Britain’s economic crisis: Is Brexit to blame?

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With its economy in tatters, England is not in its heyday. It’s a time of transition for the UK, with a new monarch and a new prime minister. Not since Churchill took office in the dark days of May 1940 has a British Prime Minister faced so much uncertainty in the early days of an administration.

No sooner had Queen Elizabeth II’s official period of mourning ended than the announcement of Prime Minister Liz Truss’ economic plan, known as ‘Trussonomics’, sent stock markets tumbling, rising interest rates and caused the pound to fall to a record low against the dollar.

If you are planning a trip to London, now is the time to go.

England is now in an economic slump – another slump in consumer spending amid a rising cost of living. While the inflation rate slowed slightly in August to 9.9%, the fastest pace in 40 years, inflation is expected to reach 11% before the end of the year.

The Bank of England says it won’t hesitate to raise interest rates. But he hesitated on an emergency rate hike lest it plunge the country into recession. To right the sinking ship, the Bank has just waded through the financial markets, buying up to 5 billion pounds a day of “gilts” or long-term British Treasury bonds, in order to restore stability. This decision undoubtedly saved the country’s pension funds from certain disaster.

Former Chancellor of the Exchequer Rishi Sunak has claimed the government’s economic plan will lead to 7% interest rates and “push millions into misery” as efforts by the Bank of England to curb inflation are inconsistently inconsistent with the government’s economic plan for taxation and spending. calling for the biggest unfunded tax cuts in a generation, as well as energy subsidies.

Economists say Britain is drifting into a long recession. Some attribute this dismal situation to geopolitical forces, the price of oil, COVID-19 or supply shortages.

Others to Brexit, when the relationship between the Bank of England and the Treasury first soured. You may remember that in 2016 a majority of the British public (52%) voted to leave the European Union. It took four years, but Britain finally did it at the end of 2020. Brexit, it was argued, was a gamble on globalisation. But globalization was no panacea for decoupling from China, the war in Ukraine and global protectionist sentiment, events that were particularly dire for a middle power trying to go it alone.

What was the outcome of Brexit?

Government analysis in 2018 showed that UK economic growth under Brexit would be stunted by 2-8% over the next 15 years. And recent studies have argued that Brexit has exacerbated Britain’s cost of living crisis.

What is there to do? The government puts the hat on Kwasi Kwarteng, the embattled Chancellor of the Exchequer. On his first day in office, Kwarteng made the seemingly reckless decision to fire veteran first permanent secretary Tom Scholar, leaving the two top civil service posts vacant.

This “shock and awe” approach to a fragile economy has left many concerned about Kwarteng’s leadership, which violates the maxim that “a good plowman does not butcher his ox”. While the Prime Minister is likely to back the Chancellor so early in her administration, many MPs say her head is on the block and have predicted her impending resignation.

The swirl of controversy around Kwarteng reminds him that he has spelled out how the growth plan will be implemented, rolling out supply-side reforms next month and releasing the medium-term fiscal plan to cut demand. debt on November 23, which many see as wooing. disaster.

Most likely, the budget situation is the last thing the Chancellor wants to be reminded of.

But it all comes down to Brexit. As Robert Shrimsley writes in the Financial Times: “What was once a slow economic puncture is now an audible whistle.” Was Brexit a huge mistake? Will this ultimately lead to Scotland separating from the UK? He last decided to stay in a referendum achieved eight years ago by a 55-45% vote.

And what about Northern Ireland, which for now is still part of the EU, and where Catholics outnumber Protestants for the first time? Under Northern Ireland’s post-Brexit protocol, there is no physical border between it and its neighbour, the EU member Republic of Ireland. This allows goods to move to and from Northern Ireland and the Republic of Ireland, as well as the rest of the EU.

Nevertheless, Britain still has to pay a tariff on goods, such as steel, shipped from the steelworks of Port Talbot in Wales to the shipyards of Northern Ireland. Negotiations are needed for a comprehensive agreement that will allow Northern Ireland to remain part of the UK, remove tariff barriers with Britain and trade freely with the Republic of Ireland.

What Brexit has gained for Britain in terms of sovereignty, autonomy and the ability to chart its own economic course without having to go to Europe hat in hand, it has lost in terms of permanent free trade agreement with its largest trading partner. Former Bank of England economist Peter Doyle said: “The very big self-harm the UK inflicted on itself was the decision to Brexit.

What is the way forward? And what to do with the current economic slide? Can Scotland and Northern Ireland continue to be part of the UK? Boris Johnson got Brexit done. Ms. Truss has the much more difficult task of making it work. She realistically has a year to turn things around, by which time the next general election, due no later than January 2025, will already be looming.

James D. Zirin is a member of the Council on Foreign Relations.

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