In the 1970s, the UK was known as the “sick man of Europe”. Today it seems to be the sick man of the developed world. The IMF forecast this week that Britain would be the only leading economy to shrink this year. Its gloomy outlook was published, by coincidence, on the third anniversary of the UK’s exit from the EU. The Brexit deal is by no means the only reason for Britain’s underperformance, but it is a factor. Finding ways to soften its impact needs to be part of a broader strategy to rekindle growth.
The IMF may be overly pessimistic. But the UK is undoubtedly lagging behind its peers as it suffers the worst of two economic worlds. As in the US, its shrunken post-pandemic workforce has left it with a labour market squeeze. And, like the rest of Europe, Britain is exposed to sky-high energy prices. The disastrous “mini” Budget of Liz Truss’s short premiership led to a rise in borrowing costs which has eased but is still affecting families and businesses.
A 2023 recession will compound years of underperformance: the UK is the only major economy that has not regained its pre-Covid size. Productivity growth and business investment were anaemic pre-2016, but few economists dispute that Brexit has exacerbated the UK’s weakness since the referendum.
Business investment has stagnated, depressed by political and economic uncertainties and the erection of barriers with Britain’s biggest trade partner. The UK’s post-pandemic recovery in trade has trailed that of other big economies. Newfound regulatory freedoms, and new trade deals with the likes of Australia, cannot offset the damage.
The EU exit has also eroded the quality of governance. Successive Conservative governments have wrestled with the contradiction between Brexit purists’ belief that it would free Britain to create a low-tax, small-state economy, and many Leave voters’ for greater government intervention.
Boris Johnson, dumping an industrial strategy from his predecessor Theresa May, tried to square the circle by promising to “get Brexit done” while embracing big-state government — till Covid-19 wrecked the public finances. Truss’s bungled lunge for growth through massive unfunded tax cuts in turn repudiated Johnsonism. Rishi Sunak has changed course again. The reversals have led to incoherence in economic policy and exacerbated business reluctance to invest.
As polling suggests voters are doing, politicians of all stripes need to acknowledge Brexit’s impact and the urgency of trying to improve on Britain’s bare-bones trade deal with the EU. Resolving the dispute over trading rules with Northern Ireland would be a welcome step. But the UK also needs to address structural factors holding back its growth potential.
As a start, the government should replace or extend its super-deduction on capital spending, which expires in April, to boost business investment. The planning system needs transforming, to clear the path for building more on undeveloped land.
As well as getting more people back into jobs, including through better childcare support, Britain needs to develop a more agile training and education system. Harnessing the UK’s success at producing start-ups means channelling more investment into innovative firms; a forthcoming cut to R&D tax credits is a step backwards. Driving growth in second-tier cities, partly through decentralisation, will be key to reviving the levelling-up agenda.
Business groups labelled Jeremy Hunt’s economic plan outlined last week as “empty”. The chancellor has a further chance to spell out a more ambitious agenda in the March Budget. If he cannot go beyond mere buzzwords, the latest bout of “British disease” will become ever more chronic.
Source: Economy - ft.com
