Labour’s strategy regarding Brexit has given rise to a lot of comment and analysis (e.g. Chris Grey’s recent blog, or my own musings), but the Tories’ approach is not less intriguing. Despite hopes Sunak’s government would be marked by a return of realism to British politics, Sunak still seems to espouse an ideological commitment to a hard-right course. Including on topics where that puts the party at odds with the vast majority of voters. Thus, Sunak stubbornly refuses to negotiate with the unions over the NHS workers’ pay demands, despite strong support for the strikes among the general population (50% according to an Ipsos poll). Rather than trying to win a popularity contest in the centre of the political spectrum in a hope to win the next General Election (GE), it increasingly seems like the Conservatives’ strategy is aimed at preparing for their time in opposition. That strategy has at its core seducing right-wing voters with a mixture of fantasies and nastiness, while scorching the (economic) earth for the next government.
Burning down the house
On December 9th, 2022 Chancellor Jeremy Hunt announced a set of 30 regulatory reforms – dubbed the Edinburgh Reforms – of the UK financial services industry, promising to ‘unlock investment and turbocharge growth in towns and cities across the UK.’ How exactly the turbocharging of growth will happen is unclear when one looks at what is being proposed.
One argument seems to be the usual Brexiter trope about Britain’s ‘agility’ outside the EU. According to the government, the reforms will establish a ‘smarter and home-grown regulatory framework for the UK – that is both agile and proportionate’ and will repeal ‘burdensome pieces of retained EU law.’
Substantively, the proposals include reducing solvency requirements for insurance companies currently set by the EU’s Solvency II directive. The government promises that this will unlock around £100bn for infrastructure investment. It is worth noting, however, that the EU has announced to take similar measures.
Similarly, the promised overhaul of the listing rules on the London Stock Exchange (LSE) certainly will attract more companies to London, possibly slowing the decline of the LSE since Brexit. But these are hardly going to be companies with large operations and high levels of employment in the UK, and certainly not SMEs. The jobs that this will create are in the City of London not in Grimsby or Middlesborough.
Moreover, the reforms will undo some of the prudential regulations introduced after the global financial crisis of 2008 (e.g. ringfencing and bonus caps) and impose a mandate on the financial regulators to adopt a more risk-taking approach. Indeed the government announced that: “Regulators will have a duty to facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy and its growth in the medium to long term.”
Taken together, one gets the impression that the proposed reforms can only end in disaster. Scholarly work by financial historians and economists has shown that the one unescapable consequence of financial liberalisation without prudential regulation is financial crisis. Indeed, serious financial sector figures, like Sir John Vickers and Lord Turner, consider some of the proposed reforms ‘pointless, dangerous,’ or simply a ‘mistake.’
Regarding the claim that boosting financial services will lead to growth in ‘towns and cities,’ we should remember that the bloated finance sector in London has never played a major role in financing UK businesses. In fact, British banks and other financial institutions mainly keep busy with making money with money (speculation), rather than providing funding to the productive industry (see one of my own studies with Philipp Kern for instance). That was one of the reasons why the coalition government decided to establish the British Business Bank to finance SMEs.
The fundamental flaw of Hunt’s reforms is the basic assumption that financial services are a sector like anyone else, which implies that companies (banks and other financial institutions) compete with each other based on ever changing products (e.g. new forms of ever more complex derivative financial instruments) to maximise profits. This constitutes a transformation of finance from a support service, providing the lifeblood to the productive economy, into a purely speculative money-making operation, which Ian Toporowski has called ‘the end of finance.’ That development is not something to celebrate, even less to actively promote, because all it does is increasing systemic financial risk and provide a small strata of the population with the possibility to amass obscene fortunes, while draining the rest of the economy from talent and resources, thus arguably increasing inequality.
For the Tories, however, the reforms may be win-win in terms of their electoral strategy. The straw fire the government is igniting may generate short-term economic growth in a limited part of the economy. While not doing anything to rebalance the UK’s economy from a bloated financial services sector to productive industries, that straw fire may be enough to provide the Tories something to boast about come the 2024 GE. At the same time, the financial crisis that will almost certainly ensue, may not materialise until the Tories are in opposition. In other words, the straw fire may burn down the house once the Tories have moved out, creating problems for the next (non-Tory?) government whose economic incompetence the Tories can then denounce. In short, the Edinburgh Reforms may become a useful part of what one could see as a scorched earth approach to the economy, increasing the Tories electoral chances not in 2024, but in the following GE after a period in opposition.
Indeed, many of the disastrous policies now undertaken – e.g. regarding the underfunding of public services – can be interpreted as part of a scorched earth strategy, whereby the Tories are preparing the ground for their time in opposition. Destroying the public sector and the economy now, will make it harder for any Labour or coalition government to turn things around after 2024. That will increase the Tories chances to recover even from a very serious electoral defeat in 2024.
Trade fantasies and trade realities
Trading in fantasies has always been a hall mark of the Brexiter political strategy. It still is key to the Tories’ electoral strategy. Two weeks ago, Liam Fox presented the third Global Britain Report, which is at the heart of the Brexiter strategy to make people believe Britain is greater than it really is.
