Gerhard Schnyder / Apr 2024
Image: Shutterstock
Brexit came – among many other things – with a promise of a new economic model for the UK. A model that – depending on the audience – was based on a libertarian vision of low regulation, low taxation Singapore-on-Thames, or a ‘high skill, high productivity, high wage’ equilibrium. Eight years on from the Referendum, opinions about Europe remain divided, but there is an emerging consensus across the Leaver-Remainer divide that the British economic model remains broken.
Nick Timothy – avowed ‘Leave’ voter and former aid to PM Theresa May – penned an article in the Daily Telegraph, which declares the bankruptcy of the British economic model and the economic theories underpinning it. Specifically, Timothy challenges the UK’s trade openness and focus on services. In his view the idea of competitive advantage – according to which countries should specialise in whatever they are most efficient at producing, relying on imports of things that other countries produce more efficiently – needs to be challenged. Timothy considers, “[i]f Britain only does the things it is best at – like financial services – and stops doing the things it does less well, the people and places reliant on those abandoned industries suffer.” Instead of focusing on further developing the UK’s strength in services, the country needs a rebalancing of its economy, including reindustrialisation.
This could be taken as a Brexiter’s admission that the free-trading vision of a buccaneering ‘Global Britain’ has failed. Indeed, Brexit’s negative impact on trade is now all but undeniable and will contribute an estimated 4% decline in GDP to Britain’s economic vows. Yet, Timothy remains optimistic about Brexit. By challenging ‘the logic of comparative advantage’ – which presumably refers to the new trade barriers, including new tariffs, that are now also undeniable – Brexit allows Britain to focus on doing more at home. How exactly that will be achieved remains Timothy’s secret.
On the other side of the Leave-Remain and partisan divide, Shadow Chancellor Rachel Reeves set our her vision for the UK’s economic model in the annual Mais Lecture at City University London. Like Timothy, Reeves considers that we are at a point where ‘old certainties about economic management have been found wanting' and where a ‘a new model of economic management is needed.’ Reeves calls that model ‘Securonomics.’ Referring to Harvard Professor Dani Rodrik’s idea of a ‘new productivist paradigm,’ which he summarises as ‘production, work, and localism instead of finance, consumerism, and globalism.’ Reeves’s Securonomics acknowledges the importance of supply chain resilience and of political factors increasingly influencing commercial decisions, which also necessitates a more active role for the state – albeit a ‘smart’ one not a ‘big’ one.
Yet, contrary to Timothy Reeves suggests a strategy relying on Britain’s (potential) comparative advantages, which suggests a stronger focus on tradable services rather than an ambitious strategy of reindustrialisation.
Fiscal discipline rules
While Timothy and Reeves hence seem to disagree on some aspects of their recipe for fixing ‘Broken Britain,’ one thing they agree on is that the dominant orthodoxy in public finance is not among the things that need fixing. Both underscore the importance of sticking to ‘sound public finances,’ by which is meant an aversion to public debt and deficit spending.
Timothy considers that ‘[t]he theories that underpin [the UK model] have failed,’ but insists on adherence to one of them – namely ‘fiscal discipline.’ He states that ‘[w]e need fiscal rectitude to survive our dangerous exposure to the bond markets’ and that '[…] we need brutal honesty about what we can and cannot afford.'
Similarly, ‘fiscal discipline’ has been at the forefront of Labour’s messaging around its economic policy in recent months. This includes the scaling back of its £28bn a year Green Prosperity Plan and the commitment to fiscal rules about balanced public finances and debt reduction. This ‘fiscal rectitude’ is meant to maintain (or rebuild) ‘market credibility and public trust.’
To be sure, Labour’s fiscal rules focus on balancing the current deficit, rather than the overall deficit as the government’s current rules do, which the Shadow Chancellor claims means investments that lead to long-term gains will not be affected. Nevertheless, even Labour’s version of fiscal discipline will mean reduce investment as Andy Haldane former Chief Economist at the BoE explained.
Both Timothy and the Shadow Chancellor thus acknowledge that we need a new economic model…but it must cost nothing.
Saving humanity for free?
The bon mot ‘we'll go down in history as the first society that wouldn't save itself because it wasn't cost-effective’ seems to be borne out by the commitment to the fiscal orthodoxy by politicians from both major parties in the UK.
It is certainly important – as Reeves states – for any government to create and maintain ‘market credibility’ and ‘public trust.’ Indeed, Liz Truss’s fateful ‘min-budget’ that sent financial markets into turmoil, certainly provides a cautionary tale. Yet, there is a difference between unfunded cuts to the highest tax rate and rejecting fiscal orthodoxy to finance the transition to a more socially and environmentally sustainable economic system. The US Inflation Reduction Act, which imposes a new 15% Corporate Alternative Minimum Tax (CAMT) on the largest companies, is expected to raise $222bn over the next 10 years. The new tax did not lead to a financial market reaction like the Truss-Kwarteng Crash in September 2022. Here, the Shadow Chancellor’s commitment to not increase corporation tax for the first five years of a Labour government may seem an overcautious and unnecessary additional constraint on the next government’s ability to co-finance the ‘net zero transition.’
While Labour’s Green Prosperity Plan focusses on ‘crowding in private investment,’ financial market participants seem well aware of the need for massive public investment. Thus, UK Finance – the financial sector trade association –, after the Prime Minister’s U-turn on the government’s Net Zero strategy, insisted that ‘the transition offers vast opportunities’ for ‘decarbonised growth.’ The association’s report also makes it clear that ‘ambitious climate policy […] ultimately can only be secured through wide scale, systemic buy-in from government alongside adequate public funding.’
Acknowledging that is also not an electoral problem. After over a decade of austerity and public services at breaking point, it is far from clear that ‘sound public finances’ is what will build ‘public trust’ in the next government. Indeed, according to one poll 62% of voters seem to believe that the government should prioritise public spending over tax cuts.
Saving the planet and with it humanity will require thinking outside the ‘balanced budget’ box and adopting innovative and possibly controversial measures may be inevitable. Labour has already ruled out the most radical of which – the introduction of a wealth tax – as well as much less radical ones (increasing corporation tax). Yet, other measures are still available, e.g. the simple idea promoted by Prof. Richard Murphy of taxing capital gains at the same level as income from work, or – even less radical – incentivising the wealthy to donate more to charity, as former PM Gordon Brown suggests.
Whatever economic model Britain needs post-Brexit and in the middle of the climate crisis, one thing that does seem certain is that the radical change the country (and the world) needs can hardly be achieved within the straitjacket of current fiscal rules. Rather than trying to reassure the public and markets about ‘fiscal discipline,’ the next government will need to reassure the public that it considers saving humanity and the planet is worth every penny.
