Nov
2022
Beginning to See the Light: Brexit, it Just Won’t Go Away
DIY Investor
24 November 2022
‘When savagery turns all good reason
There’s no turning back, no last stand’
The World Cup rather sums up the world we live in. Fun and enjoyment are replaced by corruption and states using their money to buy influence. It is a pathetic sell-out.
FIFA have stopped captains wearing the ‘rainbow’ armband by threatening them with a yellow card. Criticism of Harry Kane et al for falling into line is stupid, everyone should now you can’t start a game one tackle away from being sent-off and missing future games.
FIFA and Qatari mercenaries such as David Beckham are bringing the game into disrepute not the teams.
It is reported that the cost of Qatar’s vanity project is C. 6,500 deaths, the regime has acknowledged 3! One was Zac Cox, an Englishman who died in January 2017 after falling 40 metres from rigging while installing a catwalk. An English coroner described the working conditions that caused his death as ‘chaotic, unprofessional, unthinking and downright dangerous‘.
FIFA and Qatari mercenaries such as David Beckham are bringing the game into disrepute not the teams.
One of the most powerful sporting gestures in recent years was undertaken by the Iranian players refusing to sing their own national anthem, before the game with England.
Unfortunately, all I can think of is the Berlin Olympics of 1936 and Herr Hitler!
From sport we turn to masochism, Jeremy Hunt’s budget. I was determined to avoid this, but when I read that the chancellor said, ‘To be British is to be compassionate,’ something had to be said. I suspect the compassion he refers to, is not cutting benefits. The fact that his government had done so in 7 of the last 10 years to levels lower than most comparable countries seems to have escaped him.
There really is no better summary for the mess the Tories have created than the forecast from the Office for Budget Responsibility (the ‘OBR’) that living standards will fall 7% over the next 2-years, – wiping out all growth from the previous 8-years.
Undeterred, Hunt told us that ‘Conservatives do not leave our debts to the next generation‘. No, instead he plays politics, announcing £55bn of tax increases and spending cuts, then delaying the pain by slightly loosening fiscal policy for this year and next. His plan is two-fold:
One, by 2024, he hopes the economy will be out of recession with inflation under control. If so, his new rules on borrowing potentially leave him room to cut taxes or increase spending in the run-up to the election.
Or, secondly, if the wind blows in the wring direction and the Tories are defeated in the next election, Labour are left holding his £55bn of tax increases and spending cuts.
All of this, of course, assumes that Hunt can get his budget through the House.
It looks likely that Sunak / Hunt will be the next victim of their party’s hard-right, as former cabinet minister Esther McVey said she could not support the taxes rises while projects such as HS2 went ahead.
Other Conservative backbenchers questioning Hunt’s budget include John Redwood, and Richard Drax.
Redwood said Hunt should have considered ‘popular spending cuts‘ such as axing the £11bn to the Bank of England to deal with bond market turmoil, ‘ending the hotel bills for illegal migrants’ and ‘stopping the anti-driver expensive changes to main roads‘.
Drax argued that raising taxes on businesses and workers ‘risks stifling the growth and productivity that he [Hunt] and I both want, and that would counter the recession we are now in‘.
Jacob Rees-Mogg called the package of tax rises the ‘easy option‘, suggesting that Hunt should have looked at the ‘efficiency of government’.
Whatever the hard-right think, we have suffered an unnecessarily harsh budget because Hunt and Sunak wanted in that way. Despite what they say, the market never expected the UK was going to default on Gilts. The economic policy mistakes of Sunak, and his predecessor, Truss, will impact sterling and strangle future growth, making the UK a progressively less attractive place to invest.
The economic policy mistakes of Sunak, and his predecessor, Truss, will impact sterling and strangle future growth
Much of the belt-tightening they talk about is due to higher debt interest costs due to Sunaks previous foolishness. When he was chancellor he embraced the selling of inflation-linked national debt when there was no need.
Currently, C.£500bn of UK debt is index-linked, which represents 25% of the our £2 trillion sovereign debt pile.
An example of the impact this has on debt interest payments was seen in May; the expected cost was £5.1bn, but due to rising inflation the actual number was £7.7bn. (1)
The rich, especially Non-Doms, will remain rich, while the poor will get poorer with higher costs, lower take home wages, and fewer services.
We still have no actual growth strategies, only 12 years of failure, and the greatest repression of real wages in history.
Salaries in the private sector are only fractionally higher now in real terms than in 2010. However, the incomes of public sector workers have been decimated; the Nuffield Trust estimates that real pay for NHS staff is C. 5% lower than in 2010, with doctors and consultants suffering >10% cuts. Offers of 2% rises, which is what the Chancellor is budgeting for does little for workers with inflation running at 9.1% this year and 7.4% next.
