Autumn Statement shows Brexit makes us poorer

.030ZyesAutumn Statement shows Brexit makes us poorerBy Tom O’Leary

The ever-optimistic Office for Budget Responsibility (OBR) has come under sustained fire from the Brexiteers for its gloomy prognosis and forecasts for the Autumn Statement. This criticism is entirely misplaced. The OBR has underestimated the negative impact of Brexit.

The OBR has loyally served successive Tory or Tory-led administrations having been created by them in 2010 and has routinely forecast much stronger growth than has occurred, along with rising living standards that have failed to materialise. However, what the OBR cannot do is ignore economic reality. Its forecast weaker growth over the next two years, that is before Brexit is enacted, chimes with almost all private forecasts. The Brexiteers want to shoot the messenger, who brings news of the downturn they have created.

The OBR repeatedly emphasised that it cannot make any substantive forecasts about the Brexit period itself as the government would not provide any information on the post-Brexit economic regime, not even in the widest parameters. Instead, the OBR focused on the immediate negative impact of the Brexit vote and the deterioration of the economic outlook, and even assumed a resumption of slower but steady growth from 2019 onwards. Give the disruption that is currently scheduled for 2019 when the UK is scheduled to leave the EU, this seems implausible.

Worse outlook because of Brexit

The most important OBR forecast changes are shown in Table 1 below (taken from Table 1.1 of the OBR’s November 2016 Economic and Fiscal Outlook). GDP growth falls by a cumulative 1.1%. Household consumption is down by 1.8%. Crucially business investment falls by 12.75%. In terms of living standards average earnings fall by a cumulative 2.8%.

Table 1. Changes in OBR forecasts for key economic variables since March 2016

Source: OBR

Not all of this deterioration is due to Brexit. The OBR specifies that around 60% of it is. In the OBR’s ‘counterfactual’ scenario, as if there had been no referendum, shows that 61.25% of the deterioration by the end of this parliament is due to Brexit (Table 1.4 of the OBR document). 

The remainder is the customary downward revision to forecasts as the OBR’s rose-tinted view gives way to reality. But this can hardly provide much comfort to the Brexiteers on the right or left. The OBR has only really taken account of the turmoil of the next two years and its previous track record suggests the forecasts will be markedly lower over time.

It is clear from Table 1 above that the biggest single casualty over the next few years is business investment. This is entirely predictable and predicted. As the level of investment is in part determined by the scope of the market, the UK’s withdrawal from the world’s largest market will inevitably deter investment. Contrary to government propaganda and much easily-led commentary, there will be no attempt to replace this new slump in business investment with increased public sector investment, as shown in Chart 1 below. Contrary to Tory propaganda there is no ‘National Productivity Investment Fund of £23 billion’, it is simply the relabelling of existing government spending on road, rail, housing and so on.

Chart 1. UK Pubic Sector Investment as Proportion of GDP

Brexit may have been sold as an opportunity to ‘get our country back’, but no vote can overcome the forces of global capitalism, or abolish the laws of economics. Irrespective of the ideas those who supported Brexit, the effect of the vote is to prolong the longest period of falling real wages in recorded UK history, as shown in Chart 2. Real wages had been falling since the end of 2014, when they were 5.7% below where they were when Labour lost office in 2010. But Brexit postpones the wage recovery primarily through flat wages and higher prices, so that they are not now officially forecast to recover until Q3 2019. This lost decade in wages is prolonged by Brexit.

Chart 2. Index of Real Wages

Overall the crisis of the British economy is demonstrated by the change in Consumption and Investment since the beginning of the crisis. The OBR has forecast the outturn for the remainder of this year. The changes in Consumption and Investment are shown in Chart 3 below. The change in aggregate Consumption since the beginning of the crisis has been just over £135 billion, led by rising private Consumption. The cumulative rise in Investment is just £0.8 billion, effectively zero.

It is this rise in Consumption without any rise in Investment to sustain it which has led to enormous overseas borrowings to cover the current account deficit. Consuming without Investment is also responsible for flat or falling living standards for the overwhelming majority.

