This week saw Brexit a turn in the Brexit project that I had feared for a long time. Indeed, it has become clear that the extremist libertarian right wing of the Brexiter coalition finally has amassed enough influence over the government to take the country down the route of an uncompromising and ruthless deregulation strategy. The announcement of the Retained EU Laws Bill this week, constitutes another step in the creeping extension of executive power at the expense of Parliament, thus further breaking the Brexit promise of Parliamentary sovereignty and undermining the separation of power. Indeed, if passed, the law will allow ministers to amend retained EU law by secondary legislation, thus circumventing Parliament. It can be expected that as long as Truss is in charge, this power will be used extensively, as it is likely to keep the extremists in the European Research Group (ERG) happy. The Bill also includes a “sunset clause,” which means that unless explicitly persevered, all EU law that was transferred into UK law before Brexit will expire on 31st December 2023. This is likely to lead to a great deal of uncertainty about possible legal and regulatory changes in the year to come, and most likely to deregulation by default or inactivity.
As always, deregulation will benefit one group only, namely the richest of the rich. Indeed, this week was the week when the Brexiters in charge finally decided to openly throw their Red Wall supporters under the bus. This became crystal clear this week with the announcement by Chancellor Kwarteng of what was officially a mini-Budget, but in fact amounts to a major break with conventional economic policy making.
Mini-budget, major consequences
In a move, that shows that the Britannia Unchained government clearly is sick of experts, Kwarteng refused to allow the Office for Budget Responsibility (OBR) to assess the fiscal and economic impact of his mini-budget. Yet, the government could not prevent other organisations, like the Institute for Fiscal Studies and the Resolution Foundation, to do it instead. The findings of the Resolution Foundation’s analysis of the budget can be summarised in the following way:
Income
The more extensive than expected tax cuts very largely benefit taxpayers in the highest income bracket. Due to the scrapping of the 45p rate of Income Tax, people earning more than £200,000 a year benefit most. As a result, the top 5% of households will get 47% of the estimated £45bn gains, while the bottom 50% of the income distribution gets a mere 12%. Consequently, despite the rhetoric of putting money back into people’s pockets, most of the population will continue to see a decline in their real incomes. Indeed, “non-pensioner incomes are projected to fall by 8 per cent over the course of this year and next, significantly more than during the financial crisis (5 per cent between 2009-10 and 2011-12).” As a result, by the time of the next General Election (GE) in 2024, 2.3m more people and 700,000 more children are expected to live in absolute poverty. That means, one in five Britons will be poor and 28% of children will live in absolute poverty in one of the richest countries in the world. At the other end of the income distribution, thanks to Truss’s tax cuts, the top 5% of households are expected to see their income rise by 2% over the same period.
Debt
The tax cuts together with the cost of the energy bill cap means that public debt will increase further at a time when borrowing becomes more expensive due to interest rate rises. The Resolution Foundation estimates that “energy support and the weaker economic outlook will increase borrowing by £265 billion over the next five years compared to the OBR’s March forecast. Tax cuts of £146 billion over the same period increase that to £411 billion.”
Kwarteng maintains that his objective remains to see public debt fall as a percentage of GDP. Yet, to achieve that, the government would have to make spending cuts equivalent to those imposed by George Osborne in 2010. For those who have forgotten, Osborne’s austerity was a key contributor to the declining living standards in the poorest parts of the country that then voted to leave the EU.
Growth: Corporation tax and energy bill cap
The goal to balance the books in the mid- to long-term could be made easier if the government’s plan of boosting economic growth worked. However, here too the Resolution Foundation does not find much cause for optimism.
The scrapping to the increase in corporation tax (CT) is not predicted to have any effect on growth. Indeed, reversing the planned increase from 19% to 25%, does not constitute a decrease in the CT rate, but merely keeping it at the level where it was for the past ten years – during which growth was sluggish. Even if the government did cut the CT, the empirical evidence shows that short of very radical cuts, CT cuts generally do not lead to increased growth. Indeed, according to the Resolution Foundation, both, countries with lower (USA) and higher (Germany) corporation tax rates than the UK have outperformed the UK in terms of GDP growth over the past decade, indicating that CT levels are not the key factor here. Therefore, the £18bn cost of this measure is highly unlikely to be offset by increased growth.
The one measure that is expected to contribute to a GDP growth boost in the short term is the cap on energy bills announced by the PM the previous week. Here, the Resolution Foundation projects the measure to increase GDP by 1.5% in the short run. The irony, of course, is that this is precisely the measure that does not fit Truss’s libertarian ‘no-hand-outs’ ideology but was adopted in spite of promises made during the leadership campaign.
