Brexiteers who voted to leave the EU continue to get a lot more than they bargained for. Friday’s shocks? The firmest evidence yet that the referendum has sent the economy reeling and the abandonment of the government’s approach to tax and spending for nearly a decade.
Business activity has shown a “dramatic deterioration” in the wake of the referendum, shrinking at the fastest pace since the 2008 global financial crisis, according to a survey of purchasing managers. Sterling fell in response to the survey, which Barclays said was consistent with imminent recession.
No wonder, perhaps, that Chancellor of the Exchequer Philip Hammond went out of his way during a news conference in Beijing to flag that he stands ready to consider a fiscal boost for the economy. “Over the medium term, we will have the opportunity with our Autumn Statement, our regular late-year fiscal event, to reset fiscal policy if we deem it necessary to do so,” he said.
Theresa May has already ditched former Chancellor George Osborne’s target of returning the public finances to surplus by 2020. Hammond is now seemingly dangling the prospect of more radical steps – not a course correction or an adjustment or a tweak but a “reset” of policy – if the economy enters a free fall.
The Bank of England has all but promised an aggressive policy easing in a fortnight’s time. Hammond’s comments raise the tantalising possibility of a coordinated monetary and fiscal stimulus to cushion the Brexit blow. Joined-up policy is welcome, but what could Hammond do? A cut to VAT or petrol tax would leave more cash in people’s pockets, but they might save the windfall, especially as the outlook for growth and jobs has darkened since the referendum. Alternatively, Hammond could pump money directly into the economy by dusting off ‘shovel-ready’ public spending projects. Britain needs more homes and fewer pot holes.
And it makes sense to increase the budget deficit when taxes are tumbling because of an economic shock and when the government can borrow 10-year money for just over 0.8%.
But would it be easy to ramp up spending? First, the construction sector faces a severe skills shortage that would be even worse – Brexiteers please note – without foreigners, who make up 10% of the workforce. Second, a drive to alleviate the housing shortage would run into tough planning restrictions enforced by successive governments – not by the EU, Brexiteers please note. Third, as Britain’s senior auditor warns, the government may not be able to deliver existing major infrastructure projects, let alone embark on new ones, because it will have to divert civil servants, IT professionals and legal advisers towards managing Brexit.
So while it is too soon to predict the government’s fiscal response, the needed direction of travel is clear. The economy is probably entering recession as companies put investment on hold. The recovery in the euro zone, by far our largest trading partner, is slipping as a result of Brexit. Our decision to quit the EU has unleashed economic and political forces that, though largely predictable, will not be easily manageable.
Edited by Hugo Dixon
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