Chart 3. UK Consumption and Investment Q1 2008 to Q4 2016 (Forecast)
 Unsurprisingly, the notion that exports will boom because of Brexit is revealed as pure fantasy. With zero investment the economy can only decline competitively if there is zero investment, once the one-off boost from Sterling’s devaluation fades. This is shown by the OBR in terms of export market share, that is exports divided by imports, in Chart 4 below. In fact, the OBR forecasts showing the relative decline of export performance accelerating post-Brexit compared to the previous trend.
Chart 4. UK Export Market Share

Economic objectives

As noted above, the OBR sought but was not given any meaningful advice from the government about its aims in the Brexit negotiations, or what policy outcome it expected. Instead it was given two statements by Theresa May. Below is a key section from the statements they were given.

Theresa May said, “I want it to give British companies the maximum freedom to trade and operate in the Single Market and let European businesses do the same here. But let me be clear. We are not leaving the European Union only to give up control of immigration again.”

The OBR requested guidance on economic policy. What it got was bombast on immigration. This must be assumed to override economic policy, or supersede it.

Yet the OBR is clear, the objective of reducing immigration will itself reduce both growth and living standards for all. There are 70 references to migration in the OBR document. It states that potential growth will be 2.4% because of lower net migration by 2021. To be absolutely clear, this is not simply an effect which reduces GDP, it also reduces living standards for the entire population, measured as per capita GDP. The OBR states, “On a per capita basis, cumulative growth would have been 0.3 percentage points higher because net migration adds proportionately more to the working-age population than to the total population, thereby boosting the employment rate too” (p.45).

It should be the goal of all economic policy to maximise the greatest sustainable increase in the living standards of the population. The Brexit vote and the Brexit government have overturned that strategic aim, replacing it with immigration-reduction. Chancellor Philip Hammond told the Tory party conference that ‘no-one voted to be poorer’. Yet his own government acts as if they did. It is what they will deliver.

The reason the Cabinet Brexiteers are in uproar is that their reactionary fantasies cannot survive contact with the real world. Even the perennial optimists at the OBR must be attacked. But this is in the nature of Brexit, a reactionary project propelled by distortions and outright lies. Because Brexit erects barriers between the UK economy and the world’s biggest market, living standards will be much lower than otherwise. Curbing immigration will compound this effect.

Of course, it is quite possible for political movements and even nations to sustain themselves on reactionary fantasies for a whole period. But they tend not to survive contact with the outside world. The Autumn Statement is probably just a small foretaste of what is to come as the Brexit fantasy meets reality.

After Trump’s victory China is the main strategic pillar for globalisation

.387ZAfter Trump’s victory China is the main strategic pillar for globalisationBy John Ross

Trump’s election as US President means 2016 is ending with a stark public contrast between the positions of China and the US on global trade. The US has its first president proclaiming support for protectionism since World War II, while China states its support for increased international trade and economic globalisation.

December 2016 also marks the first anniversary of China’s major free trade agreements (FTAs) with South Korea and Australia – so far China has signed 14 free trade pacts with 22 countries and regions in Asia, Latin America, Oceania, and Europe. In contrast Trump, far from calling for extending FTAs, has called for revision even of the existing North American Free Trade Agreement – the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investors Partnership (TTIP) are different issues as analysed below.

This reality that China is now the largest economy supporting progress towards free trade, while the US moves towards protectionism, is therefore a key event in the world economy. It is consequently crucial to analyse both the fundamental issues involved, that is the most powerful forces driving the process, and the immediate practical consequences for China in pushing for FTAs and to understand the consequences of the contrasting strategic approaches of China and Trump.

The importance of trade

First, analysing the most powerful forces in economic development, international trade is one of the clearest issues where economic theory and the facts of economic development completely coincide. Economic theory states that international trade will aid economic development: numerous and repeated factual studies show a positive correlation between the trade openness of an economy and its speed of economic development. Nevertheless, to understand developments in the world economy given the now contrasting policies of China and Trump it is crucial to understand the reasons for the firmly established positive correlation of trade and the rate of economic development in the modern globalised economy.

Trade and division/socialisation of labour

Trade’s importance does not arise from some ‘magic effect’ of crossing national borders. The distance from Shanghai to Beijing and from Shanghai to Osaka is approximately the same, but the importance of trade does not mean that there is some extra benefit from Shanghai’s trade with Japan rather than another part of China.

International trade’s importance follows from the proven fact of the first sentence of the first chapter of the founding work of modern economics, Adam Smith’s The Wealth of Nations: ‘The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is directed, or applied, seem to have been the effect of the division of labour.’ Marx used the term ‘socialisation of labour’, rather than ‘division of labour’, but entirely agreed with Smith’s conclusion.

