As the United Kingdom approaches the Brexit cliff edge, the task of preparing the economy has fallen to a secret group within the civil service. Their mission – creatively dubbed “Project After” – is to model and plan for a variety of scenarios, from the significant disruption associated with no deal to the more moderate outcome of a negotiated departure.
When preparing for the economic consequences of Brexit, policymakers need to consider two time horizons. Over the long term, growth is determined by the economy’s potential output – that is, the amount we would produce if all our resources were used most effectively. Any changes to the supply or productivity of the economy’s factors of production (land, labour and capital) impact potential growth rates.
In the long run, however, we are all dead. Over the short term, levels of demand – determined primarily by individual consumption and business investment – influence how much of that potential output is used, and therefore how much the economy actually grows. Increases and decreases in demand are a natural part of the business cycle, driven by what John Maynard Keynes called “animal spirits”. But extreme events – financial crises, natural disasters and wars – can affect demand as well.
Of all the possible Brexits, no deal is most likely to impact growth today. Immediately after the UK leaves, logistical problems could prevent vital goods from reaching shop shelves. Falling house prices would affect people’s wealth, and rising import costs could erode spending power. Lower consumer spending and increased uncertainty would, in turn, constrain business investment, potentially leading to job cuts and wage reductions.
A negotiated exit would be unlikely to impact spending by either consumers or businesses, but if it made trade more difficult it could reduce potential growth rates.
This analysis, however – like all the predictions made so far by professional economists – rests on the assumption that the government will not intervene to address any of these problems. A properly resourced stimulus programme could both absorb the initial demand shock of any exit, and expand the economy’s productive potential.
However, Project After does not, as it stands, represent this. To absorb the initial shock to demand of a no-deal Brexit, the government’s preference is to cut taxes, rather than increase public spending. Tax cuts, depending on how they are targeted, might boost spending and profits, but they are unlikely to encourage pessimistic businesses to invest and will most likely widen income inequality.
If left to the civil service, planning for a post-Brexit economy is only likely to exacerbate the UK economy’s structural weaknesses: low wages, low investment, low productivity and rising private debt. In truth, there is only one option for Project After: a green new deal.
In the event of a no-deal Brexit, billions of pounds worth of investment in green infrastructure and research and development into green technologies would both absorb the demand shock today, and expand productivity tomorrow. Combined with policy measures to democratise ownership, and reforms to the tax system, future growth would be more fairly shared.
Yet even if the UK were to leave with a deal, the grim outlook for the global economy in general, and the British economy in particular (GDP growth in 2018 was the weakest since 2012), means that a stimulus package will be required sooner rather than later. The argument for “reactionary Keynesianism” has been severely weakened by Donald Trump’s tax cuts, which inflated profits without increasing investment. The argument for a green economic stimulus, by contrast, becomes stronger every day.
The uncertainties associated with climate change – extreme weather events, mass global migration, food shortages and political instability – are impossible to price, so cannot be left to the rule of the market. Investors, meanwhile, have failed to account for falling demand for fossil fuels, creating a huge “carbon bubble” – assets in overvalued energy sources – in global stock markets.
Co-ordinated state action is necessary to address climate change without harming the economy or inflicting the costs on the poorest. Far from being a radical dream, then, a green new deal is increasingly the only sensible choice.
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This article appears in the 13 Feb 2019 issue of the New Statesman, The revolution that fuelled radical Islam