Thursday, 12 May 2016

Budget 2020 - 'twas the year after Brexit

I seem to have been transported into a dystopian future:

March 2020: after a marginal vote to leave the EU, it is the last Budget before a General Election under the Fixed Term Parliament Act.  Opposition members have deliberately not toppled the minority administration led by Boris Johnson, reckoning that the carnage wrought by the economic and social meltdown triggered is a daily reminder of the understatement that the Remain campaign's diluted "Project Fear" and their respect for honesty, evidence and debate failed to communicate to the electorate.

A year after the UK seceded from the EU, it has no bilateral trading deals in place with any major economic power.  The election of Donald Trump to the US Presidency in 2016, again on a contested ballot, resulted in a world trade war with protectionism rife across the globe.  This, coupled with the reduction in UK and EU economic activity triggered by the referendum, resulted in further crises within the remaining EU membership, and the collapse of the Italian banking sector in 2017 was the trigger for siege economies across the west.  With defaults and economic depression endemic across Europe, the UK's problems are, surprisingly, relatively benign.

After three years of recession, where around 12% has been wiped off GDP, the forecasts for Michael Gove's final Budget are more benign.  Against a 3% decline in 2019, the consensus amongst economists is that the UK's decline in 2020 will be around 1%, and that growth might return, sluggishly in 2022.  Assuming that long-term, pre-Brexit growth rates are achievable, the productive output of the economy will reach the same level as 2016 by 2032, although with continued population growth, overall income per capita will not recover until 2035.

The impact of UK exit was an immediate devaluation of sterling by around 10%.  This translated into an increase in inflation to 4%, which required an immediate increase in interest rates despite the difficulties that firms and households now found themselves in.  Manufacturing, already in recession before the referendum vote, is now at 15% below pre-Brexit levels.  Whereas in previous recessions, the service sector took up some of the slack, the relocation of financial services and the impact of the global crash has resulted in significant reductions in high-end services and London being eclipsed as a financial centre by Frankfurt.  Where new jobs have been created they have been low-paid, and therefore consumer spending has nose-dived.

To finance a recession where two million jobs have been lost, partly as a direct result of leaving the EU but mostly as a consequence of the financial crash, taxation has had to be increased and services further reduced.  The standard rate of income tax has been raised to 30p, and the higher-rate to 60p, with thresholds reduced accordingly.  Increases to VAT and excise duties also fuelled inflation, which is now running at around 7%.  Nominal wages are growing around 3%, which with tax increases means that the average household has suffered an annual reduction of around 10% in its real spending  power.

Despite pledges, Gove has had to increase corporation tax and reduce the number of exemptions.  This has resulted in investment plummeting to levels not seen since the early 1930s, and consequential uncompetitiveness.  With tariff walls erected, and no immediate prospect of negotiating with an isolationist US, China (suffering from the global crash) or an inwardly-focused EU, British exports have fallen off a cliff.  Gove will be forced to choose between increasing tariffs on imported goods, which will fuel inflation and further declines in living standards, or increasing the budget deficit, which will drive up interest rates.

Against this economic background, the next General Election is likely to be fought on separatist lines.  Large parts of the UK voted strongly to remain in the EU, and there is popular resentment fuelled by Scottish and Welsh nationalism, as well as the collapse of the London economy.  The only budget to be protected is that for public order and domestic military spending, despite warnings that if the UK cannot sustain its defence expenditure it could well be expelled from NATO.  Riots, food shortages and unemployment are making the UK ungovernable.

This may be hyperbolic, and based around the premise that there are a number of external events that could trigger global economic turmoil.  The Brexit advocates have not at any stage been able to provide a convincing story as to how the UK would be better able to be buffered from one major shock, and a combination of more than one could knock the economy and society off-course.  As we have seen today there are no risk-free routes forward, and the experience of history demonstrates that economists, like Generals, are always fighting the last war.  Over the next six weeks, I would like to see the remain campaign push the glib and ignorant into answering questions.

Remaining does not imply a rosy path to the future.  It does, at least, reduce the risks both to the economy and, most importantly, to people's security.  An economic meltdown, which Brexit could facilitate, would make the 1920s and 1930s look like relative picnics, especially given the weakness of the current social and economic fabric.  The irresponsibility of playing with fire should be a constant charge whenever the swivel-eyed attempt to gloss over their sham and hypocritical lack of coherence and credibility.

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