The reactions
Given the impact the budget is already having on the cost of public debt, Sterling, and the UK’s international reputation, Kwarteng’s budget may easily become the worst piece of economic policy by any UK government in living memory. Indeed, former US Treasury Secretary Larry Summers took to Twitter to lambast the UK government’s economic strategy in no uncertain terms, comparing it to that of a developing country. Whatever one thinks of Summers and his own views on the economy (or of the economic policy of developing countries for that matter), the fact that a senior American economist and public figure like him openly and in no uncertain terms criticises the UK government for its economic strategy is not normal. It is an extraordinary thing to happen that shows just how far the UK is down the path of becoming a country run by a group of fanatic ideologues who are completely cut off from reality.
This was confirmed by the markets’ reactions to the budget, which saw the pound Sterling drop to new lows against the US dollar, making the prospect of a historic first-time parity with the greenback a distinct possibility. The market reactions shows that the Brexit fanatics controlling the UK government may well be the only ones believing in the soundness of their economic theories. Moreover, the further depreciation of sterling will make the government’s goal of boosting economic growth more difficult still: A weaker pound means more imported inflation, which in turn will put more pressure on the Bank of England to increase interest rates further, thus dampening any positive effect on growth that increased demand due to tax cuts and energy bill caps may have.
Wealth trickling down south
The tax cuts together with the reduction of the stamp duty will also disproportionately benefit London and the South East of England, compared to the rest of the country. Indeed, given the income disparities between North and South, the Resolution Foundation estimates that the South East or London will see over three-times (on average, £1,600) the gains of those in the North East, Wales and Yorkshire (an average of £500). The tax bill on the sale of the average first-time buyer home in London will fall by £6,300, compared to no gain for the average first-time buyer in the North East.
This shows that the only sense in which Trussonomics is leading to a trickledown effect, is in the sense that any wealth created in the country continues to trickle down from north to south. This constitutes a flagrant violation of the Brexiters’ promise to ‘level up’ the country. In a sense, it constitutes the boldest and most surprising bit of Truss’s economic approach. As Chris Grey writes, the Truss government “acts as if it were a new government and has presented an entirely different manifesto to that of 2019” even though “it is reliant upon the voting coalition it inherited from 2019.“ The fact that Truss seems to be forgetting that is the strongest sign that she may actually believe her economic strategy will work. Only if it does and GDP rises by Chinese levels so that perhaps a bit of wealth does indeed start to trickle down, will she stand any chance of keeping the Red Wall Tory voters on board. This is even more the case given that she has already been forced to abandon several other promises Brexit voters were given during the campaign and since.
Migration
It has transpired that due to the ongoing labour market shortages and their negative impact on sectors like agriculture and hospitality, the PM is considering extending some of exceptions to the strict migration rules to allow UK businesses to more easily fill vacancies. While the precise nature of the changes is not known yet and may be only temporary (at least until they have to be extended again), they will almost certainly mean an increase in immigration. That of course is not what Brexit voters were promised and not something that a Tory government will find easy to justify in an election campaign. Either Truss is very desperate, or her trust in the miraculous effect of economic growth is so strong that she believes right-wing voters will forgive her throwing over board the possibly most important Brexit promise in exchange for increased prosperity.
Trade
The Truss government’s desperate attempt to generate growth and ‘Brexit benefits’ at any long-term cost is understandable given what the real world is doing. CityAM recently reported figures from HRMC that show a decline in the number of UK firms that export to the EU fell 33 per cent to 18,357 in 2021, from 27,321 in 2020. HRMC rejects this interpretation of its figures, pointing to changes made to the methodology of data collection since the end of the transition period on January 1st, 2021. I did not manage to find out where CityAM’s figures come from exactly. The latest numbers of UK exports published by the HRMC seem to be from April, 2022 and no new figures are expected until 2023. Nevertheless, CityAM’s one-third decline in UK exporters, does correspond quite closely with what academics at the London School of Economics (LSE) have found in terms of trade relationships. In a recent report – which I have critically discussed here –, Rebecca Freeman and colleagues found a 30% fall in export relationships between UK and EU firms.
Regardless of the dispute about this particular set of figures, what is patently clear is that the UK is a far shot from becoming the export power that some Brexiters had envisaged post Brexit. ONS figures released on Monday last week, show that the UK trade deficit has reach a near all-time high (£27bn) in the three months to July. While this is to a large extent owed to the massive increase in the price of energy imports, the weakness of exports aggravates the problem. Indeed, while UK exports to the EU have reached a record level, that is due to the fact that the UK imports large amounts of liquified gas from non-EU countries and exports them to the EU after regasification. The surge in UK to EU exports is hence merely a result of increasing energy prices, not any UK export prowess.
The prospect of the UK generating growth through an increase in trade intensity has been dealt a further blow this week, when PM Truss openly admitted that a US-UK trade deal is not on the cards after all. Chris Grey has righty called this a “huge admission of failure.” Not only are Free Trade Agreements (FTA) trade deals in general a symbol of ‘sovereignty’ in Brexit mythology, but also does the failure once again cast doubt on the existence of alternatives to a close integration of the UK economy into the European trading block. The admission is also embarrassing given how confidently leading Brexiters talked about the prospects of such a deal.
