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A friend recently forwarded me an email from a client who was bemoaning the state of the United Kingdom and questioning whether it still met the standards of a G7 country. In response, I joked that since the population chose to leave the European Union, the country has been in the hopeless state described by his client, but that it probably couldn’t get any worse from here. A contrarian may want to buy the pound as the mood improves as things become marginally less gloomy.
In fact, gallows humor aside, it would be a risky bet, as there is ample evidence to suggest that unless there are bolder policies, the country will be very challenged. The reasons fall into three broad, interrelated categories, starting with Brexit.
Britain is in many ways paralyzed by both the decision to leave the EU and the way it was done. Mainstream politicians and the current government are too afraid to admit that Brexit has caused significant damage to the economy. Nor will they discuss the possibility of replicating membership of the EU’s single market through the alignment of regulatory and trade policies.
As a strategic matter, the present government’s reluctance is vaguely understandable Current opinion poll And continued pressure from ardent Brexiteers such as Nigel Farage. But Labor has also been relatively quiet. However Labor leader Keir Starmer was one of the most Obvious lawyers Being in the European Union, the party does not want to re-claim the issue now that it is already ahead in the polls.
Is this wisdom? All those advanced analysts who previously warned that disaffected voters would be happy if the UK left the EU are now pointing to signs that some of the same voters Regret The decision, or at least the way it was carried out. There is absolutely no doubt that Brexit has indeed been bad for the economy. Standard Economic Indicators – Real (Inflation-Adjusted) GDP growth, investment level, size labor force – All show that the UK has underperformed its peers in recent years.
Before the 2016 Brexit referendum, I could see why many people wanted to leave the EU, even though it would almost certainly be an initial negative for the economy. I did not believe that the EU was the single most important issue facing the country. I was more worried about the UK scare Productivity performance and surprise Regional disparities. Although I favored Remain, I was at least open to the idea that leaving the EU would provide the necessary political impetus to deal with these problems.
But four subsequent prime ministers have claimed they would address the country’s investment and productivity challenges, but none have, either because they didn’t last long in power or because they were never truly committed in the first place.
That brings us to the UK’s second big problem: us investment performance Most of our peers remain apprehensive, and in the absence of major change it is hard to see how productivity will improve. Brexit-induced shocks to both trade and labor supply have made the creation of a new investment program even more urgent.
In 2022, Liz Truss’s short-lived government claimed it would boost productivity through old-fashioned tax cuts, but we know how. has come out. Now his replacement Rishi Sunak has shifted focus Financial responsibility While little attention is paid to the still urgent need to increase investment spending. While his government has restored some confidence in financial markets, it has not offered any new hope for the economy. Worse, it could be two years Before the next election.
In the UK and other advanced economies, there is a clear case for bolder policies to force the private sector to increase investment spending. The case for bolder public investment spending is even stronger. As long as such a program is well articulated, transparent and supported by non-partisan bodies (such as the UK’s Office for Budget Responsibility and the National Infrastructure Commission), financial markets will respond positively.
There is a third big problem Regional inequality. Here, there is still hope for building a broad-based consensus around bold solutions. Despite the ongoing factional political battles, the current government knows it must get serious about devolving more economic policy-making powers and stimulating investment in less affluent areas of the country. Furthermore, although Labor largely ignored the problem of intra-regional inequality for many years (since I chaired the Cities Growth Commission in 2013-14), the party has finally woke up.
“Leveling up” the UK’s underperforming regions still holds great promise. We have shown in the David Cameron government Northern Powerhouse Schemeis UK Well located To capitalize on its excellent universities, alternative energy and other reliable sources of innovation and growth.
The UK economy is in dire need of new, forward-looking leadership. The political party that takes the leveling challenge most seriously can enjoy a long tenure in office.
Jim O’NeillFormer Chairman of Goldman Sachs Asset Management and former UK Treasury Minister, Member of the Pan-European Commission on Health and Sustainable Development. Copyright: Project Syndicate2022, published here with permission.
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