Beyond Brexit: Rebuilding Britain

“The government has been beset by terrible scandals.”

“Her government imploded in a political crisis very, very quickly.”

“Our relationships with our most important partners… are in a total mess.”

“You have to say, looking at British history, that the Tories will be defeated… They are exhausted, they have no ideas, and they are mostly incompetent.”

When one of the UK's most respected commentators starts out in this vein, it's hard to find hope. Yet I do still see the faintest light beginning to emerge at the end of the Brexit tunnel. You may judge me mad, so whilst I have your attention, let me take you back 2,405 days.

Early on the morning of Friday 24th June, 2016, I flew into London’s City Airport. The mood, as I landed, was at best uncertain, and became darker as the hours passed. Irrespective of your views on Brexit at the time, there was one brutal truth: Britain had been torn in two. The big cities – and university towns – had voted clearly in favour of remaining part of Europe. Much of the rest of the country – and slightly more by number of people – had voted for “Brexit”, though perilously few really knew what that meant.

Britain had chosen to leave the EU, with profound consequences.

Whilst we’re here, let’s not forget that fully a fith of the population, and a much higher proportion amongst those under the age of thirty, had not voted at all. 29% could not vote at all, as they were below voting age. In other words, "did not vote" and "could not vote" outnumbered the brexiters almost two to one. 

Unsurprisingly, the consequences of Brexit began to be felt within hours. As it happens, I spent that day in discussions with various colleagues at the Cambridge University Institute of Sustainability Leadership. The day ended with a apoplectic senior representative of the University explaining with huge exasperation that they had already lost a major hire, as a team that had agreed to move to the university from elsewhere in Europe could not be assured of retaining its EU funding sources - a massive blow to the school concerned.

Since then, plenty of turbulent and turgid water has flowed under the Brexit bridge – thanks to the effects of that decision, the subsequent COVID-19 crisis, and the war in Ukraine. Despite all the "Get Brexit done!" rhetoric, the brutal truth is that Brexit is still just starting, not a single one of the many promised benefits has been delivered, and the UK economy has been smashed.

It was thus particularly fascinating to hear Martin Wolf speak today on the economic challenges and opportunities that lie ahead for the UK, thanks to our good friends at Network 2020.

Unsurprisingly, the outlook for the world's fifth/sixth largest economy (India is now fifth on some numbers) is grimmer than anyone under the age of about eighty can remember. Post war Britain saw a boom in living standards, employment opportunities and innovation. Though the 1970s crisis was painful at the time, it triggered a round of industrial restructuring that was ‘good for growth’ (though I understand now that it was truly terrible for some communities). Many in Britain prospered, the financial sector grew and grew and, by 2003, the nation had even managed to win a major sporting competition for the first time in (the rugby world cup in Australia - a game I watched with great relish, but that's another story). Connections and trade with Europe improved and, by the time London hosted the 2012 Olympics, it felt as if the nation had finally shaken off the emotional baggage of a century of ‘decline and fall of the British empire’ and recovered its mojo.

The foundations of this success were, however, rotten. The global financial crisis had hit the UK economy particularly hard, as the country had one of the two largest international financial sectors in the world, and that activity represented a much larger part of the UK economy than Wall St does in the USA. And, unlike America, much of the rest of the British economy is geared to old economy activities. As Wolf commented, there have been "hardly any important new companies listed on the UK stock exchange for twenty years, perhaps longer". As a result, the UK’s decades-long trend of rapid growth evaporated.

“Real incomes per head and real wages per head have been stagnant still 2007. We have not experienced this as a country since the early nineteenth century.”

UK income per head is now 30% below where it would have been under the previous trend (for comparison, the US is 20% lower) and, put simply, “We are much poorer than we thought we would be.”

“We have made a series of important policy mistakes – of which the worst is Brexit – which explains the worsening of our position relative to other major economies.”

Just as has been seen in Australia over recent years, this has been accompanied by weak capital formation: indeed the UK has seen a collapse in investment compared to any major western country. As a result, it has emerged from the pandemic with one of the weakest developed economies. Unlike the USA, this has been exacerbated by a massive energy price shock. And, though Europe has faced similar challenges, the latter has implemented policy responses that provide significant protection to ordinary people without taking on massive additional national debt (by taxing the super-profits of energy companies). Adding to these challenges, inflation has spiked in food and other critical areas, and the UK unsurprisingly faces widespread labour strikes brought on by significant cost of living pressures, the likes of which have not been seen since the 1970s.

