How Austerity created Brexit, and the economic and political decline of the UK

 

For many people things started going very wrong in the UK the moment the Brexit referendum result was announced. There can be no doubt that Brexit has been a disaster on almost every level. In economic terms this disaster is well established: if you have any remaining doubts, listen to Adam Posen giving the first presentation at the recent UK and a changing EU conference on Brexit. He shows how we have become a more insular country in terms of trade, FDI and migration: this has already led to lower UK growth while the implications of lower trade, FDI and migration for future productivity growth have yet to be felt. In addition, Brexit has led to higher food prices (see this conference presentation), adding to the cost of living crisis. In addition less trade leads to reduced competition, which allows price mark-ups to rise. For more detail on all this see Chris Grey’s latest blog.

However, just as important have been the political costs of Brexit. In 2019 we saw the election of the most incompetent, dishonest, corrupt and authoritarian UK government in living memory because it would get Brexit done, a government that has become either a joke or an embarrassment among other democratic countries. This was hardly a surprise, in that Boris Johnson - a serial liar - is at its head and he demanded unequivocal devotion to a hard Brexit as necessary to be in that government. As I have said before, demanding devotion to a hard Brexit is an excellent way of selecting either those MPs who have little clue about how the world works, or those MPs who are inveterate liars (or both). Johnson has institutionalised the influence of wealthy donors within government (the ‘leaders group’ and ‘advisory board’), turning the UK into a plutocracy where power is retained by trying to set one group of voters against another. This government has been so focused on retaining power and shutting down criticism that it has passed legislation to make demonstrations illegal, to end the independence of the Electoral Commission, to make it much harder to vote and more.

It would be wrong, however, to see the Brexit referendum result as some rogue event without which normal service could have continued. The political and economic decline in the UK began not in 2016 but in 2010 with austerity. Brexit and austerity are alike in one crucial respect, which is that they both reversed established approaches to economic policy. While Brexit reversed the idea that lower trade barriers were good for trade and therefore consumer welfare and growth, austerity reversed the idea that the aim of macroeconomic policy in a recession was to support the recovery by all available monetary and fiscal tools. [1]

In this sense austerity was the first central policy move that ignored the wisdom of experts. Brexit was the second, and government actions throughout the pandemic have been the third. But the links between austerity and Brexit may be rather more causal than that. This is the thesis of an AER paper by Warwick economist Theimo Fetzer, which is one of a series of Brexit studies that he discusses in the UK and a changing EU conference mentioned above.

It is well known that the less educated people were (in terms of formal educational qualifications), the more likely they were to vote Leave. But this correlation does not provide a causal mechanism for why Brexit was so successful in 2016. Fetzer also shows that this correlation was absent from UKIP support before 2010. It is also very well known that the gap between the earnings of skilled and unskilled workers has been growing. However under the Labour government this trend was moderated to some extent by the welfare state. This moderating effect ended, and was put into reverse, under austerity.

What Fetzer suggests and shows is that the impact of austerity was strongest on those with few qualifications, and as a result support for UKIP grew. In other words support for UKIP started to grow in areas with significant exposure to specific benefit cuts. It was the threat from UKIP that led Cameron to promise a future referendum. More importantly, as support for UKIP is closely correlated with support for the Leave side in the referendum, then Fetzer uses his estimates of the impact of austerity to suggest Remain would have won in the absence of austerity. (He also argues in his conference presentation that this austerity induced UKIP vote also helped the Conservatives win outright in 2015, which made a referendum inevitable.)

What this does not show is why cuts in welfare and other support led the less skilled to vote for UKIP, rather than some other opposition party. However that gap is not hard to sketch in. First, in many voters’ minds, Labour were at least equally to blame for austerity as the Coalition government, in large part because of the highly successful (and largely uncontested) lie put out by the Coalition government and their press that the Coalition were clearing up the mess that the Labour government had left. Second, the Coalition and its press used immigration as a scapegoat for much of the impact austerity was having, yet the Coalition also failed to bring immigration under control. For many, therefore, UKIP was an obvious choice.