Fox’s assessment of how Global Britain is going is a sullen one though. Writing in the Telegraph, Fox blames the civil service for the fact that “[…] in the three years since Brexit, rather than supercharging our presence [overseas], we are falling behind.”
A key aspect of Global Britain is trade. Yet, while Fox urges government and businesses to recognise the importance of trade and especially to understand “value of trade in the intermediate goods which now account for almost 50 per cent of the total,” there are no direct proposals whatsoever regarding how trade with the EU could be facilitated, e.g. by reforming the Trade and Cooperation Agreement (TCA). Once again, Tory economic policy consists of empty, ideological slogans about supply-side reforms, competitiveness, efficient government, while denying the reality British exporters are facing due to the Tories’ trade deal with the EU.
Indeed, just how disconnected Fox and his party are from reality is illustrated by the contrast between the Global Britain Report’s complete ignorance of trade barriers and the calls from the British Chamber of Commerce (BCC) to have more honesty in discussing the necessary reform of the TCA. In its report on the occasion of the second anniversary of the TCA, the BCC draws up a 24-point list of measures aimed at easing the trading restrictions UK companies face when doing business with customers inside the EU. The wish list of British businesses includes a Sanitary-Phytosanitary (SPS) agreement modelled on the Swiss example, a VAT regime modelled on the Norwegian one, and recognition of EU standards for certain goods.
The BCC’s survey of its members also shows that rather than teething problems, the post-Brexit trade deal with the EU the obstacles for British businesses to trade with the EU are structural and here to remain. As that realisation sinks in, UK businesses reportedly become increasingly frustrated with the government.
The government, in turn, seems unperturbed and continues to oversell any progress there is with its trade policy. After the failure of the UK-US trade deal to materialise, Trade Secretary Badenoch was in India this month for face-to-face negotiations with her Indian counterpart. A deal still seems some way off, notably because of conflicts between the Tories trade policy and their anti-immigration stance, which limits the leeway for concessions on visas for Indians.
In the absence of any concrete ‘world-leading’ trade deal signed with any major nation, the government has blown out of all proportion the signature of a Memorandum of Understanding with South Carolina. It is not worth spending much time commenting on this ‘deal,’ because it is substantively completely meaningless and certainly not a Brexit benefit that will compensate for the massive loss in trade with Europe.
This situation is particularly concerning because the world around us is evolving while Britain is stuck with a governing party unable to update its policy beliefs and strategies to reality. That reality increasingly diverges from how Brexiters imagine international trade works. The US’s Inflation Reduction Act (IRA) signals another step of the world’s largest economy away from free trade towards more protectionist and interventionist policies. Generally speaking, the IRA constitutes a massive ($369bn) investment package, that makes tax credits and subsidies dependent on the use of US-made technologies. Thus, a key provision in that respect is a new clause that makes subsidies for the purchase of electric vehicles (EV) dependent on final assembly in the USA.
The EU has reacted with concern, considering the Act to unfairly discriminated against European firms. In response, it is considering its own subsidy programme for green technologies. France and Germany in particular are pressing the Commission to abandon its traditional anti-state subsidies stance to allow members states to pursue more active industrial policies in order to compete with the US. The fact that such a programme is being considered is in itself remarkable, given that the Commission has for decades developed an extremely strict regime strongly limiting member state’s ability to provide firms with any state subsidies.
The significance of this change should not be underestimated. It potentially constitutes the beginning of a new era of a more nuanced approach to free-trade and a more active role of the state in the economy. Such a role may very well be necessary for advanced economies to make the transition to a net-zero economy and for individual trading blocs to be able to compete with heavily state-subsidised firms from countries like China.
This new reality seems to completely escape the UK government. Once again, unable to deliver on any of the promises made during the referendum campaign, the government retreats into symbolic policy territory to at least maintain a semblance of competence and success. This strategy also applies to immigration policy – the key policy in the area of nastiness.
A deliberately nasty immigration policy
This week the High Court ruled that the Home Office’s plan to send refugees arriving in Britain to Rwanda was lawful. Unsurprisingly, the government proclaimed a great victory, and the right-wing press was evidently pleased. In reality, however, as David Allen Green argued, the ruling also shows that implementing the plan will be a massive challenge for the government and the civil service. Indeed, while the policy itself was deemed lawful, so far, EVERY concrete decision on individual cases taken by the Home Office under the plan was quashed by the court. This illustrates that implementing the policy may very well constitute an insurmountable challenge. And even if implemented, the plan will do nothing to solve the actual problem it is meant to address (i.e. illegal immigration), but that is not the point. The government and especially Home Secretary Suella Braverman will not care, because the main purpose of the plan is to show to right-wing voters that – no matter the strength of resistance – this government means business when it comes to cracking down on refugees and does as it bloody well pleases regardless of any standards of humanity or decency. That is the sort of nastiness the average sun or express-reading Tory voter wants to read about. In a few years’ time, they will not bother looking up any figures regarding the absurd cost of the Rwanda plan (Some commentators estimate that a seat on a Rwanda-bound deportation plain may costs up to £1m!), or its actual impact on the number of refugees coming to the country.
