Brexterity Britain - no way out?

Without confronting the impairment of Brexit and austerity directly, the Government risks sinking into the same quicksand that swallowed German Chancellor Olaf Scholz.

"Americans can always be trusted to do the right thing, once all other possibilities have been exhausted," Winston Churchill once famously quipped.

While this may not be true of the current generation of American leaders - and whilst we don't know for sure yet though we can guess - it could be true of British leaders. Because frankly, we're stuck, economically and so politically. Welcome to Brexterity Britain.

The Government's determination to see improved growth is firm - up to a point. In October, debt rules were rewritten absolutely rightly. There may have been a slight uplift in market interest rates as a result but the benefit of freeing resource for public investment more than justifies that small cost. That needle flickering though is a warning that the UK might be taking a much bigger risk to shift its fiscal trajectory much further. The Government is right to warn about the risks. We are not in the same boat as Germany which has national debt just above sixty percent.

Re-regulation of planning, AI action plans and draft industrial strategies, reform of Government machinery, whatever quibbles about the details, are all sensible. Innovation has to be pursued, productivity of public services sought to meet rising demand without even more brutal cutbacks. Bonfires of red tape tend to return little by way of growth uplift but the regulatory garden has to be persistently shaped and pruned nonetheless. Does this all amount to a theory of growth? Yes, but it's a theory of some rather than abundant growth.

I won't repeat the numbers about persistent low growth, low productivity growth and low wage growth here again. You likely know them by now. It says something about the state we're in that the national statistics are probably wrong- and if we had the right numbers that it could well be worse according to analysis from the FT’s Chris Giles.

All of this together creates a revenue crisis for the state. The challenge we face is primarily one of economics which in turn reflects bad policy for far too long. Again, the Government is absolutely right that this is a situation they inherited.

This week the consequences of this revenue crisis were laid bare. Once more, the Government is right to be concerned at increasing demand for ill health and disability benefits and in wanting to see much greater support for individuals back into work. That doesn't tell the whole story. In no imaginable universe where the revenue crisis was not as acute would the reforms, which will absolutely push ill and disabled people into poverty, look like what is actually proposed. This chart from the Resolution Foundation showing where receipt of these benefits is concentrated brings the point home:

To repeat the theme, these sorts of cuts, if not imposed here, would have to be made elsewhere. Basically, as demand shifts, sometimes in unanticipated ways, that part of the state is cut back and that leaves scars- often on people directly. The forthcoming spending review will also likely take a further bite out of prisons, courts, skills, police, local investment when the public realm is already in a shocking state, transport, infrastructure, green transition and much more besides. All of this would be hit even harder without welfare reforms. The intention here is not to advocate for one form of austerity over another; it's to say the choices are real given constraints both real and self imposed.

What is the difference between the austerity state and the Brexterity state? There was a way out of the austerity state. And in fact, ahead of the EU referendum, things were starting to recover. They recovered enough to give the Conservative party a majority in the 2015 election. Sometimes you have to think we are cursed. That majority enabled them to follow through on an insane referendum. The rest is, well, not yet history.

Perhaps I'm completely wrong and the flurry of reform, strategies, plans, will all deliver the step change in growth that is essential. Sometimes it is better to be wrong. But given much of this has been tried before without noticeable impact, not least by the previous Government and its predecessors, it is at least worth entertaining the notion that we are stuck in Brexterity Hotel California. And what then?

Sometimes it's better to approach a problem head on. We have a revenue crisis exacerbated by Brexit and a weakening tax system (partly caused by the last Government's unfunded tax cuts and then made lopsided by closing that gap on employer taxes that have disproportionately negative economic impacts). Brexit is not our only output problem by any means: persistently low productivity growth since the mid 2000s is a structural impediment too. But it is one thing a Government can decide to address directly.

Symbolic of our dire international trading position was the EU announcement this week of a defence fund. EU countries can draw it down but only spend it in EU countries or countries with whom the EU has a defence and security partnership. This includes Norway, Moldova, South Korea, Japan, Albania and North Macedonia. Turkey and Serbia can also take advantage. But not the UK. Now, this may be fixed in a matter of weeks. But if anything emphasises the absurdity of our current partnership with the EU then it's this. It's our biggest overseas market and, as of January 20th, our most important strategic security ally. And now Europe is about to become a global growth engine, driven by Germany's fiscal muscle, and the UK is positioned to miss out.

As much energy is now required to secure an improved trade deal with the EU as we need for a new security partnership. That won't be full membership but has to be as close to single market membership as feasible. Already supply chains have adjusted around the EU-UK Trade and Cooperation Agreement. So the harm caused thus far won't be fully undone. Yet, at least alignment with the single market targets the infection directly.

Meanwhile, reform of the tax system will be essential. This is aimed at the austerity component of our stagnation. Reform will have to make taxes broader based, fairer, and more linked to services directly, especially local services. Wealth taxes probably don't raise much but they raise something, especially on high value property, and they emphasise fairness in the system. France and Spain have pursued this route. Taxes should be more localised to refresh the public realm and services. There's no point reducing NHS waiting lists if everything else is dilapidated. And we simply do not have a sufficiently broadly based tax system that can accommodate shifting demand for state services; nor for necessary increased expenditure on defence. This week disability support, what in six months time?

Don't worry, I can hear the shouts of "broken promises, electoral disaster!" at the back. I see your betrayal and raise you a Friedrich Merz and the German debt brake. Olaf Scholz, the outgoing German Chancellor basically spent his time in office like a rabbit in the headlights, rooted on the spot and that spot was quicksand into which he was sinking. In fairness, he would have removed the debt brake if he could have got that through his Government and the Bundestag. In came Friedrich Merz and straight away he removes the fundamental barrier to German prosperity and security - its debt rules. Cleverly, he kept a constructive ambiguity on this during the election. There's lessons there.

When the context changes, and US deserting Europe is one such context, you have an opportunity to make the case for changes that otherwise would be off the table. Changing course is politically difficult - especially when you've made pledges that will have to be weakened. But administering the Brexterity state with no way out is likely far harder.

The lesson for the UK Government from the Scholz submersion is that whilst you have to do lots of smallish things, you have to remove fundamental barriers too. A statecraft which places your politics of support at odds with your politics of governing is not sustainable and vice versa. When in Government you have to make big moves to shift that conflict or you may end up losing both support and the ability to govern. Brexterity is a very high and wide wall to navigate. You might just need a bulldozer - get one while you can.