Ministers Have a Golden Ticket but Must Overcome ‘Brexit is bad’ Negativity
22 January 2020 by Gerard Lyons
Let's level up the UK economy. That's the aim. Increased infrastructure spending. More housing. Better transport links. A focus on poorly performing regions and northern cities. All combined with deregulation and a desire to cut taxes eventually.
Rarely can a government have been handed such a golden ticket. The ability to reboot economic and financial policy with a fresh start in the wake of Brexit. The potential is immense.
However, market expectations of what is possible appear low, largely because of the economic groupthink that Brexit is bad.
An immediate challenge is to change the international view of the UK. That weight will fall not only on the prime minister but also, at global economic events, on the chancellor, as this week in Davos, and the governor of the Bank of England.
For three years global audiences have been told a negative story about Brexit. Simplicity has captured the political narrative in terms of "take back control" and "get Brexit done". In terms of the economy, the simple slogan might be: "Let's rebuild Britain".
The UK economy is imbalanced.
In terms of place, it is not only London versus the rest, but economic gaps also exist between urban and rural and coastal versus inland areas. Other imbalances include those between homeowners and renters, skilled and unskilled workers linked with our productivity problem, plus the constraints of a persistent but now low-budget deficit and an unsustainable trade deficit.
The good news is we can address these with a fresh agenda.
What, then, should be done? Well, first, set the vision while making clear that progress takes time.
Success requires getting three areas right: the domestic agenda, our future relationship with the European Union and our ability to trade with the rest of the world.
It makes economic sense for the UK and EU to reach a free trade agreement. Political negotiation is the hurdle. Businesses crave clarity soon so that they can plan ahead.
It is vital, though, that our EU exit deal does not tie our hands in other areas, hence the desire to be outside the customs union to cut global trade deals and outside the single market to pursue a divergent regulatory agenda where needed, such as in financial services but not autos.
The UK will continue to be a world leader on environmental issues and will protect workers' rights, but this should not prevent cutting red tape in many areas.
The March budget should identify quick wins, such as kickstarting the housing market by boosting supply, improving affordability and increasing turnover. Immediate measures include reducing stamp duty, reversing the 1961 Land Compensation Act that inflates land costs, easing some prudential regulations hindering borrowers and releasing more government owned land for building. The infrastructure boost needed should be focused on revitalising transport connectivity HS2 must be reviewed.
Monetary and fiscal policy need to be aligned fully. Last year more than 60 central banks cut rates but the Bank of England did not, despite a weak and uneven growth picture.
The Bank now has a bias to ease, even though there has been a postelection economic bounce. The main message, though, is that rates will remain low for long, in turn keeping sterling competitive.
As policy aims are set in coming weeks, boosting infrastructure may be the first priority, but getting the incentives right through tax and regulation while encouraging innovation and private sector investment are essential. Ensuring the right policy focus on infrastructure, incentives, innovation and investment will boost growth and make inroads into inequality.
Please remember that when investing your capital is at risk.