Modern econometrics fully confirmed the Smith/Marx analysis. Modern econometrics finds, in economic ‘growth accounting’ terminology, that the most powerful factor in economic growth is the increase in ‘intermediate products’ – that is the output of one industry (e.g. a steering wheel, a hard drive) used as an input into another industry (e.g. a car, a computer). But the increase in ‘intermediate products’ is merely a measure of increase in division of labour.

Modern econometrics also finds that the second most powerful factor in economic growth is fixed investment. But fixed investment is again simply another form of division/socialisation of labour – the use of the outputs of capital goods industries to produce other products.

The key role of international trade follows directly from this decisive role of division/socialisation of labour. As Smith immediately noted: ‘the division of labour is limited by the extent of the market’ – increasing division/socialisation of labour required an increasing market size. It was for this fundamental economic reason that Smith advocated free trade and Marx was a fierce critic of the founder of modern ‘protectionist’ theory Friedrich List

It is this increasing division/socialisation of labour, not of crossing national borders, that is decisive for economic development and which therefore allows the unfolding economic processes involved with Trump and China’s current policies to be understood.

‘Opening up’

These fundamental economic forces evidently explain the success of China’s ‘reform and opening up’ process since 1978 – and why China seeks new FTAs. A key reason for China’s more rapid economic than other major economies is that it makes greater use of international division of labour than the other two of the world’s three largest economies. China’s trade in goods and services in 2015 was 41.2% of China’s GDP compared to 36.8% in Japan and 28.1% in the US. Given the success of the ‘opening up’ policy it corresponds to China’s national self-interest to press forward with proposals for freer trade and FTAs.

But the fact that this advantage of division/socialisation of labour in economic development is the foundation of trade means equally means that developing this is in the interests of other countries as well as China. The statements that in economics ‘one plus one can be more than two’, and the concept ‘win-win’, are not pleasant but empty words but correspond to this decisive economic advantage of division/socialisation of labour. This is why China has been able to secure its free trade agreements with South Korea, Australia and other countries, and why it wants more.

It is also the beneficial effects of such globalisation that has helped produce rapid economic growth in China, India and other developing countries, thereby helping lift hundreds of millions of people out of poverty. Globalisation is consequently decisively important for countries, but particularly developing countries and the world’s poorest people, to achieve economic development.

US economic history

If China since 1978 dramatically illustrates the advantages of open trade US history provides one of the most dramatic examples of the negative nature of protectionism. The passing of the Smoot–Hawley act raising US tariffs in 1930, against the advice of huge numbers of US economists, was a decisive factor in the depth of the Great Depression. Trade’s share in US GDP dropped from 11.0% in 1929 to 6.6% in 1932 and was still only 7.6% in 1938 on the eve of World War II. US GDP fell by 26% between 1929 and 1933, and was only 2.0% above 1929 levels by 1938.

Following this devastating experience of the Great Depression after World War II the US turned policy through 180 degrees and actively built a globalised world trade order. The US played a decisive role in seven rounds of negotiations under the General Agreement on Tariffs and Trade (GATT) each of which further liberalised world trade. This culminated in 1995 in the creation of the World Trade Organisation (WTO). Every US President from Truman to Obama declared support for freer trade and many acted on it. It is this 71 year old at least verbal commitment to freer trade that Trump’s campaign broke with.


To fully understand the present stark contrast between China and US positions on global trade it is important to realise that the US already began to break with the goal of an increasingly globalised world economy in reality if not in rhetoric under Obama. The TPP and TTIP differed decisively from previous trade agreements under GATT and in creating the WTOs. Their real content was regionalised protectionism for the US beneath mere words on support of freer trade.

This real content was shown extremely clearly in the TPP. The US and China are the world’s first and second largest trading nations and overwhelmingly the largest Pacific trading nations. The foundation of a genuine US orientation to freer trade in the Pacific would have been to negotiate with China. But instead the US deliberately excluded China from the TPP negotiations – confirming that, as numerous Western analysts noted, the TPP’s real aim was not to liberalise trade but to form a bloc under US dominance against China. As US Secretary of Defence Carter stated: ‘In fact, you may not expect to hear this from a Secretary of Defense, but… passing TPP is as important to me as another aircraft carrier.’

