Leader: A devalued economy

The UK, damaged by Brexit and austerity, will face the next recession in its weakest position for decades. 

NS

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A decade after the end of the last recession, it is possible to construct a seemingly positive story about the British economy. Growth has risen in each of the past nine years, employment is at a record high (75.8 per cent) and real wages rose by 1.3 per cent in the most recent quarter. These are the facts that the Chancellor, Philip Hammond, will cite when he delivers his Spring Statement on 14 March.

However, these headline figures mask disquieting trends. Although Mr Hammond may boast that the economy has grown continually under the Conservatives, this is comparable to a flagging runner declaring that he has, at least, kept moving. Since 2010 the UK has endured its slowest economic recovery on record and the outlook is merely worsening.

In Q4 of 2018, impaired by uncertainty over Brexit, GDP grew by just 0.2 per cent (down from 0.6 per cent in Q3 and far below the pre-crisis average of 0.7 per cent), while in December it contracted by 0.4 per cent. Though real wages are now finally rising, average earnings are not expected to return to their pre-crash peak until 2025 (workers are still £13 a week worse off than in 2007).

But even before the damage of the last recession has been undone, the threat of a new global crisis is looming (as Grace Blakeley writes in this week’s cover story on page 24). Record debt levels, great power trade wars and China’s slowdown are among the multiplying threats.

Should the world soon enter a new recession, it will do so in a significantly weaker position than 2008. Monetary policy is already ultra-loose (UK interest rates are just 0.75 per cent, compared to 5 per cent before the crisis), while fiscal policy is constrained by higher debt (Britain’s national debt is 82.6 per cent of GDP, compared to just 40.9 per cent in 2007-08).

In the event of another crash, there is no leader comparable to Gordon Brown to co-ordinate a global stimulus programme. Rather than unifying in the years since the crash, the world has been fractured by rival populists and nationalists: America’s Donald Trump, Russia’s Vladimir Putin, China’s Xi Jinping, Brazil’s Jair Bolsonaro and India’s Narendra Modi.

In this context, 2019 is a particularly poor moment to enact Brexit. At the very time that Britain should be insuring itself against economic threats, it has created a new one. The Office for Budget Responsibility found that the economy was 2 to 2.5 per cent smaller by mid-2018 than it would have been had the referendum not been called.

Brexit has served to distract the government from the domestic problems accumulating after a decade of austerity (which the Leave vote was partly a revolt against). Fatal stabbings are at their highest ever level in England and Wales, while the number of under-16s hospitalised for stab wounds has doubled over the past five years.

This disturbing increase in violence cannot be attributed to austerity alone. However, it was implausible for Theresa May to insist on 4 March that there was “no direct correlation between certain crimes and police numbers”. Since 2010, the number of police officers in England and Wales has fallen by around 22,000 to the lowest level since 1981. Almost 90 per cent of officers say that they lack the numbers needed to manage the demands that their team or unit faces. Faced with inadequate resources, it becomes more difficult for police to gather intelligence and to build crucial community relationships.

This year’s government Spending Review, the first since 2015, will determine whether Mrs May maintains her promise to bring the era of austerity to an end. Yet even if the cuts programme is finally abandoned, it will take many more years to undo the damage to Britain’s public realm.

Rather than spending billions preparing for a no-deal Brexit, an outcome that both the Prime Minister and the Chancellor regard as an act of self-harm, the UK should have invested in the infrastructure needed to support growth and communities. Instead, Britain will now face the next recession in its weakest position for decades. 

This article appears in the 08 March 2019 issue of the New Statesman, The next crash