Comment

The last throw of the Brexiters

Philip Stephens / Sep 2022

Photo: Wikimedia Commons

 

The fortunes and misfortunes of our own country are often best weighed from abroad. A distant vantage point strips out the political clatter, draws a line between the important and the immediate, and separates cyclical bumps from and enduring structural shifts.

I was reminded of this the other day when I picked up a strictly confidential memorandum penned by HM Ambassador to Paris. The note lays out the envoy’s view of the state of contemporary Britain for the private consideration of the powers-that-be back home in Whitehall. Sad to say, it turns out to be a long, detailed reflection on the nation’s dismal economic performance and on the concomitant shrinking role for Britain in world affairs.

“You only have to move about western Europe nowadays to realise how poor and unproud the British have become in relation to their neighbours”, the ambassador observes with a candour rare even in such private communications. The nation’s decline is visible not just in the economic statistics but also in “the look of our towns, airports, hospitals and local amenities”.

Europe, with consistently higher productivity and stronger economic growth, has pulled ahead. Economic success, the despatch continues, has given nations such as France and Germany additional weight on the international stage. Has no one noticed that, for all its Gaullist disdain for most things American, Paris now gets a serious hearing at the highest levels in Washington? So much for the cherished “special relationship”.

Close students of postwar British history will have recognised by now that this heartfelt lament was written some time ago. As long ago, as it happens, as 1979. The 1970s had been a decade of crisis. Britain was the sick man of Europe. In 1976 James Callaghan’s government had gone cap in hand to the International Monetary Fund. Nicholas Henderson thought Paris would be his last ambassadorial posting before his planned retirement. So he told it as it was.

What’s striking is the force of Henderson’s assessment some four decades later. To reread it in 2022 - with sterling crashing towards dollar parity in a self-inflicted financial crisis and the IMF telling the government to rein in public borrowing -  is to ask “what’s changed”? The personnel, yes. And the ravages of inflation in the intervening period have made Henderson’s numbers seem triflingly small.  The Conservatives rather than the Labour party now hold power. For all that, the ambassador’s analysis is as relevant now as it was then.

The present government’s humiliation at the hands of the financial markets was entirely avoidable. Liz Truss entered Downing Street with the economy heading into recession. Inflation is in double figures. The current account deficit has widened to 8 per cent of national income. And energy price subsidies are set to add tens of billions of pounds to public borrowing. Inexplicably, Truss and her ideological soulmate at the Treasury Kwasi Kwarteng decided that this was just the moment to pile on more public debt with a hefty dose of Reaganite tax cutting.

Reagan, these self-styled Tory radicals seem to have forgotten, had the dollar. When US government borrowing ballooned to pay for the president’s tax cuts, international investors had nowhere else to go with their money. There was nothing to stop them dumping sterling. The permanent secretary at the Treasury Tom Scholar could have told Truss so. He was summarily sacked before he could protest that the markets would not take kindly to debt-funded tax cuts.

The market panic, however, is a symptom also of the deeper British malaise. Now, as during the 1970s, it speaks to the underlying weakness of the economy and a corresponding lack of confidence in markets. Kwarteng promised that his “supply-side” package, setting deregulation alongside tax cuts for big corporations and rich individuals, would unleash faster economic growth. Like the IMF, the hedge funds did not believe him. In the wounding description of former US Treasury Secretary Lawrence Summers, Britain now looks like an emerging market set on turning itself into a submerging market.

Henderson’s analysis focused on the steady accretion of bad decision-making that left Britain falling badly behind its neighbours. The problem was low investment, inadequate research and development, weak productivity, poor labour relations and faltering exports. The inevitable outcome was a country that had become visibly poorer than its neighbours. And this, in essence, is also the story of the past decade.

Year-by-year Britain has been losing ground. It hasn’t invested enough, properly trained its workforce, paid enough attention to its science base, or set in place the right incentives for research and development. The nation’s productivity languishes 20 per cent behind competitors such as France, Germany and the Netherlands. Per capita national income has been growing at less than half the rate of the rest of Northern Europe. Trade volumes have shrunk.

These structural weaknesses, of course, have been supercharged by the unprecedented self-harm of Brexit. Britain has thrown up barriers to trade with the nation’s most important economic partner. Supply-chains have been broken, and investment flows disrupted. Competition has been stifled.  Businesses have been robbed of skilled workers. Regulatory uncertainty drains confidence. The nation, in short, has impoverished itself.

And here too is the context for Kwarteng’s reckless economic package. Tax cuts for the rich deregulation are the Brexiters’ last throw - a lurch towards a Singapore-on-Thames model that would supposedly unleash faster economic growth. Four weeks in and Truss’s government has had its answer from financial markets. This last, futile, demonstration of British exceptionalism is as hollow as the notion of a new “Global Britain” reclaiming influence on the international stage. Truss’s problem is that she has nowhere else to go.

 

 

Philip Stephens

Philip Stephens

September 2022

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