Small wonder that, as a country we are getting poorer. The 7% drop in living standards predicted by the OBR represents an average of £1,700 per household. Real wages will not return to the levels at which they were before the 2008 financial crisis until 2027.
Hunt tried passing this off as a ‘recession made in Russia‘, but that isn’t true
Hunt tried passing this off as a ‘recession made in Russia‘, but that isn’t true. All economies have been impacted by Covid and Russia’s invasion of Ukraine, but many have proved more resilient. The Institute for Fiscal Studies came closer to the truth when describing 12-years of Conservative economic policy and political instability as a series of ‘economic own goals‘.
I believe that the blame lays with the Cameron / Osborne governments of 2010-16.
In opposition their ideas sounded interesting, rebalancing the economy away from consumption driven by an inflated housing market towards investment and export-led growth, and away from growth driven by the financial sector in London and the SE towards more evenly distributed regional economies.
Once elected they used the financial crisis as an excuse to impose deep and unnecessary cuts to the public sector, while eroding the welfare safety net for low-paid parents and people with disabilities. Not only have these cuts made Britain an unpleasant place to live for many people, they have also harmed our long-term growth potential. People have left the labour market due to long-term ill- health, many don’t have the skills and qualifications required in today’s society, and many businesses are restricted by poor infrastructure outside the SE.
At the same time, rentiers benefitted from tax cuts, and QE providing an ocean of cheap money.
‘these cuts made Britain an unpleasant place to live for many people, they have also harmed our long-term growth potential’
The result was a vastly inflated wealth gap, which led directly to Brexit which has served only to further depress our growth potential for the medium term, and has proved particularly detrimental to export-led growth. The net result is that people will be poorer for decades to come. Brexit is largely to blame for the fact that the UK economy remains smaller than at the start of the pandemic, while the German, French, Italian, Canadian and American economies have all grown. The areas of the country that can least afford it will be hardest hit by the Brexit penalty.
I doubt there is anyone in a position of power in the Tory party who can admit the obvious truth that Brexit is one of the great own goals, which makes the Sunday Times report that government figures have privately discussed the possibility Swiss-style relationship for Britain even more interesting.
By way of an explanation, the Swiss-style relationship with the EU is a series of multiple treaties. At its core is access to the single market. In return Switzerland pays into the EU budget, while taking regulatory dictation, and accepting free movement of people. Any of which would enrage our Eurosceptics.
Sunak commenting on these rumours said: ‘Let me be unequivocal about this, Under my leadership, the United Kingdom will not pursue any relationship with Europe that relies on alignment with EU laws … I voted for Brexit. I believe in Brexit and I know that Brexit can deliver.’
In truth, Sunak knows that the party’s hard-line Brexiters, assisted by the likes of the Daily Mail and GB News, would look to overthrow him for such a betrayal. He will remember that Theresa May’s doomed Chequers deal was similar to a Swiss-style arrangement, and the European Research Group (the ‘ERG’) swiftly deposed of her.
If such a deal was floated by the government, there is no reason for the EU to backtrack on its position that Britain cannot pick and choose the aspects of the single market it wants, and rejects those it doesn’t, such as the free movement of people. As such, it is beyond the bounds of credibility to imagine that there will be a Swiss-style deal under the present government.
The areas of the country that can least afford it will be hardest hit by the Brexit penalty
What it does tell us is that within government people are starting to ask questions. Perhaps, they read the opinion polls, too?
According to polls, the number of Britons who believe it was a mistake to leave the EU now stands at 56%, compared with 32% who stand by the decision.
Releasing its economic forecast before last week’s autumn statement, the OBR stated that Brexit had delivered a ‘significant adverse impact‘ on trade. The free market was supposed to be replaced with wonderful trade deals, one of which was with Australia, and according to the former environment secretary, George Eustice, was ‘not actually a very good deal’.
The public are now starting to realise that the hard Brexit Johnson orchestrated, and which Truss attempted to double down on, has failed. Sunak must realise that he leads an ungovernable, divided party, which, for better or worse is wedded to Brexit. For Keir Starmer, the Swiss speculation represents a clear opportunity.
The Tories want the impossible, frictionless trade, but on their ideologically-terms. They still dismiss Europe as frail, failing, and declining, believing that trade deals with rising powers further afield are more beneficial. At the same time they thought we wouldn’t lose the benefits of the single market because EU businesses would lobby to retain access to our consumers. Lastly, the believed that the cost of regulatory compliance with EU rules was greater than any benefit of membership.