In that context, adopting an unrealistic but highly symbolic anti-immigration approach is relatively cost free for the Tories. If Labour forms the next government, none will remember five years later that the Rwanda plan was fundamentally flawed and would not have produced any tangible results. Instead, the Tories will be able to claim that they had the right policy but were prevented from following through by electoral defeat. Promising a return of Rwanda-style policies may then become a key electoral strategy in the 2029 GE.
Farage’s long shadow
While the Tories strategy can be explained by various factors, including ideological blindness and egocratic tendencies amongst leading Tories, one factor seems to be increasingly driving Tory strategy, namely the spectre of a resurgence of Farage or a Faragist party. This seems like something Tory politicians are increasingly nervous about. In that context, the increasingly radical anti-immigration approach by the Home Office since 2010 makes good sense.
Given the unfavourable polls, damage limitation may be a key concern for the party. Playing to the right-wing anti-immigration gallery is an important element to that damage limitation strategy. While it will probably not avert an electoral defeat, it may prevent the resurgence of a Faragist right-wing challenger party to the Tories – most importantly Reform UK. Indeed, political scientist Matt Goodwin notes that if the 9% increase in voting intentions for the Reform UK party in recent polls were to persist into 2024, this would be sufficient to seal a Tory defeat in the next GE. Keeping the former UKIP vote on the Tories side, is therefore a necessary, albeit not sufficient, condition to avoid defeat. Even if accepting defeat in the next GE, if the Tories lost voters to both Labour and Lib Dems on the centre right and Faragists on the far right, the blow could be so hard that five years in opposition may not be enough to recover.
A deepening gap – the damage limitation strategy that damages the country
The gap between fantasy and reality that is characteristic of Tory denialism across several areas, is increasingly translating into a gap between the UK and other Western countries, in particular EU member states.
Nowhere is the crass denial of reality clearer than in the diverging approaches to trade policy between the UK and other Western countries, which risks leaving the UK in the worst of both worlds. While the EU and the US are getting ready for – and are indeed shaping – the new global trade regime, the UK government seems stuck in an outdated ideology and utterly unprepared for the new realities. The Times’s Simon Nixon argues that it is high time that the UK government accepts to see the world as it is, not as it would like it to be. In the absence of doing that, the UK’s isolationism will mean the country will remain outside any of the worlds’ main trading blocks and become a declining middle-power in the North Atlantic in between the two largest economic blocs. Or in Chris Grey’s as ever astute formulation: “Brexit leaves the UK trapped between the trade blocs of the EU, the US and China, affected by all three whilst belonging to and influencing none.”
The deepening gap between the UK and other countries also becomes obvious when comparing the UK to Ireland. Britain’s fearful approach to international integration and the idea that sovereignty requires ‘going it alone’ seems most ridiculous when compared to Ireland’s approach. As Emma DeSouza writes in a Byline Times article, the Republic of Ireland is increasingly becoming an integral part of the EU. Irish politicians are occupying key positions in the EU including, the head of the EU’s Russia sanctions, the lead of the EU’s climate talks, the general secretary of the European Trade Union Confederation, and the president of the European Court of Human Rights. Brexiters will be hard pressed to explain how occupying these positions reduces Ireland’s sovereignty.
The UK government’s denialism is also in evidence regarding a new proposed foreign influence register, which is unanimously considered to not solve the problem it proposes to address (foreign influence on British politics), while imposing massive additional bureaucracy on legitimate businesses, NGOs, and professionals. (It is also remarkable how this ill-advised policy flies in the face of both the Edinburgh Reforms’ claim of the government to ‘unburden’ the economy of unnecessary regulation and its strategy of making Britain a competitive financial centre). The FT’s Peter Foster considers that “[s]uch denialism has become a hallmark of this series of post-Brexit governments, but constantly saying things that everyone can see are untrue is not a way to imbue confidence in those who would interact with the UK — from investors to academics, charities to industries.”
That is no doubt true. However, for domestic purposes, constantly saying things that everyone can see are untrue may be a very good strategy. Indeed, while this will sound like a cliché, it is eerily similar to how George Orwell describes Big Brother’s strategy to foster ‘controlled insanity’ of the masses through the strategies of ‘doublethink’ and ‘blackwhite.’ The former describes a situation where the ‘truth consists of lies and these lies can be changed at any time into new lies,’ while the latter is at play ‘when told that something is black that has to be believed and thought by everybody, even if it’s white.’ In Brexit Britain, white is black. The South Carolina MoU is game-changing, the vaccine roll-out is the result of Brexit, the TCA is not hurting British businesses. We all known none of this is true, except if you define the truth as lies.
Taken together, denialism, fantasies, nasty symbolic policies, and the scorched earth approach to the economy constitute a potent yet horrifying strategy of damage limitation for the Tory party. Needless to say that the damage this strategy will do to the country is enormous.