The poor would bare the brunt of a post-Brexit recessionby Tony Yates / May 12, 2016 / Leave a comment
Read more: Iain Duncan Smith—the quest of a quiet man
On Tuesday, Iain Duncan Smith gave a short speech on why the EU is a force for, in his words, “social injustice.” In it, he focused attention on the impact that Brexit might have on those at the poorest end of the income and wealth scale. He said: “The EU, particularly for the UK, has become a force for social injustice…[and] despite its grand, early intentions has become a friend of the haves rather than the have-nots.”
These words play on a resentment the Leave campaign knows is keenly felt, and which is arguably evidenced by the rise of UKIP in areas removed (in distance and in income) from prosperous, metropolitan areas of the UK. But the claim that Brexit would ease social injustice is in many respects problematic, and does the poor who he seeks to champion a disservice.
A central focus of the resentment stoked by IDS is migration. Writing for Prospect, John Springford of the Centre for European Reform has already dealt with two common tropes regarding migration: that immigration has driven down wages (largely false), and that migrants are a burden on public services (false). In fact, although migrants take jobs when they come, they also create others with their own spending power (and to think otherwise is to fall prey to what economists call the “lump of labour fallacy”). And since migrants are younger, healthier, and more economically active than the average domestic resident, they are net contributors to the welfare system.
But a key worry for the “have-nots,” that is not much dwelled on, however, is the consequences of a recession that might follow a vote to leave the EU. The UK might experience a shock immediately following the referendum.
This risk has been signaled not just by the Treasury, whose motives many might doubt, but also by the Bank of England, and most recently by the National Institute for Economic and Social Research.
The scenario is that there is a sharp fall in confidence, as worries about just what a “Leave” vote means sink in. This could cause capital outflows, a fall in demand and a rise in unemployment. A somewhat less likely—but not entirely implausible—concern, and one that the Bank of England has also revealed it is preparing contingencies for—is that outflows from the financial system are such that banks and other financial firms have difficulty funding themselves, and we get a UK-only re-run of September 2008.
In a circumstance like this, the Bank’s Monetary Policy Committee will do what it can, keeping interest rates lower for longer than otherwise. But although the BoE Governor Mark Carney has tried to reassure that they “have the tools” to deal with a Brexit shock, this is far from the truth. With rates close to their natural floor of zero, and unconventional monetary policy of dubious worth now, there is little that the bank could do. The strain would fall on fiscal policy, and a government that has set its stall by doing as little as it can get away with in this regard.
A Brexit that led to such a recession would, like all recessions have previously, create economic costs that fall disproportionately on the poor. This is because the unemployment and under-employment that would ensue (either through redundancies or cut-backs in hours) is greatly concentrated at the bottom of the occupational ladder.
This might not be so bad if one could dismiss this as an inconvenience to be suffered in the short term, a sacrifice for some longer-term good. But in fact recessions tend to leave long-lasting scars, as unemployment (to re-emphasise this means unemployment for the “have-nots”) turns into long-term unemployment, eroding skills, causing household break-up, and stoking mental health problems. And a recession that hits when macroeconomic policy levers are hampered (as they are now) is particularly likely to be protracted, turning a short-term recession into a longer-term stagnation.
Moreover, a vote to leave will set up the UK for a whole series of subsequent referendum-like events, as negotiations throw up key decision-points, and the UK polity convulses as it tries to decide.
For many reasons then, contrary to Iain Duncan Smith’s claims, Brexit would be highly regressive. It will be detrimental to the “have-nots.”