Boris Johnson’s victory: What it means for the British economy | The Daily Star
12:00 AM, December 15, 2019 / LAST MODIFIED: 12:00 AM, December 15, 2019

Boris Johnson’s victory: What it means for the British economy

The outcome of Britain’s recent parliamentary elections should not come as a surprise to anyone. The British Prime Minister Boris Johnson and the Conservative Party had sought a clear mandate from the people to “get Brexit done”. With 364 seats, they got it. Hopefully now, cooler heads should prevail—and do a stock-taking of what the economic cost of this vote will add up to. As one would expect, there will be some short-term costs which could be justified by countervailing long-term benefits.

The margin of the Tory victory was a surprise, though. While all polls leading up to the vote were indicating that the pro-Brexit ruling party was ahead of the Labour Party by 10-12 points, the quantitative extent was not anticipated. Britain’s effort to get out of EU was handicapped by the slim majority that the Conservative Party won in 2015 under David Cameron. The majority then disappeared in the 2017 election, which the next PM Theresa May had called in the hope of increasing the lead in the House of Commons. Since Margaret Thatcher’s 1987 victory with 376 seats, which was termed a landslide, the Tories never attained the same level of popularity until now.

What does all this mean for the British economy? Barring a major revolt or a palace coup in the victorious Conservative Party, UK will leave EU on January 31, 2020. Between today and the new Brexit Day, we might see three immediate impacts. The British pound will get stronger against the euro and could attain the 1.20 level against it, a benchmark reached immediately after the 2016 referendum. Consumer confidence during the Christmas season will lead to a major boost in retail sales. Finally, one should not be surprised if trade talks between UK and non-EU countries get a jump start.

A beneficial fallout for the British economy is the significant reduction in uncertainty in the short run, i.e., until December 31, 2020. The Brexit uncertainty was crippling the British economy. In the medium-term, there will still be a degree of leftover uncertainty driven by the need to work out a trade deal with EU before the transition period ends on December 31, 2020. Knowledgeable authorities are sceptical about the PM’s contention that there is “absolutely zero” prospect of the UK being forced to leave without a trade deal with EU in 11 months. Our experience with trade talks indicates that these often drag on for years. UK also will now embark on trade negotiations with the rest of the world, and there might be uncertainty there too. Progress in negotiations with the USA, China, UAE, Japan and South Korea may depend on Britain’s long-term relationship with the EU, and they “may want to wait to see what that looks like before spending a lot of time and effort on negotiating with the UK”.

There will be some hard bargaining between UK and EU in three areas: trade, migration and regulatory alignment. Brussels’ chief Brexit negotiator Michel Barnier has already voiced concerns, indicating that UK-EU negotiations could last “maybe two, three, four years for some areas to rebuild everything that is having to be unpicked as a result of the desire of those who wanted Brexit”.

The long-term prospects for Boris Johnson’s dream of reshaping the UK economy into a low-regulation “Singapore-on-Thames” will depend on how accommodating the European leaders are. In this regard, there are already signs of discomfort in European capitals including Paris and The Hague. Barnier has privately voiced fears about Johnson’s desire to undercut the EU’s “level playing field” in state aid and tax regulations—a move that would hinder any tariff-free trade agreement.

However, UK’s economy which grew at its slowest annual pace in nearly seven years in October, will get a shot in the arm. The Tory election manifesto made a swath of promises to convince the voters that a new era will emerge if Johnson gets the votes he sought. A few of these were part of his “Brexit roadmap” and others to broaden the electoral base for the party. For example, he assured the electorate that he will promote a “Buy British” campaign once UK was unbound from EU rules. That will obviously be a direct benefit of Brexit. Another spill-over effect from Brexit is the possibility of helping out struggling British industries.

To boost domestic demand, post-Brexit UK can freely adjust fiscal and monetary policy including rate cuts, quantitative easing, benefits under social programmes, additional capital spending and reduction in VAT. Samuel Tombs, an economist with Pantheon Macroeconomics, opined that even though the economy was growing more slowly than expected, the promises of looser fiscal policy by the main political parties would reduce the need for lower interest rates.

The Tory party, in a break with the past, has offered a programme to channel money for expanded public services and investment for infrastructure projects outside London to narrow the divide between the northern and southern regions. This is a major departure from its own creed of Thatcherism. Under the Conservatives, Britain has cut its budget deficit from 10 percent of the gross domestic product (GDP) in 2010 to about 2 percent now.

Johnson’s hope that Brexit will “unleash a great tide of investment” into Britain may take a little while to materialise. But Liam Fox, the international trade secretary, declared, “My department will continue to promote the strengths of the UK as a great inward investment destination, with an open, liberal economy, world-class talent and business friendly environment.”

Boris Johnson has pitched two ideas to support British agriculture and industry. One of them is to provide incentives to buy British agricultural products. He also pledged to use Brexit to introduce new state aid rules, change state purchasing policies and reform farming so that pubic bodies aim to “buy British” goods. The second policy reversal for Johnson is the promise to come to the aid of industries in trouble. This is a clear break from long-held Thatcherian policy to let the ill and sick industries die.

Under EU rules, a subsidy to a failing industry is considered unlawful, since the free-market principle implies that factories that cannot compete must be allowed to close or regain competitiveness on its own. Johnson announced that he will change state aid rules to “make it faster and easier for the government to intervene to protect jobs when an industry is in trouble.” Other changes in the offing are lower VAT on fuel, stricter immigration rules, and tax cuts for construction and research industries.

Incidentally, it is not clear what the impact of reduced immigration from EU might be. The Director General of Confederation of British Industry has warned that Johnson’s plans to reduce immigration risked a skills shortage.

What are the risk factors affecting the cheery picture I painted above? There are four: i) The failure to reach a deal with EU by the end of 2020; ii) The inflationary effects of the burgeoning public debt; iii) Stalled negotiations with the rest of the world on trade, technology and climate change; and iv) Lower GDP growth due to global uncertainty and slowing economic growth.

As an American newspaper, the Washington Post, cautioned the victorious PM, “Untangling 45 years of integration with Europe—not only on trade, finance, migration and manufacturing but also on security, intelligence, aviation, fishing, medicine patents and data sharing—will take another year or more of hard-fought negotiations with Europe and will almost certainly dominate headlines and consume the agenda in Westminster.”

 

Dr Abdullah Shibli is an economist and works in information technology. He is Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA.

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