HMS Brexit

By Dickson Igwe, Contributor

The Ocean Liner HMS Great Britain is heading into stormy seas. Those seas are troubled by matters surrounding Brexit?  The proceeding narrative states that the UK economy is entering a period of uncertainty.

ANDREW RAWNSLEY, writing in the UK Guardian of February 19, 2017, stated that the British Government’s love affair with austerity meant ‘deeper spending cuts and higher taxes ahead’.

Spending cuts, coupled with rising taxes, spell ‘austerity on steroids’.

Public spending cuts, plus increased taxes, further show a government that is short of resources, especially in relation to its political ambitions, and national vision.

At best, it points to a government that is uncertain about its access to the scarce resources required for effective governance, especially in the near and medium term, say 2 to 5 years.

Spending cuts are a necessity when there is a fiscal crisis such as is the case with Greece, and countries where the economy is in freefall.

In the United States Virgin Islands, and Puerto, where governments have accumulated unsustainable debt for example, spending cuts give investors confidence that the crisis is being managed effectively.

It shows that government is unwilling to allow financial collapse and the subsequent economic depression that a collapse will trigger.

Britain is in no way in that precarious position. Britain remains a very wealthy country.

However, spending cuts are also the operating mode of a UK governing culture wedded to austere economic policy and Trickle Down Economic theory, and unwilling to consider the alternatives in terms of economic and fiscal stimulus.

Of course, the people who suffer most from ‘austere’ policies are those on the lower end of the social pyramid.

Spending cuts impact the poor and lower middle classes inordinately. Spending cuts mean less educational opportunities for Little Johnny, longer waiting times for critical medical services, and less social care and welfare for the most vulnerable citizens and residents.

Increasing taxes limit the ability of businesses to invest and employ workers. Tax increases also reduce consumer demand by taking cash out the pockets of Jack and Jill Spender.

Healthy and sustainable Consumer demand is a critical driver of economic growth.

Austerity therefore, is a noose around the necks of the working and middle classes.

Austerity lowers economic growth, and where austerity drives growth, there are underlying dangers, such as growing consumer debt that becomes unsustainable, leading to recession, and ultimately depression.

That is the history of austere economic culture. Austerity began the western financial culture of boom and bust.

Post War Keynesian Economic Policy from 1945 to 1973, led to the strongest period of middle class prosperity in recent times. Post 1973 and the oil embargo, Austerity, and the introduction of Trickle-Down Supply Side Economics, led to the decline of the western middle class.

It destroyed western manufacturing and drove jobs critical to western middle class health to the Asian Pacific.

Stimulus spending has its drawbacks. It can lead to huge annual deficits and growing national debt. This too can become unsustainable and lead to investor fright.

However when stimulus drives growth, it leads to healthy consumer demand and greater infrastructure development. Stimulus leads to a stronger middle class.

Fiscal and economic stimulus generates the type of bottom up spending that spurs strong and sustainable economic growth.

Austerity and trickle down on the other hand have not been good for the British economy, the world’s sixth largest economy.

Austerity has exacerbated the type of social inequalities that have led to political turmoil in Europe, and the United States. Austerity fueled the frustration that led to Brexit.

Austerity drove the services oriented culture that led to manufacturing decline in Britain, and the loss of major manufacturing brands and manufacturing jobs that kept the working classes content.

Consequently, Britain is facing a double edged sword with the Brexit matter.

Now, Rawnsley is undoubtedly a pessimist. That is clear from his article. He described the British economic outlook as ‘GRIM’.

Brexit would deliver an economic shock. The outlook for the British economy would be GRISLY. Not good at all!

The preceding would be exacerbated. How? All things being equal, the cyclical nature of economics determined that the next global recession is just around the corner.

Consequently, there is increasing concern that recession coupled with the uncertainty of a Brexit, would deal the British economy a double blow.

Then there is the Trump Factor. Rawnsley the pessimist is deeply pessimistic about a President Donald Trump.

‘Trumponomics’ could plunge the US into a period of 1970s style stagflation. Stagflation is a combination of low growth and spiraling inflation.

Presently there a rosy view among investors about President Donald Trump.

However, Rawnsley describes shrewd observers as expecting the ‘Trump bump’ to turn into a ‘Trump dump’.

If the US falls into recession, and Europe decapitates, then one wonders how the UK will benefit.

Presently, inflation in the UK is rising. This has been due to the plunge in the pound as a result of Brexit, caused by a loss of confidence among global investors who want Britain to remain in the European Union.

Prior to Brexit, disposable incomes had been rising in Britain. This was due to falling inflation.

Brexit has reversed that trend. Investor confidence has taken a hit. There are too many uncertainties. This is part of the Brexit fall out.

Today, the tax rate in Britain is expected to reach its highest level as a proportion of national income in thirty years.

The pain of increasing taxes will be made worse as spending cuts increase. This is the proverbial double whammy.

There is more. The British National Health service is facing an ‘existential crisis’. UK Health Secretary Jeremy Hunt has stated that ‘the service is under extraordinary pressure’.

Spending cuts are causing mounting strain on Britain’s hospitals. Demographic changes of an aging population are making matters worse.

An aging population profile raises the cost of healthcare, pensions, and social care.

The British are not having enough children to look after aging parents and grandparents.

And there is irony. There have been six years of austerity in Britain. That austerity culture has been a failure.

Austerity has weakened the British economy by weakening its social infrastructure

The budget deficit remains higher than what it was before the Great Financial Recession of 2007. The government’s fiscal position has deteriorated over the past 12 months.

The UK has tended to buck trends. If one believes in good luck, then the UK is a very lucky country indeed.

The country replaced its manufacturing economy with an orientation towards retail and financial services after 1980.
One would have thought that to be madness. It succeeded.

Then the UK has always been a mercantilist nation. This is the legacy of the Industrial Revolution, colonialism, and imperialism, coupled with a powerful maritime tradition.

An island nation built an empire on nothing, but hubris, and a very attractive feudal culture.

So, there is no reason not to believe that it will successfully sail the stormy seas of Brexit.

In any event, the greatest danger for Britain is that Brexit may be ‘botched’. And a Brexit disaster could unleash mayhem and peril.

Undoubtedly, Supply Sided Trickle Down has failed the UK woefully.

One can only wish for the ‘coming back to life’ of one John Maynard Keynes, and his various fiscal stimulus models.

Connect with Dickson Igwe on Twitter and facebook