The pound’s latest collapse is a symptom, but Britain’s decline has been going on for years

On Monday in Birmingham, on the fringes of Conservative Party conference, a group of free-market acolytes of the sort that helped Britain get where it is today will meet for a discussion called, with no shred of irony, “Reaping the Brexit Dividend”.

You might grimace. But the speakers, including Sir Iain Duncan Smith MP, John Redwood MP, and Professor Patrick Minford, will be there to convince wavering Tories, and probably themselves, that Brexit has been a tremendous success. For true believers, no doubts will be entertained. No amount of evidence – of falling trade, of receding trade deals, of insuperable problems like the Northern Ireland border – will make them question the cause.

But the desire to wave the Brexit banner is sustained by an almost religious belief in Britain’s exceptionalism. This is the myth that says the UK is a world power that can go it alone; can risk fracturing trading and diplomatic ties with its biggest market (the EU); can rely on special favours from the world’s most powerful nation, the US, and is entitled in perpetuity to special a status among the world elite power blocks and institutions.

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Liz Truss thinks that. So does her Chancellor, Kwasi Kwarteng. How else do we explain last week’s act of hubris, which sunk the pound, threatened pension funds, and saw Britain’s borrowing costs soar above those of EU weak links like Greece and Italy? Mr Kwarteng has expressed his scepticism of economic forecasting. His belief in supply-side theory will brook no argument.

The pound’s crash against the dollar was spectacular. But its slide against major currencies, accelerated by Britain’s decision to leave the European Union in 2016, has – with the odd zig-zag – been going on for years. A sign of Britain’s gradual decline; evidence, in the eyes of many, that those in charge for the past decade are trapped in a myopic vision of this country, unable to see the world – and Britain’s place in it – for what it is.

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Ms Truss and Mr Kwarteng can point to the fall of other currencies against a US dollar, buoyed by the Federal Reserve’s rock-solid determination to hike interest rate hikes to quell inflation. But Britain’s currency has fared worse than others. The pound’s demise is indicative of Britain’s broader decline “in multiple dimensions”, according to Professor Ian Goldin, an economist at the University of Oxford, specialising in global development.

The UK has unique strengths – particularly in terms of its softpower. But its economic importance is fading. The symbols – and facts – stare us in the face. India, the country Britain once plundered to help it become an economic superpower, has now overtaken it. The latest IMF data shows that India just displaced Britain as number five in the GDP listings.

Perhaps if schools taught children about the brutality and exploitation of the British empire as well as the pomp and glory, we might not have had such an inflated opinion of ourselves over the years. Prof Goldin notes “it’s just a question of time before it falls out of the top 10 economies in the world”.

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By 2023, Britain will be the worst-performing major economy, apart from sanctions-hit Russia, among the 38-member Organisation for Economic Cooperation and Development. An OECD report this summer listed interest rates and reduced trade as two of the main challenges facing the UK. This was before last week’s train wreck mini-Budget, which will cause interest rates to rise further and faster, and raise the price of the imports we rely on.

Liz Truss might have thought she was aping US President Ronald Reagan, who cut taxes amid high inflation in the early 1980s. Mr Reagan saw the dollar surge, helped by its unassailable position as the global reserve currency, and a fairly robust global economy.

Britain's Prime Minister Liz Truss (L) and Britain's Chancellor of the Exchequer Kwasi Kwarteng (R) chat during a visit to Berkeley Modular, in Northfleet, in south-east England on September 23, 2022. - The UK's new government has unveiled multi-billion-pound measures aimed at supporting households and businesses hit by the highest inflation in decades. (Photo by DYLAN MARTINEZ / POOL / AFP) (Photo by DYLAN MARTINEZ/POOL/AFP via Getty Images)
Prime Minister Liz Truss (L) and Chancellor of the Exchequer Kwasi Kwarteng shocked markets with their mini-Budget designed to boost growth (Photo: Dylan Martinez/AFP)

The pound isn’t the dollar. Times have changed. And to take such a risk without even the Office for Budget Responsibilty’s (OBR’s) assessment for such a gamble scared investors.

The spiralling cost of money will discourage firms from borrowing and investing to boost productivity, thus cancelling out the supposed growth benefits from Mr Kwarteng’s controversial tax cuts. If you think about it too much, you go mad.

The chorus of disapproval – not only from political opponents, but also from the Tories’ traditional allies in the financial sectors – ought to set alarm bells ringing among supporters of Trussonomics.

Dario Perkins, a managing director at TS Lombard international financial analysts, noted: “The problem isn’t that the UK budget was inflationary. It’s that it was moronic.”

