A Greater Britain After Brexit
February 05, 2020 @ 11:49 UTC
Britain left the European Union last week, but the event isn’t quieting defeatists insisting that Brexit will be an economic disaster. They’ve been rounding on Chancellor Sajid Javid for thinking big about the U.K.’s future. Mr. Javid dared to tell a newspaper in January that he thinks Britain’s economy can grow by 2.7% a year or faster.
Cue a parade of economists claiming this isn’t possible. Their claim boils down to this: Britain is afflicted by the same collapse in productivity hitting every other developed economy. This will put a brake on Britain’s economy, especially if immigration declines and Brexit imposes new trade friction with the EU. The Bank of England assumes growth of 1.5% is the best Britain can do.
President Trump’s tax reform and deregulation unlocked enough business investment and job creation to offset the headwinds of his trade wars. Policies matter. Britain has ample scope to replicate that success. Mr. Javid’s critics are right that the key will be accelerating productivity growth—an increase in the amount each worker can produce per hour. Britain for the past decade has achieved economic growth primarily by expanding its labor force, and more Britons are working now than ever in absolute numbers and as a share of the population. That labor expansion will wind down soon, especially if Prime Minister Boris Johnson limits immigration.
But the critics are wrong that a productivity explosion is out of reach. British productivity—about $58 of GDP per hour worked in 2018, according to the OECD—is lower than Continental Europe’s habitual laggard economies. France hits $68 and Germany $66. In the U.S. it’s nearly $71. The U.K. can catch up by stimulating investment to reach similar levels of capital stock (computers, machines and the like) per worker and increasing the skills of workers.
Bad policies explain why British productivity grew only 2.7% cumulatively between 2010 and 2018, according to the OECD, compared to 5% in the U.S. and nearly 9% in France and Germany. Culprits range from a lagging rollout of broadband by what used to be the nationalized telecom company to ultralow interest rates that divert investment to the likes of real estate.
Mr. Javid is well-placed to tackle a major productivity impediment, the U.K. tax code. The top rate on corporate profits has fallen to 19% from 30% in 2007. But Britain is more hostile to business investment than are most other developed economies, despite the rate cuts.
Britain can follow America in a better direction, combining high productivity with high employment rather than substituting one for the other. The costs in lost productivity of an EU trade deal that roped Britain into Brussels directives on green energy, consumption-tax rates and the like would be much higher than Britain’s losses from new trade friction.
All of this boils down to a choice: Will Britain go for growth after Brexit, or not? Britons voted for Brexit in part because they were tired of elites lecturing them about what was possible for Britain, often with reference to some EU rule. That era is ending.