This is a dark story – and an optimist might say that it is darkest before the dawn. There are certainly some areas of opportunity. The UK still has fiat currency – ie could take on additional debt in order to invest to attract new businesses and to create the new industries that will be required to rebuild the nation’s once great prospects (read Stephanie Kelton's "Deficit Myth").

But, as Wolf makes clear, “There are no magic bullets here. They need to raise investment, raise innovation and find a way of creating new entrepreneurial businesses. But, after 15 years of stagnation, it is very hard for people to have the courage [to do this]”.

So, the path ahead remains a tough one. Inflation will likely fall over the coming year, but interest rates will probably remain fairly high. Jobs are being cut by some of the largest and best-paying employers on the planet and unemployment will thus rise too. In stronger economies, new industries will progressively take up some of the slack, including the burgeoning green economy (an area where the UK has not done badly, for what its worth). As one of the weakest economies, however, with demoralized entrepreneurs and cautious investors, the challenges for the UK are especially great.

Reflecting on this on a dark, cold night in London, I can’t help but think of the parallels with the USA, where a significant proportion of society has been left behind over the last fifty years. The precise same challenges of social disadvantage, economic exclusion and declining quality of life have translated into significant increases social tension.

In America, this gave rise to the MAGA movement, which was successful in winning election but which objectively did nothing for the ordinary people it promised to help. Indeed, it did quite the opposite, handing huge tax breaks to billionaires, whilst hoovering up political donations from supporters in unprecedented volumes.  

In the UK, rising social tension has provided a fertile environment for another popularist authoritarian to rise to power – though even some of his one-time supporters have muttered to me over dinner in recent weeks that Johnson was “a complete and utter disaster for Britain”. It's hard to argue this given what is quite clearly the worst economic performance more or less in living memory.

One interesting point to note is that reformers on both sides of the pond have called for change to the bipartisan political system itself through the introduction of ranked choice voting (Andrew Yang: “The War on Normal People”, and “Forward”). To me, this seems an almost unattainable dream in both countries. Yet the power of what can be achieved has been illustrated clearly down under through the rise of Australia’s community-selected independent politicians (some call them ‘teals’, after the colour of my excellent MP Zali Steggal, though in reality they come in a veritable rainbow of colours).

So, one moral of my story is that communities need to act, and take political power back into their own hands. With sufficient volunteers, and some modest local financial support for a campaign, it is truly amazing what can be achieved through true democracy in action.

More broadly, the degradation of society I’ve described above isn’t just a qualitative observation based on media reports – or even an academic view based on economic analysis. It is a deeply ingrained systemic failure illustrated precisely by the systems models built as part of the Earth4All initiative over the last few years (for more on this, including policy recommendations, see www.earth4all.life).

This, perhaps, is where the first glint of light at the end of the tunnel lie.

After decades of relentless short-termism, there is a growing call from civil society for a radical rethink of what is meant by ‘economic success’, ‘social welfare’ and ‘national prosperity’. In this new world, the best companies will think about how they can create good, well-paying jobs and contribute to their communities, not just next quarter's market announcement. With luck, they will see that this mind set can, in turn, lead to better profits and profitability over the long term, and greater resilience in the meantime.

And here’s the rub: the four little words that are almost always forgotten by every proponent of shareholder capitalism… “over the long term”. All too many commentators love to allude to Milton Friedman views on the purpose of companies, as outlined for example in his op ed in the New York Times back in 1970 (see here). In part, his view rests on what now seems like a deeply anachronistic view that “Only people can have responsibilities.” Leaving that aside, Friedman draws rather neatly how the interests shareholders and other stakeholders can draw rather closer together as you think about the long term.

“To illustrate, it may well be in the long‐run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to at tract desirable employes, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.”

And that, for me, is the second glimmer of light at the end of a very dark tunnel.

Almost a decade after I published my first book, The Long Term Starts Tomorrow, it feels as if companies, investors, governments and philanthropists are all beginning to flirt with the importance of long-term thinking in a manner that I have not seen before.

So remember this, dear reader. The long term isn’t a vague future that you will never see. It is formed by the words you speak and the actions you take (or don’t take) every single day, and it has a propensity to arrive rather sooner than expected. Happily, investing in the future always works out better, over the medium term, than investing in the past.

Last, this is precisely the type of thinking that we have used (with great success, I should add!) to help guide Pottinger's clients over the years. For more on this and related themes, please visit www.pottinger.com.

Courage, mes braves!

PS: If you have enjoyed this piece - or if it has made you think, even if you disagree - please do take a moment to share your thoughts in the comments below - and to prompt wider discussion by sharing with your network. Thank you!