The domestic political problem with the TPP for the US administration, however, was that to enshrine the interests of US corporations it tipped the playing field even further against American workers. As well-known US economist Jeffrey Sachs noted of the TPP’s provisions: ‘Their common denominator is that they enshrine the power of corporate capital above all other parts of society, including… even governments… The system proposed in the TPP is a dangerous… blow to the judicial systems of all the signatory countries.’

As the TPP did nothing to improve the position of the US population, indeed would have worsened it, the TPP became politically toxic. All three candidates with major support during the US presidential election and primaries – Trump, Clinton and Sanders – were therefore forced to declare opposition to the TPP. Huge opposition to the TPP existed in the US because it was an attack not only on China but on the US population.

While Trump has in words turned the US from support for free trade and globalisation to protectionism, Obama had already done it in practice with the TPP and the TTIP.

China as the champion of a globalised economy

Trump famously declared during the presidential election campaign he would put a 45% tariff on Chinese imports in the US and would declare China a currency manipulator on ‘day one’ of his administration. As, however, Trump made several wholly impractical proposals during his campaign, such as that Mexico would pay for a wall along its entire border with the US, what Trump will actually do is not yet clear. As the US Peterson Institute noted: ‘If implemented, these proposals [of Trump] would provoke retaliation by US trading partners, unleashing a trade war that would send the US economy into recession and cost millions of Americans their jobs.’ In particular: ‘Industries that manufacture machinery used to create capital goods in the information technology, aerospace, and engineering sectors, which depend on exports, would be the most intensely affected. But the trade shock would also damage sectors not engaged in trade, such as wholesale and retail distribution, restaurants, and temporary employment agencies, particularly in regions where traded commodities are produced. Millions of American jobs that appear unconnected to international trade—disproportionately lower-skilled and lower-wage jobs—would be at risk.’

Putting a tariff on China’s exports to the US would also raise prices for US consumers and thereby reduce US living standards. By being inflationary such price increases would also increase pressure on the Federal Reserve to raise interest rates creating downward pressure on US economic growth. Undoubtedly the very large size of the US economy, which allows great domestic division of labour, and the fact that even Trump does not propose a return to protectionism on the scale of the 1930s, means that the negative effects of protectionism might develop more slowly in the US than in other well-known examples of the failure of protectionism in a modern globalised economy (pre-1990s India, Argentina etc). Nevertheless, turning its back on the advantages of international division of labour would necessarily lead to a slow path of growth of the US economy, and lower living standards, than if it pursued the path of an open economy.

The current problems in the US economy do not stem from its globalisation, on the contrary this has helped prevent any decisive economic decline of the Great Recession type, but of underinvestment in the US economy – a process analysed in detail in my book 一盘大棋?中国新命运解析 (The Great Chess Game?).


There is no doubt that one of Trump’s most popular pledges in the election was to oppose the TPP. The problem for Trump is that the majority of US big capital precisely wants a deal like the TPP. Possibly Trump will conclude that anger over his reneging on a pledge to oppose the TPP would be so unpopular it cannot be done openly. But that merely means that Trump will try to secure the same anti-China results as the TPP through other means.

Nevertheless, Trump’s goal is easier to decide upon than to achieve. It took tremendous efforts to get other countries to agree to the TPP. Abe was desperate for the TPP to be adopted – Japan’s parliament ratifying it even after Trump’s election. Difficulties in the TPP therefore create the opportunity for China to promote for a genuine agreement in the Pacific which expands trade rather than the protectionism which was embodied in the TPP.

China has become the main pillar of globalisation

It is the above processes which create the strategic fact that it is China that has now become the world’s largest single economy committed to free trade and globalisation – although the EU is also at least in theory a supporter of this process and the EU’s most powerful economy, Germany, is an enormous beneficiary of globalised trade. The world rapidly growing major economy with China, India, is also sharply increasing its economic openness. The percentage of India’s economy devoted to trade is, at current exchange rates, now even slightly above China’s. The powerful positive effect of foreign trade is once more confirmed by the fact that the world’s five most rapidly growing non-oil dominated economies since the early 1990s with populations of more than five million – in descending order China, Cambodia, Vietnam, Laos and India – all have high percentages of trade in GDP. Therefore, even if the US moves towards protectionism other rapidly growing economies remain committed to globalisation and China’s decisive task is to place itself decisively among and help lead the process of the rapidly growing economies seeking the advantages of international and globalisation.

