(Bloomberg Opinion) -- As part of his promise to deliver the benefits of Brexit after the U.K. leaves the European Union this Friday, Boris Johnson has set a goal of doubling the rate of economic growth after the U.K. leaves the European Union. That aspiration could be treated as a rhetorical flourish, like Donald Trump’s belief that the United States can get to 4% or even 5% annual growth by following “Trumponomics,” but I will take it seriously.
At first glance the hope is ambitious but not outrageous. The International Monetary Fund baseline forecast is just under 1.5% growth per year for the expected five years of this Johnson government. The trend growth rate pre-financial crisis through the chancellorships of Kenneth Clarke and Gordon Brown – between 1993 and 2007 -- was around 2.75%. So the Johnson proposition is that Britain can return to its pre-crisis economic performance or a bit better.
One obvious negative is the impact on growth of the government's policy to tighten immigration controls as the U.K. “takes back control” of its borders. Net immigration – around 225,000 a year – currently accounts for two-thirds of population growth; a rough calculation based on GDP per head suggests that contributes to about 0.6% of GDP growth annually. So if population growth is halved, say, there is a potential hit of 0.2% per year of annual growth.
Another negative is potentially weak demand at home and abroad. Unlike the pre-crisis period, there is no longer a booming world economy and the IMF is warning of global growth downgrades. Weak business investment at home caused by last year’s Brexit uncertainty may get a temporary boost this year from the clear election result. But there will be a long period of negotiation over terms of U.K. access to the EU and those countries where there is an EU Association agreement. The decoupling of trade and investment arrangements is bound to impose costs and inhibit investment even if you believe it will be skillfully managed by the Johnson government.
Meanwhile, households are again approaching pre-crisis debt levels, making any consumer boom underpinned by credit improbable and risky in equal measure. Household debt rose to 146% of disposable income in the crisis year of 2008, from 85% in 1997. It is now back to 140% of disposable income and forecast to reach 150% by 2024.
After a decade of quantitative easing, there is little scope for further monetary stimulus to offset weak consumer demand. Much hinges on the promised fiscal boost to public investment and the more relaxed approach to the public sector deficit and debt.
Some relaxation is necessary and welcome, especially to fund productive infrastructure, but any suspicion in the bond markets that the U.K. has abandoned fiscal discipline will test what Bank of England Governor Mark Carney referred to as the “kindness of the strangers” who lend to us, drive down sterling and prompt higher interest rates. This is in marked contrast to Japan, whose government can comfortably borrow for public spending since Japanese savers are willing to lend even at derisory interest rates.
Essentially, what lies behind the prime minister’s growth optimism is the hope that there will be a near-miraculous productivity spurt. But it is difficult to see where it will come from. Whatever the outcome of U.K.-EU trade talks, there will be new frictions that are bound to place a drag on growth.
The U.K. has already had a decade of supply-side reforms based on deregulation, cuts in corporate tax, and labor markets that are among the most flexible in the developed world. Leaving the EU gives no additional flexibility in the big remaining regulatory challenges like the rules governing building permissions, where politics and economics collide. The Conservative Party’s traditional supporters, largely middle class and wealthier home-owners, rely on planning restrictions to support their inflated housing prices. There is no sign that this government has any appetite for a new burst of Thatcherism.
More positively, there does seem to be a recognition of the importance of science and innovation, of improving transport and internet connectivity in depressed areas of the country, and of the value of industrial strategy to support high productivity sectors. The unlikely electoral coalition which gifted Boris Johnson his majority – the well-heeled, privileged English home counties alongside frustrated, “left behind” parts of Britain – will be hard to hold together in 2024, so ministers will want to see projects like Northern Powerhouse Rail (a large-scale project to improve and further develop rail links in the country’s more deprived northern regions) breaking ground and making a visible difference.
But these welcome projects will not in themselves solve the drag on the economy from low levels of mathematical and scientific literacy, deficient provision of skills training and apprenticeships. Indeed, inadequately supported life-long learning will also take decades to turn around.
It is entirely understandable that the government should try to develop a positive narrative about post-Brexit Britain. But talking up the growth rate of the economy has to be based on more than wishful thinking. Forecasting is more an art than a science but I have rather more confidence in the realist art of the IMF than the impressionism of the prime minister. Chancellor of the Exchequer Sajid Javid’s suggestion in Davos that the government might now downgrade growth as an objective suggests that perhaps the Treasury is coming around to the realist school too.
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Vince Cable is a former U.K. secretary of state for business and was leader of the Liberal Democrats from 2017 to 2019. He was previously chief economist at Royal Dutch Shell. He is currently a visiting professor at the London School of Economics. His next book, "Politicians and the Politics of Economics," will be published later this year.
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