The past week’s Brexit news was dominated by the anticipation of additional barriers to UK-EU trade following the entry in force of delayed checks on EU imports to Great Britain on January 1, 2022. In parallel, an increasing number of politicians and commentators have started weighing in on the debate about the broader economic strategy the UK should or should not adopt to address the pressing economic issues and making Brexit a success or limiting the damage it is causing.
Trading in indifference
The grace period for full customs declarations on goods imported into Great Britain from the EU expired on 31.12.2021 (imports from the EU to Northern Ireland are exempt thanks to the Northern Ireland Protocol (NIP) and the UK government has decided to extend the grace period for goods imported into GB from the Republic of Ireland). From 1.1.2022 UK importers (and in some cases their EU suppliers) will have to provide a full import declaration. A key issue with the new rules is that EU exporters to the UK will have to register for an Eori number (economic operators registration and identification number).
So, the year started with another blow to the Brexiter promise of ‘frictionless trade’ as the media are full of articles on the now familiar effect of Brexit on UK-EU trade, namely a combination of more red tape, higher costs for businesses and slower trade. Unsurprisingly, this is expected to hit smaller businesses most as the Cold Chain Federation and the Federation of Small Businesses both warned this week.
The Guardian cites Paul Hargreaves, founder of Cotswolds Fayre, as saying that the government does not understand the impact of Brexit on British businesses and that “[Ministers] are not in the real world. They think things are a lot easier than they actually are.” That is not surprising of course. We have known at least since Johnson’s famous ‘F**k business’ comment that Brexit was always going to be about nationalist ideology not economic rationality. However, while it was possible to argue (and lie) about the impact of Brexit on businesses before Brexit happened, it becomes increasingly difficult to deny the fact that the vast majority of UK businesses do not seem happy with the way things are going.
Brexiters, of course, have not changed their tune and continue to do just that, i.e. deny that Brexit is a problem for businesses. This was illustrated to perfection by Arch-Brexiter Shanker Singham’s intervention on a panel on BBC Radio 4’s Farming Today programme on 1.1.2022. On the programme Singham was asked to comment on various food producers’ complaints about the ‘completely untenable customs bureaucracy’ that meant for several interviewees that exporting to the EU was simply not viable anymore. His answer to these complaints from people who actually have first-hand experience with the new customs regime remains stubborn denial and a rehash of the teething problems argument: Yes, there were issues with new non-tariff trade barriers in early 2021, but these are the EU’s fault because the EU decided to apply full customs and regulatory checks from day one rather than applying an ‘implementation period.’ Regardless, Singham maintains that ‘challenge for customs processes going into the EU are much, much reduced now’ and the temporary difficulties have been overcome because companies have learned how to live with the new barriers. Astonishingly, according to Singham this also applies to the impediments on trade between Great Britain and Northern Ireland.
Singham’s intervention summarises nicely the Brexit ideologues approach to economic reality: a mixture of bad faith and denial that leads him to deny that there is a problem and blaming whatever problem cannot be denied on someone else, here the EU.
It is important to remember, of course, that it is the UK who did not want to extend the transition period and that the continues delays on introducing full checks on imports into the UK is mostly due to the government’s unpreparedness and not something that was part of the plan.
Regarding the Northern Ireland Protocol (NIP) it is important to remember that the very same customs processes Singham considers having been resolved are the very same that lead Brexiters to declare the NIP unacceptable and highly damaging for Northern Ireland.
Singham’s statements were in obvious contradiction with what interviewees and other panellists, including Minette Batters the president of the National Farmers' Union (NFU), had to say about the impact of Brexit and of Free Trade Agreements (FTA), like the one with Australia, are having on their lives. But Brexiters have become masters of distorting the reality in front of them and to always blame someone else for the failure of Brexit to deliver on its promises; and like Hargraves told the Guardian they genuinely seem indifferent to the negative impact their Brexit is having on businesses and their fellow citizens.
The promises and threats of deregulation
Another set of news items this week relate to the ‘détente v. deregulation’ choice I referred to last week and more specifically to the future direction of the UK’s economic strategy and macroeconomic policies.
