When it comes to Brexit, everyone seems to have an opinion on what might happen next – and what impact it will have on the UK economy. The consensus, regardless of whether you are a Remainer or Leaver, seems to be that investment has been subdued largely driven by delayed decision making. For Brexiteers the logic is now to dispel those fears, opt for a hard Brexit and make a clean break. For Remainer’s it is to minimize uncertainty by cleaving as closely as possible to a continuing relationship with Europe.
In this blog, I tend to stay out of this vexed debate around Brexit. My core position is that there are far more important things to worry about, with the advent of a Corbyn government top of the list. I think discussions about backstops and trade deals will all be irrelevant if Uncle John is in Number 11 and we face a properly Marxist government running the country.
I’ve also not been terrifically convinced that the British economy is in a funk, induced by Brexit. Growth rates have been lower than trend, for sure, as they have in many other places, but they’ve not been critically low.
For me, the real issue has been much more structural i.e Weak consumer spending growth and the accumulation of consumer debt. The urban elite with their high incomes, rising asset values and more global point of view (I freely admit to being in this category) tends to ignore a sordid reality, which is that many are struggling to survive financially on low incomes and are reacting by taking on terrifying levels of debt.
Crucially I’ve long felt that the squeeze on public sector wages was, arguably, counterproductive.
Small staters on the Right may not like the fact that the government spends a large share of GDP and accounts for a substantial portion of the workforce, but it is a reality nonetheless – they can’t wish it away in the short term.
More importantly, if you constrain wage growth in this huge sector, you are bound to crimp consumer spending economy-wide. This can be compensated for by a vibrant private sector, but this is perhaps where Brexit has indeed had its impact. Maybe there has been a delay in decision making, which has acted to weaken private sector growth rates. Put the two together – anemic public sector wage growth and anemic private sector investment growth rates and you have the makings of sub-trend growth. The result is that many, especially, in the public sector (especially amongst the low paid) have been increasing consumer debt, which is of course, which is of course about to cost more as interest rates rise.
In fact, I even would go so far as to say that I have a smidgeon of sympathy for the austerity critique originating on the Left. Of course, I think it is laughable to blame everything on tight government spending – just check out the Guardian’s comments section and I think everything from knife crime to cruelty to animals is somehow linked to tight spending settlements. But it’s also equally obvious to me that no real growth in public sector salaries will have a direct impact on GDP growth.
I’m not the only one who argues this. Albert Edwards, my favourite perma-bear and paid-up member of the awkward squad just put out a note which suggests that the recent economic growth slow down has been a direct result of
“two years of massive UK public sector fiscal tightening, in both 2016 and 2017, [which] removed some 1¼% from both years’ GDP growth…. Without that savage fiscal tightening, UK GDP would have quite happily skipped along at a 3% rate, well in excess of the eurozone, where the fiscal impulse was neutral. Contrary to what most mainstream economists would have you believe, weak UK GDP had little to do with Brexit uncertainty….Another way to look at the fiscal tightening is to see it in relation to other sector financial balances…the shrinkage of the public sector deficit… has been offset by a swing in the household sector balance from surplus to deficit…. These sector imbalances must sum to zero for an economy for example if all the domestic sectors in aggregate are borrowers (as they are currently) then the rest of the world will be financing that deficit”.
For me, there are three areas for debate which emerge out of this way of thinking.
The first is that the UKs current structural balances (trade deficit and a savings deficit) can continue to fester as long as the rest of the world is willing to finance our deficits and buy our assets. But if we have aggressively an Marxist government in charge, that consent will be withdrawn. Who in their right minds in the Citadels of Evil Global Capitalism will want to finance a properly Socialist agenda unless a) the interest rate is sky high and/or b) sterling falls precipitously in order to make sterling assets dead cheap (globalists will then buy said assets in the hope of a politically inspired rebound as the Socialists are turfed out of office after a year or so later).
The next debate is around productivity. One of the only ways of dealing with the highlighted structural challenges is to raise labour force and capital productivity substantially so that we can grow the pot, improve wages and curb debt. This is a huge challenge facing politicians of all parties and so far the suggested measures have been piecemeal and fragmented.
The last point is that anyone interested in economics, must face the reality that there is a difference between the consumption rates of the rich and the poor/struggling average. In the latter, there is a real sense of jeopardy which forces certain behavioural choices. Long term savings are delayed in order to deal with the day to day. There’s also a completely understandable reluctance to plan investment over a very long time period. Crucially those on lower incomes have a higher propensity to both borrow and spend. If we choke wage growth for this segment, don’t be surprised to see consumer spending growth rates tumble and debt levels rise.
For the rich, by contrast, the propensity to consume is much lower – they’ve already bought most things they want – and savings rates, abetted by tax policy, are much higher. Crucially much of this much larger savings pool owned by the wealthier is also deployed internationally, via diversified global portfolios both in risk assets and property. Thus, at the national accounts level, we experience seepage from the economy as the rick get richer. As the poor struggle, we see growth repressed and savings rates collapse. I would argue that this suggests an obvious truth, namely the need for smarter thinking about redistributive government policy.
Redistributive policies at the government level, tend to excite the Leftish equality brigade – it appeals to their heightened sense of moral virtue and egalitarianism. For me though, robust redistribution simply makes economic sense. The poorer are likely to spend their gains and thus boost the wider general economy while the rich squirrel the spare dosh away, much of it internationally. I should say that this is in no way an argument for taxing the rich until they bleed. It is though an argument for a more generous welfare state settlement for those least able to cope with adversity. It must be paid for of course by a robust private sector and an efficient public sector, but ‘austerity’ has a real cost in dampening down economic growth potential.
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