OPINION:
Prime Minister Rishi Sunak may give financial markets what they want — spending cuts to slash the government deficit — but not what Britons need — a path to growth and prosperity.
Prime Minister David Cameron led the U.K. out of the ruins of the global financial crisis with taxes at a fairly stable 33% of GDP—hardly high by European standards. But Brexit, COVID-19 and the war in Ukraine are leaving the UK with troubled finances, inflation and the prospect of a long recession to harness rising prices.
Mr. Cameron exploited the opportunity for London’s financial sector inside the EU but as it prospered, the rest of the country generally did not.
Overall GDP growth shifted down to 1.7% during the post-financial crisis recovery from 2.6% during the prior expansion. Going forward, growth will likely be about 1.2% but only after quelling inflation.
Financiers like Mr. Sunak got rich, but the once heavily industrialized north of England, for example, languished. Ultimately, that made possible Brexit and former Prime Minister Boris Johnson, who promised to level up the region.
Unfortunately, Prime Minister Theresa May and Mr. Johnson were either poor negotiators or lacked leverage when crafting an exit deal with the EU. Whichever spin you chose, the final agreement left the UK in unenviable circumstances.
Ms. May agreed to negotiate Britain’s large severance payment to the EU before discussing the post-Brexit free trade deal with the EU—which gave away one of Britain’s most important bargaining chips. Ultimately, Mr. Johnson accepted a deal that creates free trade in goods without “passporting” for London’s financial sector to compete on an equal footing with its opposites in Frankfort, Paris and Amsterdam.
Now, German manufacturers and French farmers and wines have free trade access to UK markets, while London’s finance industry lacks equal access to continental clients.
Mr. Johnson supported Brexit on the idea that Britain would negotiate free trade agreements with other nations. His trade ministry marked up some successes—the U.K. now has pacts with Japan, Canada and Mexico.
The big prize would be the United States, but Mr. Biden has a policy of not entering into new comprehensive free trade agreements—even with staunch allies like the U.K.
COVID-19 left the country broken, overtaxed and undercapitalized.
Mr. Sunak estimates that British companies invest 10% of their economic output vs. the 14% average for industrialized countries.
The deficit soared on $426 billion in pandemic relief spending, and Mr. Sunak—as Mr. Johnson’s finance minister—boosted payroll, corporate and other taxes.
Taxes as a share of GDP are their highest since 1950 and are slated to rise further. Financial markets are demanding that the deficit projected at about 1.9% of GDP for next year be brought down.
That’s tough, because the U.K. is as hard hit as import-dependent Germany and France by the end of access to Russian natural gas. Ordinary Britons face a terrible cost of living crisis without government assistance.
As pandemic aid ends, household energy bills are soaring. After paying for essentials, lower-income households have very little left for discretionary spending.
The country has considerable potential for natural gas available through fracking, but Mr. Sunak will continue the ban on the practice.
A return to fiscal austerity without better market access for the financial sector in the EU creates an impossible situation for growing the overall economy.
It’s time for some bare-knuckle diplomacy with the Yanks and the UK’s continental friends.
Britain is the second largest donor of arms to Ukraine after the United States, but it’s hardly in the fiscal condition of Germany and other richer EU states.
It’s high time for public shaming by Mr. Sunak of German Chancellor Olaf Scholz, French Emmanuel President Macron and other European leaders on defense to bend open financial markets.
The same goes for Mr. Biden on free trade. Britain is building a naval presence in the Pacific to support America’s focus on the looming Chinese challenge but not getting much in return.
Britain must take a page from Mr. Biden’s new playbook—industrial policy.
It has formidable capabilities in science and technology and should negotiate as it can sectoral deals to participate in America’s new emphasis on supply chains in semiconductors, green energy and autos. And to heck with financial markets, spend as needed to be a full player.
To drive down foreign borrowing and a big 2.6% of GDP trade deficit, Britain needs to find ways to promote greater self-sufficiency in manufacturing and food production.
Protectionism is not pretty, but the growth box and stances of the EU and Mr. Biden’s America on financial services and trade leave the U.K. with few other good choices.
Mr. Sunak as a financier seems to think that getting the budget numbers right and bowing to wokeism on climate change and green energy and the like will cure the U.K.’s ills—those won’t.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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