Finance: Research, Policy and Anecdotes

I am certainly not the only observer who has described the UK as having become an international laughing stock.  I have been wondering what the superlative of ‘international laughing stock’ is.  When the remaining time in office of a Prime Minister is measured with the time that a lettuce can keep fresh and when the whole political class becomes the butt of a joke in US comedy central, you know the country is no longer taken seriously by anyone.  And so it happened these past two weeks with the UK.

At a conference dinner in mid-September I made the strong claim that Liz Truss would certainly be an even worse Prime Minister than Boris Johnson.  This was before the mini-budget and the reason for my claim was the fact that she owed her ‘election’ to the extreme Brexit wing of the Tories and that she was the instigator of legalisation to break the Northern Ireland Protocol, thus possibly triggering a trade conflict with the EU. Well, she did not have sufficient time in office to blow up relations with the EU and was simply too busy tanking the British economy with the 2020s version of Laffer’s curve and pseudo-supply-side reforms.

It is certainly ironic that on the one hand, one prominent part of these ‘supply-side reforms’ was the removal of bankers’ bonus as share of overall compensation, while on the other hand, it were these same bankers standing to benefit from the removal (as well as from the removal of the 45% income tax band) that triggered the run on the pound and UK government bonds following the mini-budget. Well, if you focus on an international financial centre as core component of your growth strategy you better watch out what these financial markets think about your macroeconomic policies!

Many observers in the UK link the disastrous but short-lived prime ministership of Liz Truss to the adoption of policies promoted by right-wing think tanks in the UK (often with dubious funding sources).  What people in the UK (though most people outside) do not want to discuss is that this is ultimately the Brexit chickens coming home to roost. Brexit has reduced the potential GDP in the UK substantially (which explains the higher inflation in the UK than other advanced countries and the higher labour scarcity).  The UK is now in a situation, where everyone talks about growth and productivity, but few dare to talk about the elephant in the room – the decision to cut the British economy off the Single Market. At a minimum, honesty would be called for, but few in the media seem capable of even that.

As of Monday, there is a new Prime Minister. For the first time in many years, I would argue that Rishi Sunak might not be worse than his predecessor, though this is really a low barrier. And among all the political turmoil, it is important to note that he is the first Indian-British Prime Minister, which reflects the openness of British society; I can think of few other European countries where this would be possible! This is also one of the few elements that still give me hope for the UK.

Having said this, the new Prime Minister faces the same two major constraints as his predecessors – the reality of Brexit and the myth of Brexit. First, on the Brexit myth, which implies that he has to keep feeding the trolls of the extremist Brexit wing of his party – as became obvious by reappointing the despicable Suella Braverman as Home Secretary who dreams of refugee flights to Rwanda on Christmas Day and resigned just a few days before because of security breaches.  This also means that he has limited political capital to come to an agreement with the EU on the Northern Ireland Protocol. Second, on the reality of Brexit: fiscal space will be even scarcer than before and he has already all but announced another austerity drive – how this squares with improving health and other public services remains a puzzle! The downward spiral of politics and economics in Brexit UK continues.

Overview