China’s policy and RCEP

China’s strategic policy of supporting freer trade and globalisation can be broken down into a series of initiatives which in present circumstances give it key advantages to play a still greater global role – particularly compared to Trump’s approach in the US.

The most important proposal of China is of course to support the Regional Comprehensive Economic Partnership (RCEP) – the proposed FTA between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam) and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand). RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia. China is arguing for them to be concluded as rapidly as possible.

RCEP has numerous advantages over the TPP. In particular, key proposed participants in RCEP are rapidly growing economies (China. India, Vietnam, ASEAN as a whole etc.) whereas the TPP is based on slowly growing economies (Japan, US).

Like China’s existing FTAs RCEP builds on real trading relationships – China takes about one third of Australian exports and over 20% of South Korea’s. With full implementation of the FTA agreement with Australia, for example, 95% of Australian exports to China will be tariff free.

Unlike the TPP and TTIP, which were primarily based on giving international jurisdiction to institutions which would be controlled by a single country (the US), China’s existing FTAs, like RCEP, emphasise harmonisation of national standards with international supervision and interference reduced to an absolutely necessary minimum.


Finally, China has shown its ‘thought leadership’ on globalisation by initiatives which go beyond the approach of the US in GATT and the WTO. These initiatives were based primarily on tariffs, legal changes, regulation etc. They did not address the actual question of creating the material basis for trade. China’s initiatives in One Belt One Road (OBOR) and the Asian Infrastructure Investment Bank (AIIB) go beyond this by laying the basis for practical development of trade, in particular by infrastructure investment. It is for this reason that even before Trump came to office the AIIB and OBOR were attracting great international attention even from traditional allies of the US such as Britain and Germany.


To summarise, in very important matters, such as Trump becoming US president, it is necessary to be precise and not exaggerate. It remains to be seen how much Trump’s protectionist rhetoric is translated into protectionist practice. Nevertheless, even the change in rhetoric is important. China has now publicly become the world’s largest nation supporting and acting as a pillar of globalisation. As globalisation is the process which has brought immense benefits to the world economy, and particularly to developing countries, this creates key international strategic openings for China.

* * *

This article was previously published here on Key Trends in Globalisation and originally appeared in Chinese on Sina Finance.

Don’t believe Tory anti-austerity propaganda

.353ZyesDon’t believe Tory anti-austerity propagandaBy Michael Burke

In a year of unpleasant political surprises, what are the chances that this Tory government will surprise us by abandoning austerity? In reality, they are vanishingly small.

There has been a concerted effort by the mainstream media to portray this government as radically different from its predecessor, even to suggest that it will reverse austerity. But the evidence we have so far suggests exactly the opposite:

  • A lobby to provide the NHS with extra funds as it faces potentially its worst winter ever has been brushed aside
  • Philip Hammond has offered £2 billion of extra funding for housing (as well as soft loans to small builders) over 4 years, when £30 billion a year is needed to meet the housing shortage
  • The planned cut in the cap on social security from £26,000 to £23,000 has just been implemented, and down to £20,000 outside London
  • A large number of other cuts to pensions, to social security and working tax credits have also been implemented
  • The government has just announced the postponement of work to electrify the Great Western rail network in south-west England, a £2.8 billion project. 
  • The Northern Powerhouse remains a slogan, not a project
  • Hammond did announce £2 billion package to combat cyber-crime, specifically motivated as ‘this could lead to war’
This summary of measures could have been taken straight from the Osborne playbook, with cuts to social security, pensions and other entitlements that all hit working people again combined with further cuts to investment. The only thing that is new is this security and immigration-obsessed government has provided a small amount of funding to conduct cyber-warfare because it feels it is falling behind. If the Osborne approach was completely mimicked in the upcoming Autumn Statement, there would also be a new tax giveaway for big business.

There is a fundamental reason for this. The Tories have not implemented austerity because they are ‘the Nasty Party’, although they are. The entire austerity programme, the cuts to public services and pay, cuts to social welfare, cuts to business taxes, further privatisation and cuts to public sector investment all have one central purpose. This is not, as stated, to eliminate the deficit, otherwise the Corporation Tax rate would not have been cut and costly privatisations made, such as Royal Mail or the sale of Lloyds Bank shares.

The purpose of austerity is to restore profitability and this has been a failure. Economic weakness from Brexit is sure to hit profits too. In all likelihood the main effort to restore them will be through increasing the rate of exploitation.

