This week was a calm one compared to the chaos that has become so characteristic of post-Brexit Britain. The calm should not lull us into believing, however, that somehow Britain is starting to overcome the economic, political, and constitutional ‘multicrisis’ that it is facing. The crises simmer on just under the surface and will blow up eventually. It seems increasingly unlikely, that the Sunak government will be the one that can stop that from happening. Not only is Sunak’s grip on power inherently based on support from the far-right of the Tory party, which limits his room for manoeuvre, but also has a series of questionable ministerial appointments completely undermined any claims to professionalism and integrity, which are important to regain the trust not just of the financial markets, but also of other countries’ leaders. This week, serious questions have been raised about Dominic Raab’s behaviour towards civil servants when he was Justice Secretary in the Johnson government. After Suella Braverman and Gavin Williamson (who resigned this week over bullying allegations), Raab now is the third member of cabinet whose appointment suggests a complete lack of judgement by Sunak. These personnel problems weaken the PM’s authority and make him vulnerable not just to attacks from the opposition, but also from within the party. Two weeks into the job and Sunak’s political future starts already to look uncertain. As a result, his main focus may soon become the fight for his political survival rather than solving the country’s problems.
Sunak’s moderation
The week has brought some signs of moderation of Sunak’s government compared to the most extreme policies of his predecessors. Thus, the absurd policy of creating investment zones has been abandoned. Since the beginning of his premiership there have also been some actions that suggest a more moderate approach to the UK’s relationships with France. The thawing of relationships could mean that perhaps a solution to the issues of Channel crossings of refugees in small boats may be found in collaboration with France.
The Northern Ireland Protocol (NIP) is another area where some optimistic statements could be heard from various actors involved. Irish foreign minister Simon Coveney, saw cause for a ‘flicker of optimism’ regarding the NIP already under the Truss government. This week, EU Commissioner Šefčovič reiterated that a solution to the NIP could be found ‘within a couple of weeks’ if the political will was there. Sunak seemed eager to show such political will by attending the British Irish council meeting in Blackpool where he met with Irish Taoiseach Michael Martin and insisted that he was optimistic about the possibility of a negotiated solution.
However, the situation on the ground in Northern Ireland and in the Tory party are so complicated now, that even with the best will in the world a solution may become elusive. As Chris Grey argues, with the passing of the deadline for the reestablishment of the Stormont Executive, the situation in Northern Ireland has morphed from a trilemma into a quadrilemma. A PM constrained by the Brexit straitjacket is unlikely to be the best person to lead us out of that quadrilemma. Any concession may spark off the fury of the unionists in Northern Ireland and the extremists in the party assembled in the European Research Group (ERG). Therefore, even if he were willing to do a deal, it may very well be that politically he would not survive it. As Chris Grey’s analysis suggests, the one way out of the quadrilemma might be that ERG support for an NIP deal can be secured in exchange for them getting what they want on another issue, e.g. the retained EU law bill.
The latter bill is increasingly seen as a major source of chaos were it to be adopted in the way it is being proposed. The bill would essentially mean that a myriad of UK laws (how many is still somewhat unclear as the government had to admit this week) would by default cease to apply at the end of 2023 due to a ‘sunset clause.’ The idea for this approach was born out of Jacob Rees Mogg’s mind, where laws only have one function, which is to constrain and prevent people from doing things. Many laws of course do have that function. But they also have a range of others – including the function of enabling (rather than constraining) people to do certain things (see for a general statement of that insight in institutional scholarship this paper by Gregory Jackson and Richard Deeg). On that bill too, Sunak has shown some inclination towards a more moderate stance than his predecessors – albeit only for pragmatic reasons rather than out of conviction.
There are hence some signs of moderation and realism emerging from Sunak’s actions during his first two weeks in office. Such realism is needed to start addressing the various crises the UK is facing and as such, without it the Tories are unlikely to win the next General Election. Yet, however much realism Sunak may show, his and the Tories electoral fate will depend on the economic situation…and on that front the news are not good.
