WHAT IS WRONG WITH THE UK ECONOMY - PT 3

20 August 2023

Most people reading this question would give a financial kind of answer rather than others who think the problem is down to a mediocre political leadership.

And most people would say that the UK's problems come from its being a declining great power that doesn't really recognise this reality of decline, and doesn't see that the problems it has are a result of its past successes and a country that generally suffers from too much nostalgia ie living on its past.

DEMOCRACY

People have doubts over the state of democracy in the UK, but we should remember that the elite did eventually recognise the Brexit vote in some way and when there was a problem last year in the LDI market, the prime minister and chancellor were given the heave-ho. 

So perhaps we have fewer problems than in America, where a complete outsider got to run the White House and when he couldn't run it anymore, tried to ransack it. And now the incumbent president has instructed his Department of Justice to find all kinds of charges to imprison his political opponent. 

In the UK, there doesn't seem to be the same level of abuse of the Constitution, nor the same growing civil unrest as there is in the States.

ECONOMIC FACTORS

To know what's wrong with the UK, take a look at long run productivity, growth, investment, equality of income, distribution of wealth and income (smaller countries do better incidentally, the UK is big), regional inequality (London & SE is very wealthy, the rest of the country is poor) all of which show a poor UK performance relative to the EU and US.  

INVESTMENT AND PRODUCTIVITY

Investment and productivity are the problems that Teresa May and Liz Truss, former British prime ministers, tried to address and got booted out for their trouble (May for Brexit too). Investment should be seen as key to the UK's problems and there has been a recent change letting pension schemes invest more broadly in the markets than just government bonds .

TAX

Actually the UK is quite a low tax country and this is reflected in the poor services compared with say France which is the most highly taxed in the world I think....so some have left!

GFC, BREXIT, COVID, WAR

The financial crisis damaged the UK economy more than any other major economy because it is so paper-based ie runs on fibancial products rather than real like manufacturing or commodities. And Brexit delivered another hammering, but strikes me this was the result of the elite greed at the GFC. And the UK was the slowest to recover after covid.

Each time and especially after Brexit the pound got a bit weaker. Trade-ways, Brexit also meant that the UK lost exports to the EU as it found itself on the outside of fortress Europe, but on the other hand imported more than it would have done had it not left, as it remained an open economy.

CURRENCY, BALANCE OF PAYMENTS

It seems - according to the experts - that between an uncertain currency and an uncertain export market, investment suffered and this, as has been stated, is key to all the problems mentioned above.

IMMIGRATION

There were thousands of people each year quitting the EU and migrating to the UK, but this is rare since Brexit. Brexit had the opposite effect and succeeded in cutting EU immigration. 

But on the other hand between Hong Kong and Ukraine plus the boat people, immigration has absolutely soared from non-EU countries. 

WORK FORCE, STATE WELFARE

This is really important for the future quality of the labour force and for some sectors like agriculture and domestics, hotels and restaurants. I can't work out if this rejuvenates demographically - Peter Zeihan has not addressed this. Anyway, Brexit failed take back control of our borders. Furthermore the pandemic meant that the proportion of working-age people not in work rose quite dramatically, but for the UK this continued even after the pandemic whereas for all other developed economies that proportion returned to trend and continues to fall. 

Seems the British are becoming more and more lazy, I don't know about the US - maybe it's the Anglo-Saxons becoming fed up with their system and leadership, or maybe it's that low taxes mean low health and welfare, poor housing and inadequate education for a hi-tech economy.

RECESSION, REVOLT

Now consider what a recession would mean. It would mean even more decline in real wages and a smaller tax base. Austerity lowers welfare, and however conservative and well-behaved are the British, you'd think that after a time this would create very serious political problems.

PUBLIC DEBT

The UK is a debtor nation and depends on foreigners having confidence in its economy enough to buy its government bonds. I just wonder that if we are a declining former superpower, how much longer that confidence will hold and what is the link to interest rates?

INFLATION ORDER

Plus inflation and recession, higher taxes and austerity, and what effect will this have on public order and stability of governments given rhe UK has had three in the last year?

UK debt is about average for a developed economy, the tax base is below average, the regulatory framework is about average, so it doesn't look like cutting taxes and regulations could be a solution.

EU

Rejoining the EU now that almost 6 out of 10 Brits (up 20pc from the referendum) would be in favour of that could be a boost for exports. But would the EU have rhe UK back, and on what favourable terms?

DEREGULATION FTA CUSTOMS UNION

Just consider...If the UK cannot be a free trade economy with Singapore-type rules because we are already as deregulated as is possible; and if free trade agreements with the rest of the world outside the States are not significant; and a free trade agreement with the States is impossible: then why not rejoin the EU customs union? There wouldn't be the problem of free movement of people, but we would have to align to EU product reg.s and standards on food and manufacturing, which after all ought to make industry more efficient - productivity being the key to regeneration - and no-one in industry would object to that. 

It would I think also solve the Northern Ireland Protocol conundrum, though we'd be right back where we were inrhe controversy over having to accept the ECJ, ie eat humble pie.

INTEREST RATES

Seems inflation and interest rates have hit UK worse than any other G7. 

G7 GLOBAL SOUTH

But the G7 as a whole is failing wrt the Global South.

EM STATUS

These factors make you think that the UK is retrograding to an emerging market status where it's bonds and equity markets drop in value, FDI drops and if Singapore on Thames is the scenario then the regulatory apparatus is weakened as well. 

Our wages, standard of living and industrial economic devt are all on the slide, as we've talked about in other articles here. But by way of context, we should bear in mind that all Western powers are facing a rate of economic decline relative to the emerging Global South.

REJOIN

But getting closer to the EU, albeit at the risk of joining a sinking ship, does offer some hope of a revival in the UK's fortunes. It would help the UK retain its status as a financial centre. 

It might also provide the tax revenue to improve the UK's education and workforce skillset, not just for those at the bottom, but also for the mediocre elite at the top. And more jobs in new areas like technology and IT, AI and cyber, improve workforce competencies. 

Welfare could over time help social and cultural integration, let's call it. 

So perhaps the UK could reverse out of the decline to EM status.

WAR

Ending the war in Europe on terms that recognise a multi-polar world - ie promote values of equality, respect, negotiation -  would undoubtedly help all Western economies and the world's. 

If only we in Europe could have the American Order, with its values, institutions and rules, but without America's bullying neo-colonial ways!