"The Prime Minister should be prepared to break with Conservative budgetary pieties"by Paul Wallace / August 18, 2016 / Leave a comment
Published in September 2016 issue of Prospect Magazine
Amid the chaos in the wake of the referendum vote to leave the European Union, Mark Rutte, the Dutch prime minister, said that Britain had “collapsed—politically, monetarily, constitutionally and economically.” His verdict looked rash following the swift coronation of Theresa May as Prime Minister, a seasoned and pragmatic politician who had supported the “Remain” cause. The pound, which at first had suffered a dizzying fall, steadied, and the stock market rallied as the political turmoil decreased.
As well as pledging that “Brexit means Brexit,” May explained that her mission was to make the economy work better for all. But that will be a hard task. Brexit may trigger the first recession since 2008-09. If it does, the downturn is likely to be short and shallow, unlike the severe recession that followed the financial crisis. Yet it would make for a miserable start to the new Prime Minister’s tenure, and the economy’s longer-term prospects will be overshadowed by deep uncertainties about Britain’s new relationship with Europe. The dismal leitmotif of May’s government will be one of damage limitation as she strives to negotiate a post-EU economic settlement.
In the elite-bashing that characterised the “Leave” campaign, economic experts were panned for their pessimistic views. The main reason for their gloom in the short-term was the financial and economic uncertainty that would result from a vote for Brexit. If anything, the experts were not pessimistic enough. Philip Hammond, who replaced George Osborne as Chancellor of the Exchequer in May’s new cabinet, spoke immediately after his appointment about the “chilling effect” of the referendum result on the economy.
That effect has yet to be revealed in hard economic figures because of the usual lags in compiling them, but it is already showing through in plunging consumer and business confidence. Consumer confidence, which had already been declining before the referendum, fell after the vote by the greatest amount in 26 years, according to GfK, a market research firm. The survey showed that consumers have become much more apprehensive about the economic outlook over the next 12 months. Such fears will curb household spending—the survey revealed a big drop in people’s willingness to make large purchases.