In 2016, Sunak wrote: ‘Canada, South Korea and South Africa all trade freely with Europe without surrendering their independence. As one of Europe’s largest customers, I see no sensible reason why we could not achieve a similar agreement.’ Also, ‘excessive red tape’ stifled every British business, even the ones that don’t export to the continent.’
He still clings on to ‘regulatory freedom‘, hoping it will unlock the benefits of Brexit that our trade deals has failed to deliver, and insisting that no alignment with EU rules would happen under his leadership.
Within this is the promise to review or repeal 2,400 legacy EU laws, carried over into British statute post-Brexit, and to do it within 100 days of taking office. He has Truss’s version of this in the form of a bill already introduced to the Commons, setting a target of December 2023 and including a ‘sunset clause’ to automatically vaporise any EU rules that haven’t been reviewed in time. There are hints that the government is heeding complaint from investors, unions, and NGO’s and is preparing to dilute the bill.
Ironically, Brexiters’ obsessions with purging the legacy of Brussels bureaucracy is more disruptive to growth than the regulation itself which harmonised rules allowing British goods to flow unimpeded around the continent. Replacing harmonised standards with our own means that any businesses trading in both jurisdictions complying with both sets of rules.
‘There is the spectre of Johnson waiting in the wings, ready to pounce’
We will continue with this charade, because the ERG deem it so. There is the spectre of Johnson waiting in the wings, ready to pounce. Anyone who doubts this should know that last week C. 40 Tory MPs, members of the Bring Back Boris WhatsApp group, gathered at London’s L’Escargot restaurant last Wednesday to discuss how to do just that.
We finish with some thoughts from Professor Nouriel Roubini, the economist who predicted the GFC of 2008.
‘Advanced economies such as the UK start to be priced like emerging markets after disastrous economic and fiscal policies, such as those from the short-lived Truss government.’
‘The bubbles of private equity, property, venture capital and cryptocurrencies will burst now that the era of cheap money is over.’
In my view his most interesting comments concerned geopolitical threats ‘causing a global backlash against liberal democracy and the rise of radical, authoritarian parties of the extreme right and left, partly driven by the rise in income and wealth inequality’.
‘Workers already feel left behind while elites gain wealth and power. This could increase as more jobs are lost due to AI, robotics and automation leading to permanent technological unemployment. Left unchecked, this could lead to dangerous, aggressive, populist governments’.
In the UK we have already experienced this; Brexit and the 2109 general election highlight how people who feel forgotten will embrace extremist options.
‘I guess you were right, when we talked in the heat
There’s no room for the weak, no room for the weak?’
Notes:
On the basis that my knowledge of football is only slightly better than my knowledge of Professor Nouriel Roubini, I think it’s for the best if I let Philip do all the talking this week; here is his preamble:
This week we start with the World Cup. I love football, but, like the supporters of most top clubs, my team takes pride of place. International football is a distraction that risks our players getting needlessly injured.
Also, football shows that familiarity breeds contempt. Years ago the World Cup was fantasy, a chance to see Pele, Maradona, Cruyff, Scirea, et al. Now, most play in the Prem and Champions League and I can watch them every week.
The choice of Qatar shows how football has sold its soul. Pride of place goes to the Iranian players who refused to sing their own anthem in condemnation of their oppressive regime. A gesture that should rank alongside Smith and Carlos in 1968.
Domestically, there is the budget. I have said it all before, but even I didn’t expect Hunt to play politics, delaying his cuts as a potential gift to a new Labour government. No wonder the Tory’s collectively make me feel nauseous.
The last 12-yrs has been a series of missed opportunities, largely due to Cameron and Osborne. Collectively they remind me of what a former business partner said about public school educated private client brokers….one “O” level and a decent address book.
In my view, without austerity there would not have been Brexit. Yes, Farage and loony Tory’s would have kept banging on about the EU, but “leave” would never have got beyond 45% support.
Brexit has achieved nothing, even the racists are still complaining! Until it is reversed, or a compromise “Swiss-style deal” agreed, we will continue to be a basket case.
I decided to finish with some light-hearted material from Professor Nouriel Roubini, who is as gloomy as I am. Interestingly he reached a similar conclusion, “Left unchecked, this could lead to dangerous, aggressive, populist governments”.
Lyrically, I decided such a gloomy article needed suitable music, therefore I turned to one of my favourite bands of all time, Joy Division. We start with “Heart and Soul”, and end with “Day of the Lords.” Enjoy!
@coldwarsteve
Philip Gilbert is a city-based corporate financier, and former investment banker.
Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s
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