Brexit Is a Distraction From the United Kingdom’s Real Economic Woes

To rebuild its position as a powerhouse, the country will need to focus on its deeper problems.

A commuter crosses a road by London Bridge in London on Sept. 15.
A commuter crosses a road by London Bridge in London on Sept. 15. Justin Tallis/AFP/Getty Images

The scars of the 2008 financial crisis haven’t even healed yet, and the United Kingdom’s economy is now facing up to one of the G-7’s largest pandemic-induced economic slumps. The decline comes alongside a potentially disruptive decoupling with its biggest trading partner, the European Union, when the Brexit transition period ends on Dec. 31. For some critics, the turmoil is just another chapter in the long saga of Britain’s demise on the global economic stage. But decline is not inevitable. For a country well accustomed to short-term crisis management, the United Kingdom will need to rediscover the sense of the long term if it seeks to refresh its position as an economic powerhouse.

The United Kingdom’s finance-driven economy never truly bounced back after the global credit crisis. Productivity growth—which is vital for long-term improvements in living standards—has been largely stagnant. Post-industrial northern regions continue to lag behind southern urban centers. Since 2008, growth in wages and business investment has also been among the weakest across developed nations. Meanwhile, years of political tumult over how to leave the EU have diverted attention from the country’s underlying economic maladies. Indeed, the past decade has seen it lose its coveted place as one of the world’s five largest economies to India, and it is projected to drop out the top 10 by 2030.

The COVID-19 pandemic has clearly come at the worst possible time. In the second quarter of 2020, economic activity shrunk by about one-fifth, surpassing the 10 percent drop across nations in the Organisation for Economic Cooperation and Development as a whole. The United Kingdom’s relatively lengthy lockdown and reliance on the hard-hit retail, leisure, and hospitality sectors were at play, alongside one of the worst virus outbreaks across Europe. As the government’s emergency grant and loans scheme begins to wind down in the coming months, a wave of redundancies and highly indebted businesses will be left in its wake. And so, the prospect for a speedy recovery looks bleak. And that’s without even accounting for the risk of further waves of COVID-19 outbreaks, a disorderly no-deal Brexit, or tax hikes to manage its $2.6 trillion debt pile.

The United Kingdom needs a plan. Prime Minister Boris Johnson’s barnstorming victory at the polls in December may have closed out a chaotic period that included two general elections, several Brexit delays, regular ministerial chopping and changing, and the surge of a socialist-leaning opposition party, but the pandemic has since stifled attempts to move on. Meanwhile, the prime minister’s ambitions to “level up” left-behind regions and unleash a “global Britain” after it leaves the EU have been uplifting but lacking in specificity. Now, between a terrible recession and looming Brexit, the government has a crucial introspective moment to build a long-term economic strategy. The administration’s autumn budget, along with its plans to review departmental spending, will need to be its boldest in generations.

With the United Kingdom’s recovery already set to lag behind peers—it will not return to pre-crisis gross domestic product levels until around 2022—economic Band-Aids and bombast simply won’t do. Building on the country’s strong business environment should be a starting point. The government should capitalize on the country’s world-class legal and regulatory frameworks—underpinned by its top 10 ranking in the World Bank’s Ease of Doing Business index—to support British firms to grow. Although research shows the United Kingdom is considered among the best OECD nations at starting businesses, it lags further behind in scaling them up. Part of this derives from issues accessing finance. The British Business Bank, the country’s economic development bank, has just a portion of the assets that Germany’s KfW has to help finance small businesses. Likewise, after years of underspending on technology and management training, the British Treasury should look to encourage business investment through tax credits to drive up productivity growth.

The agenda to overturn regional disparities across the United Kingdom must also be fleshed out further and set in motion. Widely varying experiences of globalization and technological change have turned the country into one of the most geographically imbalanced economies in Europe, constraining its overall growth potential. It is also one of the most centralized major economies in the world, and devolving more funding and power to its regions and nations could help them respond quicker to challenges. Meanwhile, improving infrastructure should be a key priority. Britain lags behind its peers in the World Economic Forum’s Global Competitiveness Index for road, rail, and fast broadband connectivity. Enabling growth sectors, including the digital and green industries, and supporting exporters to access global markets after Brexit could also spur jobs growth and renewal beyond London and the country’s southeast.

The government will also need to invest in skills. Access to science, technology, engineering, and mathematics talent is an ongoing challenge, as is the need to encourage lifelong learning to make the United Kingdom’s workforce more agile. Plans for a points-based immigration system after Brexit could help by placing greater emphasis on attracting high-skilled global talent. The country’s world-class universities—located across all its regions—are also an advantage. Investing in them as regional hubs could help support growth nationwide by stemming the brain drain of talent to London. Building their ties to the business community could also help connect the country’s strength in research to productivity- and wage-enhancing activities.

Successive governments have discussed ad nauseam the need to capitalize on the United Kingdom’s economic strengths and to invest where it is weak. But it never happens. Much parliamentary bandwidth has instead been absorbed by elections and referendums. With Brexit still looming alongside the country’s worst public health crisis in a generation, the capacity to enact long-term economic policies looks worryingly thin. Meanwhile, ending the coronavirus economic rescue packages too early and attempting to refill public coffers too soon may also stymie the nation’s near-term prospects.

Yet as the government pulls the next stage of its response to coronavirus together, it would do well to acknowledge that at stake is more than just an economic recovery from the pandemic. If Britain is to reverse its declining economic clout on the world stage, it must go beyond the short term and consider rewiring its economy for the long term.

Tej Parikh is a global policy analyst and journalist. He was previously an associate editor and reporter at the Cambodia Daily. Twitter: @tejparikh90

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