Will She Improve The Economy? She May Not
Harsh Tiwari, Fiscal Policy Contributor
Britain’s upcoming election is indicative, in a certain sense, of the stagnation in political discourse that grips Britain in regards the economy. Britain’s economic situation although not dire is not in prime condition and the negative impact of Brexit on the economy if not managed using fiscal and economic prudence can prove to be potentially catastrophic. British politicians, however, have not shown commitment or prudence in ensuring economic development and mitigating the problems that Brexit has to offer. The manifestos released by the Conservatives, which is supposed to be economically liberal in its philosophy, shows a lack of commitment or cogency in the formulation of economic policy. The Conservative incumbent candidate for Prime Minister Theresa May’s promise of providing strong and stable leadership seems to not only be unfounded but also non-committal.
The problems and pressures plaguing the British economy, as of now, are mani-fold. In a previous article, I had discussed the impact Brexit had had on the economy so far. I had stated that although, “Britain’s GDP increased by 0.7% in Q4 of FY’16, up from 0.6% in the previous quarter[,]this spurt in GDP is not one that can be predicted to continue. The Office of National Statistics has revised its estimate of the GDP for the FY’16 from 2% to 1.8%. A new set of data released by the Office of National Statistics states that “UK GDP growth in Quarter 1 2017 has been revised down by 0.1 percentage points from the preliminary estimate published on 28 April 2017; mainly due to broad-based downward revisions within the services sector. UK GDP growth slowed to 0.2% in Quarter 1 2017 as consumer facing industries such as retail and accommodation fell and household spending slowed.” Furthermore, according to a report by PWC, the UK’s growth may slow down to 1.6% in FY’17 and 1.4% in FY’18.”
The financial services sector of the British economy, which is its backbone, is bracing for a big hit to its profits due to Brexit. According to Reuters, “The largest global banks in London plan to move about 9,000 jobs to the continent in the next two years, public statements and information from sources shows, as the exodus of finance jobs starts to take shape. Banks such as Standard Chartered (STAN.L) and JPMorgan (JPM.N) are among the many high-profile institutions which are making such plans. The only reassuring sight is provided by financial markets. The London Stock exchange’s index, the FTSE100 closed on a record high 7,549.9 GBP with an intra-day increase of nearly 0.4%. However, this comes at the cost of a weaker sterling which is not good for an economy largely engaged in financial investing
The government’s debt has seen a decline of nearly three-quarters from 9.9% of GDP in 2010 to 2.6% of GDP in 2016, the total amount of government debt is rising. According to the BBC, government debt has gone from it pre-2008 level of around 40% of the GDP to above 80% of the GDP, in recent years. The Office for Budget Responsibility expects debt as a percentage of national income to peak in the current financial year at 88%, the highest level since 1966.
The Conservative party manifesto is devoid of any policy measures that could conceivably mitigate these aforementioned problems. The Manifesto does recognize these problems but its attempts at providing solutions to them are far from laudable. It states that “By 2020, we will, as promised, increase the personal allowance to £12,500 and the higher rate to £50,000. We will continue to ensure that local residents can veto high increases in Council Tax via a referendum. And we will not increase the level of Value Added Tax. Corporation Tax is due to fall to seventeen per cent by 2020 – the lowest rate of any developed economy – and we will stick to that plan, because it will help to bring huge investment and many thousands of jobs to the UK.” While these promises are welcome, they stand out in their lack of vague commitment to an end goal. In the present scenario, the British Government needs to adopt a comprehensive plan for tax reduction in order to give impetus to companies, especially those involved in financial services, to remain in the United Kingdom, not slash jobs and make greater contributions to economic growth.
The Manifesto is also very vague and brief in its commitment to reduce regulations and debts. The British economy needs this to reduce the effects of low growth that will ensue as a result of Brexit. The manifesto on this point states only that “[the Conservatives] will examine ways in which the regulation of utilities and transport infrastructure can be improved to deliver a better deal for customers and sharper incentives for investment efficiency.” The Economist, commenting on the manifestos of all parties, notes that “[the manifestos] appear to share the notion that markets need more curbs, not more freedoms. As one observer puts it, this week’s manifestos show that all have, to some degree, reverted to a pre-Thatcher way of thinking about the economy and free markets.” The manifesto seems to not only be largely silent on regulation but also interventionist in certain specific areas. It states that “the government can require a bid [for mergers and takeovers] to be paused to allow greater scrutiny. ”This can be excessively burdensome on businesses which wish to invest in the economy and generally hamper swift business transactions or the liquidation of failing businesses. The manifesto, states, further that “[The conservatives] will commission an examination of the use of share buybacks, with a view to ensuring these cannot be used artificially to hit performance targets and inflate executive pay.” While this may be welcome in preventing higher income inequality, the lack of clarity on this proposal could mean that large companies might be left with greater liquidity than they may desire. This could discourage companies from issuing shares due fear of not being able to buy them back and prevent companies from reducing liabilities in the form of shares. The manifesto also seeks to reform corporate governance by requiring the appointment of employee representatives to the Board of Directors of companies. Such interventionism by the State into business is worrying as it may potentially hamper speedier decision making and sometimes even necessary reduction of benefits to employees. It may go on to promote the flight of companies from the UK, which has already begun and open the floodgates to even greater interventionism in the working of companies.
As far as debt reduction is concerned, the manifesto is worryingly silent. The Economist notes “that in 2010 and 2015 [debt] was the central issue; as the deficit has fallen, so has its political salience. Yet given the risks associated with Brexit, and fears of a possible future recession or another market crash, a continuing large deficit and a public debt of 90% of GDP ought to be of greater concern than they are.”
The Manifesto’s plan for investment is it’s only redeeming quality. It aims to increase investment in Research & Development to meet the current OECD average of 2.4% of the GDP in ten years and expand this investment to 3% in the long term. It also promises to increase investment in Universities for R&D and create a University Investment fund. The manifesto states that “[the Conservatives] have launched a new £23 billion National Productivity Investment Fund. The government will target this spending at areas that are critical for productivity: housing, research and development, economic infrastructure and skills. This will include £740 million of digital infrastructure investment, the largest investment in railways since Victorian times, £1.1 billion to improve local transport and £250 million in skills by the end of 2020. The National Productivity Investment Fund will take total spending on housing, economic infrastructure and R&D to £170 billion during the next parliament.” Finally, the manifesto also promises to create Sovereign Wealth Funds known as “Future Britain Funds” to hold in trust the investments of the British people, backing British infrastructure and the British economy. These promises are welcome in their commitment to spur productivity, however, the unnerving silence of the manifesto on debt begs the question as to how they shall implemented and raises serious questions as to whether these promises can be implemented.
This lethargy of the Conservatives in coming up with good economic policy could be fatal for Britain in these uncertain times. The British electorate is being forced to choose between a centre-right party which has no real plan for the economy and a centre-left party which has a disastrous one. There seems to be no conceivable way in which this can do any good for the economy, given it could mean the election of a party with bad policy and an irrational opposition that will take no true steps to push for good policy. Conservative British political discourse has drifted away from economic liberalism and is moving towards rampant interventionism.