Economic reality and the Brexiter pushback
This week may have marked the start of the recession many experts have warned about. The UK’s GDP has contracted by -0.2% in the third quarter. That slump is less than some expected (most experts predicting a contraction of around -0.5%). This may be water to Brexiters’ mill. The Truss premiership disaster seemed to have broken the Brexit taboo in the UK media, with various mainstream media outlets – including the BBC – running reports about the damage of Brexit. Yet, in parallel, Brexiters seem to have stepped up their own efforts to prove that all is well in Brexit Britain, and what is not well is not due to Brexit. This Brexiter pushback against accepting economic reality is a key stumbling block for the UK to start healing its self-inflicted wounds.
Briefings for Britain’s odd theory of trade and productivity
A month ago, Briefings for Britain has published a comprehensive report attempting to dispel various predictions Remainers had made about the impact of Brexit on the UK economy – including its impact on the GDP, trade, and labour markets. The authors argue that none of the negative predictions have materialised. Rebutting the report’s findings in detail would take more time and space than I have, but some of the claims need to be challenged.
At a general level, the arguments are subject to two logical flaws that are very common in Brexiters’ defence of their project’s economic impact. Chris Grey summarises them perfectly: The first one consists of the ‘deeply illogical’ claim that since the UK is not the only country that experiences severe economic problems, the UK’s problems cannot be due to Brexit. The second one consists in the reversal of the onus: Brexiters defend Brexit’s economic record by comparing it to the most pessimistic – and admittedly at times alarmist – predictions made before the referendum (often based on specific assumptions that may not have come to pass), rather than assessing it against the promises that were made by Brexiters themselves.
Beyond these general flaws, the report also makes some more specific very questionable arguments notably regarding trade and productivity.
Regarding trade, fundamentally, the report tries to make the gravity defying argument that somehow it would be possible that more trade barriers do not negatively impact trade. The report points to the Scottish Salmon industry, which according to the figures provided by the report has boomed despite new trade barriers. This optimistic assessment seems contrary to what surveys and a great deal of anecdotal evidence about the struggles of many small companies suggests. It also contradicts serious academic studies.
Of course, it is not easy to estimate the impact of Brexit on the UK economy given all the confounding factors and the fundamentally counterfactual nature of the question (i.e. we want to know what the UK’s economy would have looked like today had Brexit not happened). This is precisely why we need sophisticated methods, like the synthetic control method (SCM) – often referred to as the ‘doppelganger method.’ Yet, Briefings for Britain and especially Graham Gudgin seem to have a particular dislike for that method. The report is another obscurantist attempt to cast doubt on the most sophisticated methodologies used to estimate the impact of Brexit on UK trade arguing for simpler ‘methods’ instead. The simple but important intuition behind the SCM approach is that we should not compare the UK’s post-Brexit economic performance to 2016 or any other date in the past, but rather to our best estimate of what the performance would have been had the UK remained an EU member.
In the new report, Briefings for Brexit apply their dislike for sophisticated methodologies to the link between international trade and productivity increases. The report criticises studies that are based on large samples that include emerging economies. Instead, they carry out an analysis that seems to be based on a simple regression of hours work per GDP on import and export growth per year for twenty high-income economies. The lack of sophistication is compounded by the fact that the authors do not adopt a longitudinal approach, but simply averaged the two variables of interest across a 40 year period (1980-2019). Based on this ‘analysis,’ the report concludes that there is no link between international trade and productivity growth and therefore the OBR’s prediction of a 4% decline in productivity due to Brexit is wrong.
More serious studies, show that the relationship between trade intensity and productivity growth is complex and contextual, but robust including for developed economies. For instance, a study by the ECB finds that the relationship is driven by at least three different mechanisms a reduction: in input costs, competitive pressures, and knowledge transfers. While the importance of knowledge transfers may be more important for developing countries and explain why the effect on productivity may be greater there, the relationship still exists for developed countries too.
Regardless, even if we accept Gudgin and colleagues’ premise that we should keep things simple and that it ‘[…] is more informative to compare the UK directly with the major advanced and especially larger EU economies,’ the case for Brexit seems very weak based on current figures. Thus, the UK is the only G7 country whose economy shrunk during the third quarter of 2022.
