U.K. Prime Minister Rishi Sunak is looking to cut spending and raise taxes to appease financial markets, but that won’t give Britons a renewed path to growth and prosperity.
From 2010 to 2016, David Cameron led the U.K. out of the global financial crisis with taxes at a fairly stable 33% of gross domestic product.
Brexit, COVID and the war in Ukraine bedeviled his successors—Theresa May, Boris Johnson and Liz Truss. Their policies left the U.K. with troubled finances, inflation, and the prospect of a long recession.
Uneven prosperity
Cameron exploited opportunities for London’s financial sector inside the European Union but as that industry prospered, the rest of the country did not fare as well.
Overall gross domestic product (GDP) growth shifted down to 1.7% during his recovery from 2.6% during the prior expansion. Going forward, growth will likely be about 1.2% but only after a recession to quell inflation.
Financiers like Sunak got rich, but the once-heavily industrialized north of England languished. Ultimately, that made possible Brexit and a populist Boris Johnson.
May and Johnson were either poor negotiators or lacked leverage when crafting an exit deal with the EU. The final agreement left the U.K. in unenviable circumstances.
May agreed to negotiate Britain’s large severance payment to the EU before discussing a post-Brexit free-trade deal with the EU—that gave away one her most important bargaining chips. Johnson accepted an agreement that creates free trade in goods without “passporting” for London’s financial sector to compete on an equal footing with Frankfort, Paris and Amsterdam.
Now, German manufacturers and French farmers and vintners have free trade access to U.K. markets, while London’s finance industry lacks equal access to continental markets.
Missing ingredient
Johnson supported Brexit on the idea that Britain would negotiate free-trade agreements with other nations. The U.K. now has pacts with Japan, Canada and Mexico but the most essential element for this strategy would be a deal with the United States. Unfortunately for Britons, President Joe Biden has a policy of not entering into new comprehensive free-trade agreements—even with staunch allies.
COVID left the country broke, overtaxed, and undercapitalized.
The deficit soared on $426 billion pandemic relief spending, and Sunak—as Johnson’s finance minister—boosted payroll, corporate and other taxes.
At 36.3%, taxes as a share of GDP are their highest since 1950. Sunak plans to raise those to 37.1% to appease financial markets, which are demanding that government borrowing be reduced.
With high taxes, its most important industry—finance—handicapped on the continent, and its manufacturers facing customs and bureaucratic hassles to service markets there, the U.K. has become an unattractive place to invest.
Sunak estimates British companies invest 10% of their economic output vs. the 14% average for industrialized countries.
As pandemic aid ends, household energy bills and prices for groceries and other essentials are soaring. Consequently, many families face difficulties paying mortgages and with the Bank of England boosting interest rates, many now face a rate reset.
The country has considerable potential natural gas available through fracking but thanks to Conservative Party politics, Sunak will continue the ban on that practice.
A return to fiscal austerity without better market access for the financial sector in the EU creates an impossible situation for growing the overall economy.
Time to get tough
It’s time for some bare-knuckle diplomacy with the Yanks and the U.K.’s continental friends.
Britain is the second-largest donor of arms to Ukraine after the United States, but it’s hardly in the fiscal condition of Germany and other richer EU states.
It’s high time for a public shaming by Sunak of German Chancellor Olaf Scholz, French President Emmanuel Macron and other European leaders on defense to bend open financial markets.
The same goes for Biden on free trade. Britain is building naval presence in the Pacific to support America’s focus on the looming Chinese challenge but not getting much in return.
Britain must take a page from Biden’s new playbook—industrial policy.
It has formidable capabilities in science and technology and should negotiate as it can sectoral deals to participate in America’s new emphasis on supply chains in semiconductors, green energy and autos. And to heck with financial markets, spend as needed to be a full player.
To drive down foreign borrowing and a big 2.6% of GDP trade deficit, Britain needs to find ways to promote greater self-sufficiency in manufacturing and food production.
Protectionism is not pretty, but the growth box and stances of the EU and Biden’s America on financial services and trade leave the U.K. with few other good choices.
Sunak as a financier seems to think that getting the budget numbers right and bowing to wokeism on climate change, green energy and the like will cure the U.K.’s ills—those won’t.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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