Brexit ideology underpins UK market rout

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Kwarteng’s statement last week was just one manifestation of the elevation of ideology on the economy. The desperate pursuit of unorthodox growth strategies has been driven in part by the 4% 15-year productivity decline that has been consistently attributed to the Brexit deal.

Thus, the British economy presents the comorbidities of a badly missed Brexit which weakened its resistance to shocks. When the markets were spooked last week, there was little that could reassure them.

The warnings were there. Conservatives are right that the strength of the US dollar has depressed most currencies (although the fall in the pound sterling is very steep), but this needs to be seen in the larger context of the fall of the pound since the Brexit.

It was only at the start of the pandemic recovery in the UK that the pound moved closer to the levels it enjoyed in the months before the Brexit vote. This dug the inflationary hole. As early as June, Andrew Bailey, Governor of the Bank of England, warned that the economy “was weakening a little earlier and a little more than the others”. Brexit-induced labor shortages and rising food prices added to the pressures.

Key sectors have been deprioritized, although there are at least signs of a more positive attitude towards financial services. British scientists face expulsion from the EU’s Horizon program in retaliation for the government’s tough stance on the Northern Ireland Protocol.

Last week’s deviation from the norm of fiscal prudence should not be seen in isolation, but as part of the contempt for the economy that has driven conservatives since the 2016 referendum.

Kwarteng’s budget was the logical end point of the tax cut strategy that free market Brexiters had demanded. But since external shocks and partisan politics prevented the spending cuts of this strategy, it was easier to proclaim the end of economic orthodoxy.

This is what happens if you keep telling yourself that everyone is wrong. Likewise, if you spend six years undermining the institutions that underpin political stability, illegally suspending parliament, shooting down the judiciary and eroding checks and balances, you can’t be surprised if investors start to worry.

Even now, conservatives prefer to blame the central bank for not doing more to protect the country from their government’s fiscal incontinence. Comparisons with Italy or Turkey are exaggerated, but you have to worry that they are even entertained.

The Tories’ only chance is Labor’s fear of the issue. Leaders tiptoed around it at the party conference this week, preferring generalities about ‘delivering Brexit’ and examples of significant but incremental change.

Keir Starmer’s only priority here is fending off Tory attacks by pledging not to weaken immigration controls by joining the single market. With a 17-point lead in the polls and a self-defeating government, why take risks when there are easier targets?

Even so, what was once a slow economy puncture is now an audible hiss. The past week has made voters, especially the 8.3 million mortgage holders, more than receptive to the argument that the Tories have mismanaged the economy.

The Brexit failure should be at the heart of this criticism. (Many will argue that this can only be sloppy, but some versions are clearly worse than others.)

Truss is left with some nasty options, not least because she won leadership by promising to double down on Brexit and take on economic orthodoxy. While she should walk away from some of the tax cuts, her instinct will be to come up with unpopular spending cuts.

Another small step would be to settle the dispute over the Northern Ireland protocol. It’s no panacea for public finances – which always demand a more immediate response – but it could change the mood music, allay fears of a trade dispute and suggest the UK is prioritizing again to economic stability.

But the Tories are now in bunker mode, only listening to those they already agree with. We are now witnessing the real-time implosion of the ruling party. It’s going to be one hell of a show, although unfortunately the tickets are going to be expensive.

FinancialTimes

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