This is an example of a more general, and often made, point about the critical role of the welfare state, that I alluded to here and which Fetzer mentions at the end of his conference talk. A dynamic economy is bound to create lower incomes and perhaps unemployment in sectors that become obsolete, or go out of fashion, or suffer from economic downturns. Globalisation is just like technical change in this respect. If the workers in those sectors are not protected and helped to a reasonable extent, then some in those sectors become fertile ground for right wing extremism.

How does this fit in with the strong correlation between support for Brexit and social conservatism? First, we have to distinguish between social conservatives who would have voted for Leave anyway (older voters in particular), and those at the margin that pushed support for Brexit over the line. Those inclined to believe that immigration is the reason why their pay, job prospects or access to public services have declined will be those who are newly attracted by right wing populists. In this sense the debate about the rise in right-wing populism between the those who emphasise the economic left behind on the one hand and those who look to the socially left behind (or, in the US, race) on the other hand as explanations may be misplaced, because the two factors may work together in the manner just described. [2]

This process is not unique to the UK. Austerity had a strong (perhaps stronger) effect on the Eurozone outside Germany, and happened in the US as well. Equally the rise of the populist extreme right occurred in many of these countries. It won 42% of the vote in the second round of the French presidential election. One big and obvious difference between the US and UK on the one hand, and France and Germany on the other, is the latter have stronger welfare states [3]. In my view another important difference is the voting system. In the UK and US this voting system meant it was very hard to displace the main party of the right [4], and so the way the more extreme right gained power in both countries was by taking over the established right wing party. Equally the voting systems meant it could subsequently win general elections without majority support. In France and Germany the extreme right could still imagine coming to power in its own name, but without cooperation from other parties this required majority support. [5]

Locating the origin of the UK’s economic and political decline in 2010 helps focus on how that decline can be brought to an end, or even reversed. A prerequisite has to be political change, and a government that does not involve the party and politicians that brought about this decline. But that alone will not be enough. Any new government has to abandon the obsession with government debt targets [6] that could both recreate austerity and foster populism, and end the demonisation of the EU that led to Brexit. International cooperation has to replace a desire for total sovereignty.

If these conditions are met, there is no reason why the UK could not recreate the economic success it enjoyed before 2010. The damage done by fifteen years of economic mismanagement is serious but not total. As the Resolution Foundation in a recent report sets out, the UK’s specialisation in many services (education and culture in particular) and some goods production reflects an international comparative advantage that will still be there in 2025. However those, and perhaps some new, specialisations will only thrive if we have better access than we do today to the huge market on our doorstep.

[1] That orthodoxy had only been challenged once since WWII, and that was very briefly by Mrs Thatcher in 1981. Unlike 2010 austerity, her experiment was quickly abandoned and substantially reversed two years later.

[2] Thus we get one element of what I have called neoliberal overreach. An attempt to do away with protection for the economic left behind with the aim of cutting taxes under Cameron and Osborne created the conditions for Brexit, and the end of neoliberal hegemony.

[3] In addition, Germany did not suffer as much from austerity as other Eurozone countries, in large part because of strong export growth.

[4] UKIP never gained an MP directly through an election.

[5] The differential impact of UK austerity on different parts of society also helps explain why many see 2016, rather than 2010, as the start of UK economic and political decline. Those most affected by austerity were also those with little voice in politics or the media, allowing politicians and the media to declare that austerity had not had much impact because it hadn't affected them.

[6] The key word here is obsession. There may be a role for trends in government net wealth (not government debt) to help inform deficit targets for current spending in good times, but these targets must not constrain direct or indirect measures to tackle climate change, government investment must be free of macro controls and no constraint should be placed on deficit spending in an economic downturn. In addition geographical levelling-up requires local areas to have financial power, and it is an obsession with debt that is part of the reason the Treasury keeps opposing that.