What next for the big problems of the UK economy?

Posted orginally on the Academy of Government blog >>

Professor Simon Clark, Head of School of Economics, Edinburgh University

During the general election campaign remarkably little was said about Brexit, despite Theresa May calling the election in order to strengthen her negotiating hand. So it might be thought that the election result of a hung parliament would have done little to resolve any of the uncertainties around the Brexit negotiations. By conventional wisdom that’s bad for confidence and investment. But if we look harder the election has settled much.

Politically, sentiment in the House of Commons seems to have shifted away from a hard Brexit, and without an overall majority that will influence the Government’s negotiation stance.

However, there is a deeper implication to be drawn from this election that might affect how we think about Europe. Although little was said about Brexit explicitly, the campaign was all about Brexit. Or to be more precise, it was about those issues that in the referendum made people vote one way or another: austerity, public services, the fairness of the tax system, the perception of entrenched inequalities in UK society.

On 23 June 2016 the answer to these problems seemed to many to be to leave the EU, so that the UK could regain control over trade, immigration, and its laws. But the uncomfortable truth is there is no serious economic question to which the best answer is ‘Brexit’.

Many of the big problems of the UK economy have been around for decades: low productivity growth, poor transport links, the low level of housing starts, the lack of a coherent long term energy policy. The solutions to these problems lie entirely within the sphere of our own domestic policy and are only negligibly constrained, if at all, by our membership of the EU. Similarly, the blessing of increased longevity also brings its own problems, and the ‘dementia tax’ turned out to be a key issue of the election campaign. Again, the answer is nothing to do with the EU.

The focus during the campaign was understandably on what can be changed at Westminster: taxes, the NHS, social care, ownership of public utilities, affordable housing, who pays for higher education; i.e. how to fix Britain’s chronic economic and social problems. Of course, Europe was not absent from the debate, but it is remarkable how little EU membership would either help or hinder the actual implementation of many of the main parties’ policies.

So here are two questions, one for the leavers, and one for the remainers. If leaving the EU is the key to thriving in the global economy beyond Europe, how come the most successful exporter of machine tools to China is Germany, a country at the heart of the European project?  And to the remainers: we joined the Common Market over forty years ago, so why is productivity stagnant, why is economic mobility so low, why do we have an almost permanent current account deficit?

The answer to these questions lies in the educational and industrial policies that we have adopted, domestic policies decided in the UK. That is not to say the EU is irrelevant: it creates trade between members and diverts trade from non-members; and it is a source of both skilled and unskilled labour.

But the election campaign put Europe into perspective. It is neither the root cause of our problems, nor a magic solution to them.

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