Jeremy Corbyn, leader of the UK Labour Party, has declined to rule out another Brexit vote.
Speaking at the European Socialist Party conference in Lisbon, Corbyn backtracked on his previous stances towards the EU yet again. A longtime Eurosceptic who for decades campaigned alongside famed Labour figure Tony Benn, Corbyn effectively refused to firmly back either Remain or Leave in the 2016 Brexit referendum. More recently, the Labour Party has moved towards backing the decision to leave – in order to comply with the cross-party slogan of “respecting the will of the people”. During the June election, there was virtually no substantive difference between the Tory and Labour stance towards Brexit but in the months since, but Corbyn is increasingly diverging from the government’s stance.
UK Defence Row Escalates
New defence secretary Gavin Williamson has vowed to protect the UK’s defence budget.
Williamson, at just 41, is the youngest member of Theresa May’s cabinet and his colleagues are rumoured to be treating him as such. Those who have worked with Williamson in the past, however, contend that he is not someone to be underestimated and point to his meteoric rise through the Conservative party as evidence of this. The Ministry of Defence is presently united around Williamson’s determination to maintain current spending levels, which has put the department at loggerheads with the Treasury. The department has a £20bn funding deficit over the next ten years, which chancellor Philip Hammond insists must come out of cost savings.
Europe Warns Trump on Tax
Finance ministers from Europe’s largest economies have said that Trump’s tax plans breach global agreements.
Europe’s leading finance ministers, including UK chancellor Philip Hammond, penned a letter to the White House in which they raised the possibility of retaliation if the Republicans push on with their tax reforms. Europe is worried that Trump’s “America First” doctrine will undermine global trade patterns and escalate ongoing tensions between the US and its key allies. With the UK looking to its closest ally for support post-Brexit, it is unlikely that Hammond’s latest move will sweeten any future US-UK trade deal. Meanwhile, Trump is unlikely to care about shaking up current trading arrangements, given that he ran for office on the platform of making the US more competitive.
Austerity, Investment and Infrastructure: Britain’s Productivity Problem
In the recent Autumn Budget, Philip Hammond painted a sorry picture of the UK economy. GDP is forecast to remain subdued, flickering around 1.5% until it slowly picks up again in 2022, whilst productivity is set to resume its abysmal stagnation, which has plagued the UK economy since the financial crisis.
While there has been a steady reduction in unemployment since 2010, much of the progress stems from superficial employment such as more 0-hour contracts, and the rise of ‘the gig economy‘. The fiscal story is similarly painful, with the government hard set on imposing further austerity – specifically lower public spending, justified by alleviating the burden borne by ‘future generations’.
Tory Party rhetoric over the last decade has successfully convinced much of the electorate that fiscal conservatism will strengthen the British economy – but is the burgeoning productivity problem linked to this policy of austerity?
Mind the Gap
According to McKinsey, a consultancy firm, the United Kingdom has an infrastructure investment gap of -0.9%, which means that based on data from 1992 to 2011, the UK will underinvest by the equivalent of approximately 1% of GDP between 2013 and 2030, the worst figure among the advanced economies of Europe.
In the US and Canada, where productivity has stagnated in a similar fashion, the figures are dire; -1.1% and -0.8% respectively. In contrast, where productivity is blossoming the figures are unsurprisingly different. In Australia, productivity has steadily increased over the last ten years, while McKinsey reports an investment gap of an optimistic +0.7%. The causal link between infrastructure and productivity is undeniable; the data shows a correlation.
Fallen by the Wayside
Austerity – the squeezing of public spending to maintain fiscal conservatism, combined with a slew of headline projects that bolsters prospects of re-election – has left British productivity in dire straits. Bent Flyvbjerg, a Professor at Oxford’s Said Business School, claims:
“Politicians like big projects because they are more spectacular, and they need that to get re-elected. They could spend £1bn on mending potholes, but it would be quickly forgotten”.
It is a classic case of the principal-agent problem in economic theory. Governments (agents) are employed by the electorate (principals) to carry out the will of the majority, and yet their incentives are misaligned with those of the public; to maximise the likelihood of re-election, the government focuses on ‘monument building’, as Flyvbjerg calls it. This leaves small-scale infrastructure problems left undealt with, and with consistent ignorance over a period of many years, productivity falters.
It is not easy to overhaul the structure of a country’s political system, and so implementing solutions to fight the problem Flyvbjerg is worried about might be difficult. However, doing away with fiscal conservatism and pumping taxpayer money into infrastructure projects little and large, would go some way in remedying the issue.
Risk aversion and fiscal prudence is natural after financial crises, when governments, households and businesses feel vulnerable. However, economic theory suggests that governments should borrow and spend during bad times, whilst saving and consolidating during the good. Often, this concept is summarised by the analogy “make hay while the sun shines” (and then use that hay in the winter).
In short, the Labour government of the 2000s should have been more sensible with their spending, and the Conservatives of the 2010s should have been less sensible. Nevertheless, it is important that the current government commits to extensive infrastructure investment so that productivity, wages and living standards begin to climb again.
Back on Track?
There are currently some major infrastructure projects under development: HS2, Crossrail, Hinkley Point, and the electrification of Cross-Pennine and GWR routes, to name a few. Despite the fact that many of these projects and others might be put down as attempts to win votes, if they come to fruition they will undoubtedly generate economic growth in the UK.
However, this is a very big ‘if’; there has been ferocious opposition to many of the headline infrastructure projects mentioned, not least the Hinkley Point nuclear power station.
Though the new government has indeed committed to boosting net public spending on infrastructure, with areas like housing, transport and digital communications pulling in most of the available funds, private infrastructure funding may play a greater role in the future. Social divisions are defining political debate both in the UK and elsewhere at the moment, with age inequality of high importance.
A government that harnesses the gigantic pension pots of the middle-aged middle-classes – and facilitates infrastructure investment that builds a prosperous future for young people and earns excellent returns in the process – would certainly get many peoples’ votes. Unfortunately, for the time being, it is safe to say that a concoction of destabilising populism (Brexit), austerity and poor investment decisions is likely to maintain a period of subdued productivity.
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