Northern Ireland Protocol
One potential positive effect of the government’s open admission that a US trade deal is not on the cards, may be that it could facilitate progress with the Northern Ireland Protocol (NIP). The EU Commission has recently reiterated its willingness to reduce the need for paperwork for exports from Britain to Northern Ireland, if the UK agreed to providing the EU with official real-time data on trade flows. Commissioner Šefčovič also promised that the issue of a 25 per cent EU duty charged on British steel sent to Northern Ireland could be easily solved, if the UK cooperated in terms of trade data.
The fact that the US-UK FTA is now off the table, may create further room for compromises. Solving the trade issues with Northern Ireland would be greatly facilitated if the UK aligned its sanitary and phyto-sanitary (SPS) rules on EU rules. So, far Brexiters have refused to do that; alleging that it would jeopardise a trade deal with the US. With the latter option now being off the table and economic desperation increasing, perhaps there is a window of opportunity opening up to throw overboard the obsession with sovereignty and divergence for the sake of divergence.
Political pressure and economic desperation may contribute to softening Truss’s stance on Northern Ireland. According to Šefčovič, the Commission is working with the US to bring potential investors to Northern Ireland next year to show the benefits of the protocol, while Biden has warned Truss over the NIP.
The mounting political pressures and increasing economic desperation may explain why we are back in a phase where the UK government adopts a more reconciliatory tone over the NIP and the EU side publicly proclaims its optimism about the possibility of a negotiated solution. However, the Commission only just received the UK’s reply to the EU’s relaunched legal action against the UK over the non-compliance with the NIP and may very well pursue the legal case if – as expected – the reply falls short.
Punching down: The environment
The focus in the media has very largely been on the effect of the mini-budget on people’s living standards, but there is another – equally important – area where the Truss government is punching down, namely our natural environment. In the shadow of the tax cuts the government’s plans for investment zones in combination with the Retained EU Laws Bill, which most likely will get rid of the EU Habitats Regulations and many other laws protecting biodiversity and the environment, the last remaining areas of the country where wildlife thrives are now under threat from construction projects.
Worse still, the only positive policy coming out of Brexit so far – namely the replacement of the EU’s Common Agricultural Policy with the Environment Land Management Scheme that rewards farmers for protecting the environment – is reported to be axed in favour of a simplistic system that subsidies farmers based on the size of their farms regardless of ecological sustainability.
Stuck in its ideological commitment to a hard Brexit – which is the greatest drag on the UK’s economic development – and faced with the unravelling of yet another Brexiter fantasy about alternative ways of generating growth (the US-UK trade deal) – the government needs to generate growth in other ways. The way it is currently attempting to achieve this is by ignoring any of the existential challenges humanity is facing and pouring kerosene on an already too hot fire of unsustainable economic growth. The result will be not only an economic fallout – as I wrote last week – but also a lot of precious time wasted in the race to design a different kind of economic system that does not destroy the basis of our and existence and that of other species who are sharing the planet with us.
What’s the point?
Truss’s approach of pursuing an economic strategy that is clearly not sustainable, internationally derided, and informed by the theories of a few marginal economists who have been proven to be so horribly wrong in their optimism about Brexit may seem completely irrational. Yet, from her perspective, it is clear that it may achieve certain important goals. Most importantly, those who matter to the PM and her party – namely the rich class of rentiers who donate to the Tory party – will like it both for symbolic and material reasons. Symbolically, it is in line with their anti-state libertarian leanings; materially, they are the ones who will benefit from it. They will face fewer restrictions, scrutiny, and barriers when it comes to their business activities, and they will see their income taxes fall and real income increase. Moreover, their wealth and mobility mean they can easily opt out of the country and do not have to rely on its public services if things really do go pear-shaped. For them, deregulatory Brexit truly does have a lot of upsides, and few downsides. With Truss’s appointment as PM, Brexit has well and truly become the Brexit of the rich. They will thank her with their continuing support and donations.
What is puzzling, however, is how the PM thinks a strategy focused on such a small fraction of the population will help her win the 2024 GE. As her lifting of the fracking ban, her shamelessly pro-rich tax reforms, and her softening stance on immigration shows, she does not seem to care about what the people in the Red Wall think. It is possible that she does genuinely believe in what she and her co-authors wrote in Britannia Unchained and therefore expects her policies to pay off. But with the 2024 GE fast approaching, she may soon start to get very nervous when reality teaches another Brexiter a lesson in economics. At that point she will either need desperate and extreme measures to make good on her promises of trickling down prosperity, or she will need a big event – like a war – to distract the population from the undeniable fact that 14 years of conservative rule have ruined the country for everyone, but the richest of the rich.