The Tory right seems to continue cranking up the pressure on the party and the government to move Britain down the deregulation path. Several pieces including some by high-profile figures illustrate this trend. Thus, the Telegraph ran a piece scolding ‘risk-averse Tories’ for squandering Brexit opportunities and deploring that the UK is staying too close to the European model rather than going full on Thatcherite. The Telegraph also gave Nigel Farage a platform to voice his disappointment with the direction post-Brexit Britain has started to take. His analysis of the economic opportunities that Brexit presents remains at the usual level of evidence-free claims and empty platitudes including ‘energising the role of our financial services industry’ ‘new health and safety provisions in the workplace’ and unspecified ‘supply-side reform [that] could add 2 per cent to our GDP;’ which taken together ‘means that our economic prospects are better than those of our European neighbours.’ Besides these well-known 1980s-sounding economic recipes for success, there are some interesting bits in Farage’s piece though; Namely a pretty open call to Tory backbenchers to topple Johnson. According to Farage, for the next stage of ‘Britain's journey as an independent nation […] a character of Thatcher-style determination must be at the helm.’ He calls for the ‘Oxbridge chumocracy’ to ‘be consigned to the dustbin’ and asks if the ‘many MPs on the Tory backbenches [who] are beginning to realise this’ will ‘have the courage to act in 2022?’
Farage’s piece is another sign that Johnson has lost the support of the UK’s hard right and that 2022 will see the Tory party face a fundamental battle over its post-Brexit economic strategy direction.
Meanwhile, at the other end of the political spectrum, trade unions start getting nervous. The Trade Union Congress (TUC) reportedly wrote to Foreign Secretary Liz Truss and Business Secretary Kwasi Kwarteng to caution against moves to undermine workers rights. Kwarteng had proposed an employment rights review, but then scrapped it in early 2021 when the extent of public opposition became clear. However, with the Tories under increasing pressure to finally show the country some Brexit dividends and with the hard right pushing for ‘regulatory reform’ – which in their mind can only mean deregulation not better regulation – there is renewed concern that workers’ rights may come under pressure again. In particular, a review of retained EU Law (REUL) carried out by Lord Frost before he stepped down may put workers rights back on the reform agenda.
It should also be noted that even without an active push for deregulation, the UK may soon lag behind the EU in terms of labour rights, as Brussels is planning several pieces of legislation that will protect workers better in terms of platform worker status, minimum wages, and collective wage bargaining. The TUC has consistently warned against what might happen to workers right were the UK to leave the EU, but the ambiguous effect of the EU on workers’ rights increasingly shows that the left-wing case for Brexit (or Lexiter) case for leaving the EU was as much an illusion as the right-wing ‘taking back control’ case. Indeed, while I would agree that the EU does not leave countries enough choice in terms of their preferred institutional economic arrangements and while the European Court of Justice has undoubtedly played a role in driving what left-wing critics (wrongly) call a neo-liberal regulatory agenda, the positive effects of the EU on some aspects of workers’ rights become increasingly clear. Thus, the TUC now lauds the EU’s efforts in the area of labour rights, e.g. its ‘game-changing new rights for platform workers.’
As with anything Brexit related, the Tory right’s frustrations and the trade unions’ concerns show that the country is deeply divided and confronted with two very different visions of what is best for the country. Although it should be noted that the libertarian anti-State, anti-regulation approach is actually not popular – which may explain the flurry of pro-deregulation newspaper articles – but driven by a small group of extremely well-funded and well-organised extremists and therefore likely to have disproportionate influence on government policy.
Wages, prices, and inflation– squaring the circle
One of the most extraordinary moments in the Brexit saga in 2021 was when in reaction to increasing nominal wages – due to labour shortages – the government briefly tried to convince us that this was part of a plan of moving the UK economic model towards a high wage, high skill, high productivity economy. This incredible case of post fact rationalisation has already lost any real world relevance since price increases now outpaces increases in nominal wages, as Jonathan Portes pointed out on Twitter this week. Yet, a further element of proof – if we needed any – that the there was no coherent economic strategy regarding wages, skills, and productivity came from Tory MP Peter Bottomley. Bottomley – the person who finds it ‘grim’ to live on £82k a year – penned a piece in the Telegraph asking for workers to be ‘given limited pay rises this year in order to protect pensioners from inflation.’ Comparing the current situation to the 1970s and 1980s and suggests that there is a risk of wage-push inflation.
That, of course, is a questionable assumption given that other factors, increasing fuel prices in particular but also supply chain issues and the excess demand as the pandemic is easing, are certainly more important contributor to price increases. In that situation, Bottomley’s economic strategy would be counterproductive. Instead, the government will be keen to avert the threat of a cost of living squeeze, which means nominal wages need to increase more than prices, which in turn means either letting wages increase or getting prices under control.
On that front – price controls – another feisty debate took place on twitter this week. Political economist Isabella Weber suggested in a Guardian piece that price controls would be a potent tool to address the current inflationary pressures. The piece led Nobel prize winning economist Paul Krugman to post a – now deleted Twitter thread – that called Weber’s arguments ‘truly stupid.’ This in turn led to a backlash including a thread posted in James K. Galbraith name defending Weber’s expertise as well as the idea of price controls.
