of Capitalism, potent forces caused the economic rift between thriving metropolises and struggling provincial towns in Britain and other high-income countries. The most sophisticated and profitable economic activities are now driven by the economics of agglomeration — more specifically, by concentrations of highly-educated and talented people.
The struggling towns are the opposite side of this picture. Not surprisingly, regional differences in productivity are now the widest they have been for a century. It is possible for the public sector to invest more. But turning such spending into sustainably dynamic economies is another matter.
A recent report on the new Tory-voting areas from the Resolution Foundation strengthens the concerns. It finds that these areas consist of large towns and smaller cities with slow-growing and immobile populations and relatively low levels of educational qualifications. A genuine levelling up is going to be very difficult, perhaps impossible.
The context will make it even more difficult. Levelling up requires more spending. Making people more content in the post-Brexit UK will also depend on ostentatiously ending austerity. The government will be pressured to spend more on health, schools, local government services, social care and support for poor families. Yet, if the Bank of England’s dire forecasts prove correct, the chancellor of the exchequer may well face a current fiscal deficit of more than 0.5 per cent of gross domestic product in 2022-23 instead of the surplus that was only very recently targeted.
The obvious response would be to raise taxes. Yet the Conservatives promised not to increase the rates of income tax, value added tax or national insurance in the election. They are scrabbling to find ways of raising taxes, piecemeal — changing the tax deductibility of pension contributions, for example. It would be more sensible to accept that, in an ageing society with substantial social needs, a permanently higher share of tax in GDP (still relatively low compared to European peers) is needed. The best way to do this is via broad-based tax increases.
An alternative is to borrow somewhat more. At current low nominal and real interest rates, this makes some sense, provided the borrowing itself is safely long term. Certainly, the government could easily justify more borrowing to pay for high-return capital spending.
Yet the main source of greater prosperity and higher fiscal revenue must be faster economic growth. Here there are two worries. The bigger one is the unprecedentedly dire productivity performance since the 2008 financial crisis. This needs to improve sharply. The smaller, yet still significant, concern is Brexit itself. This chalice will go on poisoning, as the country’s biggest trade relationship is gravely impaired. The idea that Brexit will unleash Britain’s potential is no more than a fantasy.
Sajid Javid, former chancellor, wished to raise the rate of annual economic growth to 2.7-2.8 per cent. That would be pleasant. But he had no idea how to do this. The most important transformation must be in the private sector, where investment has been low and productivity growth dismal. It is rather more likely that growth will be below 1.5 per cent a year in the medium term.
This government wants to deliver a hard Brexit, end austerity, bring the nation together, level up the less-successful regions and create renewed economic dynamism. But the economy’s trend is dismal, the fiscal position weak, regional divisions entrenched and Brexit damaging. Glib slogans will not fix any of this. In the end, reality bites.
martin.wolf@ft.com
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Source: Economy - ft.com
