The election result may signal an end to austerity but it won't last
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Gradually the results of the election are sinking in.
Mrs May, apologising to her party, signals an end to austerity. Cuts in school budgets are to be reconsidered.
Social care spending must be funded in other ways than cutting pensioner benefits. The unending freeze on public sector wages is going to be eased.
Deficit reduction by squeezing the state and public services is no longer to be the number one economic priority.
Amen to that, many if not everyone will say – but it may bring little hoped for economic relief.
It will be Britain’s approach to Brexit that will shape the economy over the next five years, not changes in government budgetary policy.
For months after the Referendum the winning Brexiteers jeered at the Remainers and their Project Fear. Far from the economic crisis of which the Remain camp had warned in lurid terms, the British economy was prospering.
Consumers carried on spending, export orders rose and there was no flood of companies leaving Britain or cancelling investment.
And beyond that there was an exciting new world of opportunities as trade deals with countries currently denied us would open up. Leavers were right: Remainers wrong.
No more. That unfounded optimism is giving way to real fear at Britain’s economic prospects, even as the government inches away from austerity.
The Remainers were more right than they knew. There is growing realisation at how deeply damaging a hard Brexit will be, with a government apparently sticking to its mantra of negotiating just that despite losing seats in the General Election.
Even before June 8 there were storm warnings of a chill settling over the economy as a portent of worse. Consumer and business confidence were retreating.
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Companies were laying plans for leaving the UK. Prices in the residential and commercial property market in central London, a bell-weather of international confidence, were falling sharply.
But so trapped is Britain in a sealed Eurosceptic bubble that this news has barely surfaced – and business, fearful of being tarred and feathered by the bullies in Leave, has not gone public with its fears.
Now comes an economic reckoning for which neither the government nor wider public are prepared. Hard Brexit is the number one economic worry.
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It should be obvious that rupturing the ties and practices that have grown up over 40 years of EU membership will be traumatic.
There is no corner of British economic life that is not intertwined with being part of the closely integrated European economy – and benefited.
Whether the car and aerospace industries, British universities, law and finance, farming, the NHS – all have benefited from EU membership. That is now in severe jeopardy.
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Critics are right to say that Britain is a more unequal society than it was forty years ago and many parts of the country – especially those that voted Leave – are cruelly neglected.
But that is no fault of the European Union. That is because successive British governments have managed the economy poorly.
There has been no consistent industrial strategy, only weak attempts to build institutions that support companies that want to create long term value and feeble efforts to create a web of company law, financial institutions and ownership structures that support great companies.
Parts of the Tory party, and Mrs May herself, now recognise this –but it is doubtful the government will have the time and energy to put its mild proposed reforms in its June manifesto into effect , and nor is it likely they can offset the maelstrom of hard Brexit.
This is the alpha and omega defining discussion of the economy.
To drive the point home, 14,000 trucks enter and leave Britain every day – mostly through the Channel Tunnel but also from ferries and across the Irish border.
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None of them have to be stopped and checked to see what goods they carry, what tariff might be paid and where the goods are made.
As long as they come from the EU we treat them just as we treat trucks crossing the England/Scotland border.
Once we crash out of the EU customs union and single market all that changes. EU trucks will be foreign trucks – as British trucks will be in Europe.
Even if the British say that despite leaving the customs union and single market we are going to behave just as before, charging no tariffs or doing no checking, (which seems improbable and is a charter for cheating on a continental scale), the EU cannot do the same.
They will have to check trucks leaving Britain to see what goods are in them, no regulations broken, appropriate tariffs paid and country of origin rules obeyed.
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The French will see no reason why they should suddenly spend billions on expensive customs posts and thousands of customs officials for reasons caused by Britain – so there will be huge queues on the Kent motorways of tens of thousands of trucks waiting to be checked, just as there will be in Northern Ireland.
That will deter trucks coming into the country, however “free market” and liberal we want to be. Logistic experts fear shortages of crucial goods, including food: in today’s world supermarkets depend on just in time deliveries dependent on friction free movement of goods.
A few even talk of the need to have stand-by plans for rationing as crucial supply chain links get weakened and severed.
Brexiteers dismiss these arguments as scare-mongering: that one way or another we will find a way through, without ever saying how.
Even if given the benefit of the doubt, this is not the background for an economic resurgence and investment boom.
Companies want to see what the way through is going to be, if at all.
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Thus hundreds of thousands of firms in manufacturing, finance and services are going to lose their so-called passporting rights so that automatically they are treated as a home firm in any EU member state.
What is the way through? There is not the space in a short article but there are same questions in every sector.
Will Airbus stay in the UK? University research? Drug exports? Nuclear power? Space? Exports of live animals? Inward investment? Multinational headquarters ( the UK has nearly 500 – many now set to leave) ?
And because decisions about 2019 have to be taken in 2018 at the very latest we have only months to come up with answers.
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It can’t be done.
The World Bank predicts our trade in goods with the EU will halve and our trade in services will fall by 60 per cent in the years ahead : even if we struck a trade deal with every non EU country in the world in the next 12 months – impossible – it could not compensate for those losses.
As a result the economy must shrink, and a shrinking economy feeds on itself. Investment gets cut back, and that shrinks the economy even more.
Put bluntly unless the government backs off now and declares it is aiming for a Brexit that keeps Britain in the customs union and in the single market, we face at least a recession – which in a worse case could easily spiral into a slump.
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Nor will be there a quick end in sight. Public borrowing will explode, and there are multiple financial risks – with sterling, with interest rates and even the integrity of the banking system.
Austerity will be forced back on us. Many Leave voters voted to leave the EU because of an understandable deep dissatisfaction with the status quo. They were duped into blaming the EU.
Now they are set to discover that EU membership was a crucial prop to our collective prosperity. It is only when the country learns this through bitter experience and insists on a constructive relationship with the EU that the economy will begin sustained improvement.
The longer that takes, the worse it will be.