The debate of price controls is a difficult one on which even the brightest minds do not agree. Most people do seem to agree that they should be an exceptional and short-term instrument reserved for times of real crises. The heated debate seems to be mostly about whether or not the current situation is actually such a crisis and whether there are better ways of dealing with the current bottle necks and shortages. Weber (and Galbraith) argue that price controls may be a better means to keep inflation under control than resorting to interest rate increases and fiscal restraint that might lead to a recession.
Regardless of where one stands on price controls, one important point that Weber makes in her piece concerns the ‘critical factor that is driving up prices [and] remains largely overlooked: an explosion in profits.’ Indeed, government policies of state support for business, loose monetary and fiscal policies mean that companies’ earnings have skyrocket; And while companies have faced supply chain issues and labour shortages, they were largely able to pass on a sharp rise in prices to consumers. So, increasing producer prices have led to increasing consumer prices and declining real wages.
At the same time, we have witnessed a stock market boom and record levels of merger and acquisition (M&As) around the world. These phenomena – not usually discussed in relation to the issues of wages, inflation and productivity – hint at an actual fundamental flaw in the UK’s current economic system, namely its financialisation and excessive focus on shareholders.
There is a heated debate about the impact of shareholder primacy – the theory that companies belong to shareholders and should be run in their interests only – on firm-level and economy-level outcomes (I wrote a short note on the debates about the EU’s sustainable corporate governance plans). Yet, there is increasing evidence that shareholder primacy has negative impacts on things like investment in long-term projects and innovation, which in turn would be important for productivity increases as well as creating good jobs. Instead, companies still are pushed to focus on generating short-term returns for shareholders.
Despite increasing evidence that shareholder primacy may be ‘the world’s dumbest idea,’ it remains deeply engrained in Britain. An interview on BBC Radio 4’s Today programme on 31 December 2021 with former Unilever CEO Paul Polman was telling in that respect. Polman – well known for his progressive views – had to remind the journalist interviewing him that it was a false idea that managers were legally obliged to maximise profits and generate dividends. Indeed, the UK Companies Act 2006 obliges management to run the company in the interest of all its members, balancing the interest of different stakeholders – including employees and shareholders.
Therefore, an economic strategy for post-Brexit Britain that seeks to successfully square the circle of wages, prices, inflation, and productivity would also need to address the underlying institutional flaws such as excessive shareholder power. But of course, the sort of regulatory reform the Tory right is pushing for would – as so often – would most likely make this problem worse rather than solving it.
‘Levelling up’ putting pressure on the pro-Brexit coalition
Levelling up – the government’s plan to address the regional inequalities – may be the only area where the government does seem to be serious about coming up with some sort of plan. Indeed, we are shortly awaiting a report by levelling up minister Michael Gove setting out that plan. So far, levelling up has mainly made negative headlines, including this week complaints about the continuing delays to the Shared Prosperity Fund and uncertainties about the amount of money available (reportedly only £2.5bn over three years compared to the £4.5bn available through EU funding had Brexit not happened) and reports that money is being spent on filling potholes on streets leading to Tory donors’ luxury mansions.
Yet, increasingly, levelling up is also coming under pressure from the Tory right though. The Telegraph’s Jeremy Warner for instance, criticises the policy for pushing the government away from the deregulation agenda due to its heavy focus ‘on Brexit-supporting red wall constituencies.’ That comment is interesting in itself as it constitutes an implicit acknowledgement that there is a trade-off between deregulation and ‘levelling up.’ In my view, the assessment that deregulation will not make things better in the deindustrialised areas of Middle and Northern England is accurate.
It also shows that the realities of Brexit and the economic choices the government is facing are starting to put serious strain on the pro-Brexit coalition. As Warner puts it “[r]econciling what was always a very broad and often contradictory coalition of the Leave-voting public is proving extraordinarily difficult.” Remainers may feel some satisfaction – or perhaps just more frustration – about this development, as it shows that even Brexiters cannot deny any longer that Brexit was achieved by promising incompatible things to different groups of the British public. Yet, unfortunately, this development will not do anything to help us tackle the serious economic challenges that lie ahead. The increasing tension inside the Tory party will not make formulating a coherent economic strategy any easier. It is to be feared that as Chris Grey put it we are now all hostage to quarrels between the extremist libertarians and more moderate forces in the Tory party. As a result, any economic strategy the government will be coming up with will most likely be the result “of factional infighting in the Tory Party rather than” a policy that is the result of “any strategic intent, still less of any sense of what might serve the national interest.”
Needless to say that it is hard to see how that will lead to economic policies fit to address the serious challenges we are facing. It also means that things will most certainly get worse before they get better; sadly it increasingly seems that they will have to for the country to realise that it has been heading down the wrong path.