By Henry Teitelbaum, Editor, P3 Planet
The Brexit vote not only exposed how out of touch the government here is from British voters, it laid bare the extent to which its leaders have failed to address the twin issues of low growth and rising inequality that led to this fiasco.
More than anything else about the UK referendum decision to leave the European Union (EU), it was middle class economic insecurity and diminished hope for the future that allowed people to be influenced by mostly false propaganda about immigration, compromised independence and lost identity.
Assigning blame for the conditions that led to these misconceptions is the easy part. Prime Minster David Cameron and Chancellor George Osborne had tough choices to make starting in 2010 as they tried to navigate the UK economy out of the worst recession in the modern era. They consistently made the wrong ones, and it is fitting that they should now resign.
As Goes Britain…
The question for Britain and the many other western countries that face populist rebellions, is whether their leaders will have the courage to do things differently before they too feel the wrath of a despairing and disenfranchised electorate. It could well become the ultimate measure of success in post-globalization politics across Europe and the US.
I am of course referring to fiscal policy, or in the case of this Tory government, the absence of one. It always seemed counter-intuitive, to put it mildly, to expect that piling austerity onto one of the worst hit economies of the 2007-2009 financial crisis would produce anything other than misery.
But that’s exactly what they did. Public spending has been cut by 8.3% since 2010, and there’s no end in sight, with the Institute for Fiscal Studies (IFS) now estimating that it will be 2020 before the budget is balanced. Benefits were cut without consideration for the massive workplace displacements that people were experiencing, and investment in public infrastructure was drastically reduced after Osborne decided in 2011 to suspend Private Finance Initiatives. This is no different from the ruinous austerity that has prolonged recessions and hobbled growth across the EU for the past seven years.
Stoking A New Housing Bubble
But Cameron and Osborne have done even worse. Instead of using ultra-low borrowing rates to encourage productive investment in long-term growth, they reflated the housing bubble with questionable programs such as Funding for Lending. Near-term, this generated some stamp duty revenue for the government, but not nearly enough to close the budget deficit.
It also did nothing to create jobs outside of the real estate business. In fact, it probably added to peoples’ sense of financial insecurity by putting the cost of home ownership even further out of reach.
The result of these policies has been one of the most uneven recoveries, and one of the world’s most persistently wide income gaps.
Historically, this level of income inequality would be resolved in one of three ways. Politically, it could happen through tax policies that re-distribute wealth. Economically, it could result in financial collapse, which causes massive bond defaults that disproportionately destroy the wealth of those with income to invest. Or it could happen by way of Europe’s traditional equalizer: war.
Britain’s Infrastructure Deficit
But there is a much less painful way out of this mess. And all it requires to produce real results for people, their communities and the economy at large is some big picture thinking and the courage to grasp the opportunity.
Britain is sitting on a more than £60 billion deficit between what is needed and what is currently being spent on public infrastructure. This is not unlike other parts of Europe, where government spending has become a dirty word. What needs to happen here is to make infrastructure development a priority the way it was during the depression era, because this investment creates stable, well-paid jobs in precisely those sectors of the economy where middle-class incomes have eroded.
Investments in infrastructure, whether financed by the government or through partnerships with private sector delivery organizations, create enormous value for the economy in both the short- and long- term that fully justifies their cost. In the short-term, new jobs restore middle class incomes, and get money circulating in the real economy. This supplies a key ingredient that has been missing from this recovery, where aggregate demand has been too weak to prevent price deflation.
Longer-term, the essential assets that are delivered – modern roads, railroads or better schools and hospitals – boost productivity and attract new investment at home and from abroad.
The Multiplier Bonus
There’s also a big bonus from the multiplier effect. This is the impact on GDP from the increased amount of money that people spend as a result of job creation and the contribution that the new asset itself makes to economic activity. According to Standard & Poor’s Corp., the UK would benefit twice as much from this multiplier effect than would Germany or France. It also specified that an increase in infrastructure spending of 1% of GDP returns 2.5 times as much as the cost of that investment over a three-year period.
Government tax collections meanwhile typically increase dramatically due to all of this additional consumer spending, eliminating the deficit far more quickly than any policy fix this government has tried.
The UK government’s updated National Infrastructure Plan (NIP), published at the end of 2014 and updated last year, contained 550 projects and programs with a combined capital value of £413bn. The pipeline of planned projects includes investments in the energy, transport, flood defense, waste water and communications sectors and features 40 major infrastructure projects termed as high priority.
It would be nice during his remaining time in office to see Mr. Cameron put an effort into mobilizing the nation around delivering these projects before interest rates start to rise. It would go a long way towards giving people hope for a better future, as well as bringing a new sense of identity and purpose to the nation.