Prime Minister Rishi Sunak may offer financial markets what they want – spending cuts to cut government deficits – but not what Britons need – a path to growth and prosperity.
Prime Minister David Cameron has led Britain out of the ashes of the global financial crisis with a fairly stable tax-to-GDP ratio of 33% – not high by European standards. But Brexit, COVID-19 and the war in Ukraine are throwing the UK into financial distress, inflation and the prospect of a prolonged recession to take advantage of rising prices.
Mr Cameron took advantage of London’s financial sector’s opportunities within the EU, but as it prospered, the rest of the country generally did not.
During the post-financial crisis recovery, headline GDP growth fell to 1.7% from 2.6% during the previous expansion. Going forward, growth is likely to be around 1.2%, but only after inflation has subsided.
Financiers like Mr Sunak have grown rich, but the once highly industrialised north of England has languished. Ultimately, this made possible Brexit and former Prime Minister Boris Johnson, who promised to lift the level of the region.
Unfortunately, Prime Minister Theresa May and Mr Johnson are either poorly negotiated or lack leverage when it comes to crafting a withdrawal agreement with the EU. Whichever way you choose, the final deal puts the UK in an enviable position.
Before discussing a post-Brexit free trade deal with the EU, May agreed to negotiate a huge severance payment from the UK to the bloc – a deal that gives up one of the UK’s most important bargaining chips. Ultimately, Mr Johnson accepted a deal that would create free trade in goods without a “passport”, allowing London’s financial sector to compete on an equal footing with its counterparts in Frankfurt, Paris and Amsterdam.
German manufacturers and French farmers and wine now trade freely into the UK market, while London’s financial sector lacks equal access to mainland customers.
Mr Johnson supports Brexit, arguing that the UK will negotiate free trade agreements with other countries. His trade ministry has had some success – Britain now has deals with Japan, Canada and Mexico.
The grand prize will be the US, but Mr Biden’s policy is not to sign a new comprehensive free trade agreement – even with a staunch ally like the UK
COVID-19 has left this country bankrupt, overburdened and undercapitalized.
Mr Sunak estimates that UK companies invest 10 per cent of their economic output, compared with an industrialised country average of 14 per cent.
$426 billion in pandemic relief spending has sent the deficit soaring, while Mr Sunak, who is Mr Johnson’s finance minister, has increased wages, corporate taxes and other taxes.
The tax-to-GDP ratio is the highest since 1950 and is expected to rise further. Financial markets are calling for a reduction in the deficit expected to be about 1.9 percent of GDP next year.
That’s tough because Britain was hit just as hard as import-dependent Germany and France when Russian gas supplies ended. Without government aid, ordinary Britons will face a dire cost of living crisis.
Home energy bills are soaring as pandemic aid ends. After paying for necessities, low-income households are left with little discretionary spending.
The country has considerable potential to obtain gas through fracking, but Mr Sunak will continue to ban the practice.
A return to fiscal austerity without better market access for the EU financial sector would create an impossible scenario for overall economic growth.
Time for some naked diplomacy with Yankees and Britain’s mainland friends.
Britain is Ukraine’s second-largest arms donor after the United States, but its finances are barely as good as those of Germany and other wealthier EU nations.
Now is the time for German Chancellor Olaf Schultz’s Mr Sunak, French President Emmanuel Macron and other European defence leaders to publicly shame open financial markets.
The same is true for Mr. Biden on free trade. Britain is building up its naval power in the Pacific to support America’s focus on the looming Chinese challenge, but it’s not getting much in return.
Britain must learn from Mr Biden’s new playbook – industrial policy.
It has strong capabilities in science and technology and should be negotiated because it can participate in America’s new emphasis on semiconductor, green energy and automotive supply chains. And to deal with financial markets, spend as needed to become a full player.
To reduce external debt and a huge trade deficit of 2.6% of GDP, the UK needs to find ways to promote self-sufficiency in manufacturing and food production.
Protectionism isn’t pretty, but the EU and Mr Biden’s US growth framework and stance on financial services and trade leave the UK with no other option.
As a financier, Mr Sunak seems to think that getting the budget figures right and succumbing to awakeningism on things like climate change and green energy will cure Britain’s ills – but it doesn’t.
• Peter Morici is an economist and professor emeritus of business at the University of Maryland and a national columnist.