Find our full September 2016 issue here
Britain has had a change of prime minister and a change of government—and now it needs a change of plan. The pre-Brexit targets developed by George Osborne are now irrelevant. His successor at the Treasury, Philip Hammond, confronts a situation in which, despite six years of austerity, national debt is at its highest level since the 1960s and the country is heading for an economic downturn.
And there will be a downturn. Despite the objections of the pro-Brexit camp who still cannot come to terms with the consequences of the vote that they espoused, there is no doubt that the referendum result has made Britain worse off, and as such a worse place to do business—and to live.
Data released in early August showed that, since the Brexit vote, activity in Britain’s services sector had fallen by the fastest rate in seven years—services make up 80 per cent of national economic output. To compensate for stalling business activity, the Bank of England cut interest rates to 0.25 per cent from an already historic low of 0.5 per cent, and announced further measures including another dose of quantitative easing.
But the real killer is the cloud of uncertainty that hangs over Britain and no amount of monetary stimulus will disperse it. Liam Fox, the new Secretary of State for International Trade, was confident during the referendum campaign that new trade deals could be struck after a vote for Brexit. But he received a sharp corrective to that assumption when, in late July, Michael Froman, the United States’s Trade Representative, made it clear that his office would not even begin discussions with Britain until its relationship with the European Union had been settled.
The EU itself is also determined that trade talks can only begin once the Brexit process has begun. These two rebuffs, combined with the row with China over the government’s decision to delay the construction of the nuclear power station at Hinkley Point, in Somerset, mean that Britain has now undermined its trade and business links with the three largest economies in the world: the US (GDP of $17.9 trillion); the EU ($16.2 trillion); and China ($10.8 trillion).
It is very hard for a chancellor—and a prime minister—to make plans in the midst of such uncertainty. But the Autumn Statement must be given later in the year and Hammond will have to decide whether the economic shock of the Brexit vote is so great that it requires increases in spending to offset the worst of it. And in the back of his mind will be the longer-term question of how to sustain spending levels while tax receipts are falling due to slowing business activity, not least in the financial services sector, some of which will now move away from the City of London in order to keep operations within the EU’s single market.
As I stated in this column last month, there is a strong case that Britain’s new settlement with the EU should be put to a further vote. As the economic threat posed by Brexit grows ever more apparent, so the need for parliamentary intervention will increase. Britain needs a new plan—in the end, a decision by the Commons not to proceed with Brexit might turn out to be the best plan of all.