Besides, the report repeats another claim that reveals a deep ignorance of how the modern global economy works. The authors observe that ‘exports to non-EU countries were down by around 11%’ and argue that therefore ‘[o]bviously, this cannot be due to Brexit as no significant new trade barriers with non-EU countries have been created.’ As I have argued at length in a previous post, this claim ignores how modern international production networks work. Trade barriers between the UK and the EU may very well affect exports from the UK to other countries even if there are no new trade barriers between the UK and third countries. The reason for this is the nature of modern production networks. Brexiter trade theory is based on the flawed assumption that whatever UK companies export is produced in autarky. The reality of course is that the production of goods exported from the UK is internationalised and thus relies on trade in intermediary goods across the UK-EU border. The argument that given that a reduction in trade between the UK and non-EU countries is proof that the cause for the reduction cannot be Brexit is therefore nonsense.
‘Doing things differently:’ The end of the EV delusion
Another Brexiter – although from a different political camp – who defends the same line as Briefings for Britain is the Guardian’s Larry Elliot who sees all Remainer warnings against Brexit belied by reality, and considers Brexit still to be mainly an opportunity to look at an under-performing economy in a new light and to do things differently.’
Here too it is hard to share the Brexiters’ optimism about how that is going. One of the key ways we were told the UK would do things differently once outside the EU was by becoming a world leader in innovative high-tech sectors. One of those is the electrical vehicles (EV) sector. Here, the self-delusion has been increasingly exposed in recent weeks.
A few weeks ago, BMW announced that it would halt the production of the electric MINI at its Oxford plant and instead partner with a Chinese company to develop the fourth generation MINI in China. Another blow to the government’s strategy to turn the UK into an EV powerhouse was the news that the ‘iconic’ EV charger commissioned by the government may never be made. The biggest setback, however, is the recent struggles of Britishvolt, the company Johnson announced would build a battery gigafactory that would create thousands of jobs in Northumberland. Instead, the company is struggling and only very narrowly – and possibly only temporarily – avoided bankruptcy.
These events cannot all directly be blamed on Brexit. But what they do show is that beyond all the boosterism, when it comes to actually implementing a post-Brexit economic strategy, the government is not serious. Partly, Britishvolt’s struggles have been caused by the government itself who has not yet given the company a promised £100m advance. Regarding the EV charger, the Department for Transport conceded that “the concept is not intended for manufacture or deployment.” That seems like a very odd statement, given that the then Transport Secretary Grant Shapps when announcing the project a year ago promised it would be ‘rolled out across the country’ and make ‘charging even easier & accessible.’ It is hard to see how that could be done if the charger was not intended for manufacture!
But at one level the department for transport’s statement may be actually very close to the truth. As so often, Brexiters’ priority is to cement their power by trading in fantasies and symbolic policies rather than seeking to solve any of the problems the country is facing. Delusional fantasies are never a good basis for sound economic policy making – the Truss government has proved that with its mini-budget that cost pension funds an estimated £75bn. So far, the Sunak government does not seem any more serious about its economic strategy. For instance, the Chancellor, Jeremy Hunt’s plan seems to entirely focus on austerity and tax rises, while he continues to downplay the cost of Brexit. Instead of developing an economic plan matching the post-Brexit situation, Sunak and Hunt have created another yet another fantasy, namely they idea of a fiscal black hole that they tell us needs urgent closing – when in actual fact it is very largely a fabrication and when there are alternatives.
On a path to a Gerontocracy
There are some signs that the Tories themselves are not very confident they will manage to solve the countries’ economic woes in time for a 2024 GE victory. The evidence for that is provided by recent actions redrawing the electoral map and voter suppression that will increase the Tories’ chances of remaining in power. Indeed, the Elections Act – adopted in April this year – has been described as a worse piece of voter suppression than what has been seen in some US states. Indeed, the act contributes to turning the British democracy into a gerontocracy! The list of accepted ID cards that voters will have to show at the polling station at next May’s local elections is clearly tilted towards older voters. Indeed, six of the Government-accepted IDs are specifically targeted at older people, who are much more likely to vote Tory than younger voters.
Just like Sunak, the Tory party is fighting for its political survival. The Elections Act seems like one tool by which the government attempts to election proof its running of the government. Given the limited room for moderation and realism and given that ideologically-induced bad economics Sunak and Hunt are pursuing, establishing a Gerontocracy may indeed be their best bet to remain in power for more than two years.