Breaking up is hard to do

04 July 2016 

Andrew Gamble  - Professorial Fellow at SPERI

Early pointers to what the future may hold for post-Brexit Britain

The consequences of the Brexit vote will take many years to be fully understood, and there are likely to be many twists and surprises on the way.  But here are a few pointers to what the future may hold.

The Conservatives will unite

Events since the Referendum result have been described as a Shakespearean tragedy.  But they are more like a Jacobean farce.  To be tragic the characters have to have some nobility.  Most of the leading figures on both sides of the Referendum debate in the Conservative party have destroyed themselves.  But the Conservative party will now unite around one of the leadership contenders, probably either Theresa May as the safety first and continuity candidate, or Andrea Leadsom as a Brexiteer, who has been endorsed by the Thatcherites.  Paradoxically May because she backed Remain may have less room for manoeuvre in the negotiations with the EU than Leadsom.  She will have to be seen to deliver the key planks of the Brexit manifesto, particularly on immigration.

The Opposition will fragment

The Labour party will split.  The gulf between the mandate of the party members and the mandate of Labour voters cannot be reconciled under Jeremy Corbyn’s leadership.  Either the leader has to be changed, in which case most of his supporters will leave the Labour party, or most of the MPs will have to be deselected and replaced by Corbynites. If the latter, a new party would then emerge splitting the Labour vote.  Many Labour voters will move to the Liberal Democrats, the Conservatives, and UKIP, which is likely to develop as a nationalist, populist working class party of the kind already established in France and the Netherlands.  Opposition to the Conservatives will be split between all these parties and the Nationalists in Scotland and Wales.  There will be no viable alternative government to the Conservatives for many years.  This will become clear quickly if the Conservatives hold an early general election and win a landslide.  But the forced exit of Boris Johnson from the Conservative leadership contest makes an early election less likely.

Scotland will leave

Another independence referendum in Scotland has been made much more likely by the vote for Brexit in England and Wales and the clear majority in Scotland for Remain.  There are signs that opinion is already shifting in Scotland, and that many unionists will now support independence.  Some of the unionist parties in Scotland, particularly Labour and the Liberal Democrats may decide to join the ‘Out’ campaign.  There are very considerable economic obstacles for Scotland leaving the UK, and difficulties about negotiating entry into the EU, which will not agree to Scotland keeping UK opt-outs.  No-one wants to repeat the experience of having the UK as a reluctant member.  But for many Scots economic arguments may not prove decisive, just as they did not prove decisive in England in the EU referendum.  In these hard times electorates seem willing to disregard the risk of further impoverishment if they feel they are ‘taking back control’.

Photo by Tom Athawes on Unsplash

The weaknesses of the British economy will be exposed

Andrea Leadsom in 2013 predicted that Brexit would be a disaster for the UK economy and would lead to a decade of economic and political uncertainty.  That has been confirmed in most economic assessments post-Brexit.  A recession is expected next year, the pound may fall to $1.20 or even lower.  Investment, jobs, and growth will all take a hit, and the economy will be permanently smaller.  Britain’s soft power, particularly its reputation for stability and tolerance has been weakened by the referendum campaign and its aftermath.  Nigel Farage, English football supporters, the Europhobic newspapers, and the surge in hate crimes against foreigners may have lasting effects on the reputation and attractiveness of many British institutions and services, from universities to tourism.  The Bank of England is seeking to counter market turbulence by signalling interest rate cuts to push down the pound, and a new round of Quantitative Easing to bolster asset prices.  But the Bank has little room for manoeuvre and the size of the budget deficit and the current account deficit are making markets nervous, and could produce much sharper sell-offs in the future.

The left behind will fall further behind

A falling pound and rising asset prices means that the left behind will fall further behind.  There is likely to be growing inequality and declining social mobility.  One Nation rhetoric from Conservative leadership candidates will not be translated into policies which change much.  The fiscal numbers will deteriorate as the Institute for Fiscal Studies has warned.  The Government will not have £10 billion to redistribute but a new shortfall in its accounts of up to £40 billion.  It has quickly abandoned the target of achieving a surplus by 2020.  The implication is that borrowing will have to rise, implying higher interest payments and a continuing squeeze on spending just to stand still.

Brexit means Brexit

The negotiations with the EU when they eventually start will centre on the trade-off between access to the single market and control over immigration.  As the Conservative hustings have already made clear it will be very difficult for the Government, whoever leads it, to renege on the Brexit pledge to end free movement.  That does not mean that immigration will necessarily be any lower.  It may well be higher, but the symbolism of taking back control of borders will have to be delivered.  That complicates the trade negotiations, because it rules out full access to the single market.  This will mean a much more painful adjustment for the British economy than if the UK just became a member of the European Economic Area (EEA) like Norway.  The City will have to shrink at least for a while, losing some of its business to other European centres once passporting is withdrawn.  This is a price the more realistic Brexiteers have always been willing to pay.  The conflict will come between the radical and conservative Brexiteers.

The radicals want Britain to adopt unilateral free trade, avoiding the need for any trade deals at all. Corporation tax would be slashed to 10 per cent, subsidies to regions and industrial sectors phased out, labour markets further deregulated.  Most of remaining manufacturing would be allowed to disappear, and the UK would become almost entirely a service economy.  The conservative Brexiteers want as little to change as possible but even they recognize that an EEA solution, although the least worst of an unattractive set of options, cannot happen without accepting free movement.  The proposals of the radicals are likely to encounter strong resistance, especially in a time of growing protectionism in the international economy rather than trade expansion, but some movement in their direction is possible, if only to try and regain a competitive advantage in a bleak and hostile world.

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