“The dissonance between Tory politicians & market participants is insane. Reminds me of the Greek financial crisis. There was a slow & painful learning curve for Bxl, EU capitals & ECB. How long will it take Liz Truss and Kwasi Kwarteng?” tweeted Mujtaba Rahman of Eurasia Group, the geopolitical risk firm.

Our impression of the world is affected and permanently altered by dramatic events, rather than gradual trends. There becomes a before and after. There was Britain before Brexit, and Brexit-Britain thereafter. Likewise, the Truss government and the public’s and markets’ perceptions have changed since Friday.

Eswar Prasad, an economist at Cornell University, said the currency crisis had further dented Britain’s standing. He told The New York Times that “self-inflicted wounds”, including Brexit and the government’s latest spending plan, had accelerated the pound’s slide and further endangered London’s status as a global financial centre.

Experts like Prof Goldin say, however, that the rot didn’t simply start with last week’s mini-Budget, the Ukraine war or Brexit. He notes that by the mid-2000s, well into the Blair government, it was already apparent that Britain had a productivity problem. It was less efficient at making and doing things than its immediate competitors, such as France and Germany.

“Britain was not keeping up with the rate of change in the world,” he said. “There was not enough investment in tech, in training, in research or infrastructure. By 2004 we were already lagging behind. This was made much worse by the financial crash.”

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The worrying productivity gap has only widened since the debt crisis of the late 2000s and has accelerated under 12 years of Tory rule. Prof Goldin says that 10 years’ of austerity and the effect that had on public services and infrastructure made Britain even less competitive. “Brexit was the coup de grâce,” he says. Although he’s convinced Brexit would not have happened were it not for the financial crash, and all the pain – and populism – that followed.

Many economists say we need taxes to fund a more modern and competitive economy. Ms Truss and Mr Kwarteng say that tax cuts and deregulation allow private enterprise to do this more effectively, but the evidence for their claims is scarce.

France and Germany, our most obvious competitors, have higher levels of taxation but achieve better productivity.

Prof Minford, who’s participating in the Tory fringe event on Monday, is a cheerleader for Trussonomics. He could also be viewed as the economist’s economist, in the sense that he’s been wrong on just about everything. Most notably, his apocalyptic warnings about the effect Tony Blair’s minimum wage would have on Britain’s economy. We now know it made Britain a fairer and more decent society without raising unemployment; evidence, it would seem, that interventionist supply-side policies, which invest directly in people and productivity, can be more effective than free-market supply-side policies that focus on deregulation, tax-cutting, and trickle-down theory.

“There’s precious little evidence that the type of deregulation they’re going on about will make much difference,” said Anand Menon, a political scientist at King’s College London.

He says one of the biggest blows to our productivity – and a self-inflicted one – was leaving Europe’s single market. A report by the OBR – the same agency whose advice the Truss government shunned before producing last week’s calamitous mini-Budget – estimated that hard Brexit would reduce long-run productivity by four per cent.

“Brexit was about sovereignty for many people – and that’s a perfectly legitimate issue,” says Prof Menon. “People were within their right to vote for it. Actually, I don’t see why certain rights should be enshrined in EU law beyond the reach of our parliament.

“But they should have been honest about the tradeoff for leaving the single market. It’s the cake-ism. You can’t have it both ways. You can’t do it and pretend you can make up for it with a trade deal with Australia, or arms deal with the Philippines.”

Britain can’t reverse Brexit, even if the EU would take us back. It’s doubtful that Liz Truss is able or willing to see reality, let alone do a U-turn. She won the leadership by hailing Brexit (something she originally campaigned against) and promising to tear up the economic orthodoxy.

But the political backlash has given Labour a chance to regain power, if this week’s polls are anything to go by.

What would Labour do? It won’t revisit Brexit. Although by renegotiating agricultural deals, it might help resolve the running sore over Northern Ireland.

But that’s not going to have an enormous impact in terms of reversing the economic impact of the single markets and custom unions, says Prof Menon.

For now, Britain remains in the grip of a trickle-down experiment. The Truss government may or may not be forced to reverse the tax cuts. Labour might win the next election and do this. Britain’s long-term economic prospects look uncertain at best.

However, in the short term, we can expect pain. Five per cent interest rates are going to feel more like 10 per cent for mortgage payers with properties that cost five times as much as they did in the 1980s. Spending cuts are looking likely.

Perhaps, most ominously of all, there has never been less slack in the system. Brexit, Covid, and now the war in Ukraine have been three huge and unexpected bumps in the road. Surely, there couldn’t be something else lurking around the corner? We’d better hope not.

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