Matthew Lynn

The Tories’ biggest gamble? Over-estimating the strength of the post-Brexit economy

The Tories' biggest gamble? Over-estimating the strength of the post-Brexit economy
Text settings

Unemployment is down. Retail sales are still strong. House prices are stable. Even the Great British Peso, the currency formerly known as the pound, has recovered much of its losses of the past year. After the vote to leave the EU, the UK economy has been remarkably strong. Even triggering Article 50, which some said would be the point when the whole pack of cards collapsed, doesn’t seem to have made any difference.

With that wind in behind the UK’s sails, it is easy to understand why the Conservative party is feeling fairly secure about the state of the economy. And that may help explain why there is remarkably little in the manifesto to strengthen the competitiveness of the country. Sure, the commitment to reduce corporation tax to 17percent is maintained, and that is great. The lowest earners will progressively be taken out of income tax. A commitment to ease business rates a little will help. But beyond that, there is practically nothing. Meanwhile, many of the ideas come straight from a 1960s corporatist playbook. A ‘National Productivity Investment Fund’ sounds like the kind of thing Harold Wilson – if anyone remembers him – would have come up with on bad day. The one thing it almost certainly won’t do is improve productivity.

That may well prove a mistake, and an expensive one. It is fine for the Tories for go chasing Ukip and Blue Labour voters with more rights for workers, clampdowns on fat-cat pay, and teasing hints of protectionism. But it all relies on a strong economic base. If that crumbles, they will quickly be in trouble.

Right now, they are taking it for granted. True, the EU’s talk of ‘punishing’ us for leaving is mostly hot air – we were on such a bad deal anyway, there is not much they can do. Even so, there will be a period of adjustment as we come out of the Single Market. Companies may face modest tariffs. Foreign workers may be reluctant to come here. Financial services, our largest industry, will certainly take a hit. Over the medium-term, the UK will come out ahead, but there will be some bumps along the way – and keep in mind that 2017-22 will almost certainly see a global downturn and probably a stock market crash as well.

In fact, the manifesto should have laid out some plans for radically strengthening our competitiveness. Why not aim to take corporation tax down to Ireland’s 12.5 percent or even lower? Or take the entrepreneurs rate of CGT down to zero to make the UK the most start-up friendly nation in the world? How about redesigning our tax system so that it works for the emerging gig economy? The manifesto could have included rewards to companies for automating more, and training local staff, to help wean them off hiring workers aboard. Or it could have included radical deregulation in new technologies such driverless cars or robotics. Any of those would have laid the foundations for a post-Brexit economy. As we leave the EU, the UK will go through its most disruptive period change since the heyday of Thatcherism in the early 1980s. It would be good if we had a plan for that – but we didn’t get one today.