Brexit will make matters worse. Last March the Office for Budget Responsibility forecast (pdf) that GDP growth would be effectively 2.1% per year over the next 5 years and that the public sector deficit would become a surplus by 2018/19. Public sector debt was forecast to fall every year as a proportion of GDP, beginning this year. The real costs of Brexit should be reflected in much more pessimistic forecasts from the OBR on all these fronts.

Even before taking rising prices into account, the level of profits in the second quarter of this year was lower than it was in the third quarter of 2014. Profits are not sufficiently recovering to allow any major reversal of austerity for a government wholly committed to driving down wages and the social wage while giving big handouts to big business.
Of course, some tinkering and publicity-seeking measures are likely, as the government pretends to be on the side of working people. No doubt it will be aided by the extremely compliant media. But anti-austerity activists should be clear. This will be the same old austerity Tories as before, and with new motivation to extend it.
A version of this piece has previously appeared on the People’s Assembly Against Austerity website.

Who are ‘the left behind’?

.690ZWho are ‘the left behind’?By Tom O’Leary

Following the Brexit vote here and the victory of Trump in the US Presidential election there has been much ill-informed discussion of the ‘left behind’, sometimes spuriously described as the white working class who have not benefitted from rising living standards, or even globalisation in general.

It is not the purpose of this article to untangle the web of half-truths, distortions and falsehoods that comprise those statements. To take one example, the first great political and social exposition of the effects of ‘globalisation’ can be found in the Communist Manifesto. This sets out the enormous capacity of capitalism to dominate the globe by raising production up to a new, much higher level and so increase the exploitation of both natural resources and labour. It has nothing in common with radical ‘anti-globalisation’, that is protectionist and increasingly anti-immigrant movements in the Western countries.

Instead the focus here is narrowly on who are the ‘left behind’ in the UK. They are not the old white workers of the former industrial north, as is commonly portrayed. They are youth, dsiproportionately Asian and black youth. These are the very people who oppose Trump and who largely voted to Remain (71% of them).

Table 1 below is taken from a House of Commons Briefing paper ‘Unemployment by ethnic background’ from April 2016. A section of the briefing’s explanatory text is also included. The Table shows that the unemployment rate for people aged 16 to 24 is 14.4%, which compares to an unemployment rate of 3.3% for all those aged over 50 years. But in every age category Asian people are nearly twice as likely to be unemployed and in every age category black people are more than twice as likely to be unemployed. Put another way, if you are young and black you are more than nine times as likely to be unemployed as if you are old and white.

Table 1. Unemployment by ethnic background. Source: House of Commons

There is a gender element too to who is in fact left behind. Table 2 below is taken from the same briefing. In aggregate the unemployment rate for women is lower than for men. But this is somewhat misleading, as the sample size is lower, 610,000 for women versus 750,000 for men. This reflects the fact that women are more likely to be discouraged from the workforce, or are obliged to be carers within the family. So the lower unemployment rate for women shown here needs to be seen in that context.

On this basis, the unemployment rate for women is lower than for men. However, contrary to the general trend the position for Asian women is worse. For them, unemployment is even higher than it is for Asian men. Yet again, the highest rates for unemployment among both women and men is to be found among black women and men.

Table 2. Unemployment by ethnic background and gender. Source: House of Commons

On pay, it is also the case that workers who are not white are paid less than their white counterparts and colleagues, and that this pay discrimination increases with qualifications. Table 3 is taken from a TUC report into black workers’ pay gap. There is a considerable pay gap for workers from all non-white ethnic groups, on average 75 pence an hour. But this rises to a pay gap £1.72 an hour for black workers on average. This pay gap also increases up the qualifications’ scale, so that black workers with a degree earn nearly a quarter less than their white counterparts, £4.30 less an hour.

Table 3. Average earnings by ethnic background and qualifications. Source: TUC
It is a fiction to suggest that the votes for Brexit and for Trump are the ‘left behind’ votes, the victims of deindustrialisation or even its opposite, globalisation. In Britain, the real left behind, much more likely to be unemployed and low paid are youth and especially black and Asian youth. Black people and Asian people in general are also more likely to be unemployed and, if in work, face pay discrimination. Women are also more likely to be discouraged from the workforce, yet Asian women are the sole category of women whose unemployment rate is higher than their male counterparts, even after taking this obstacle into account.

These are the primary victims of the third great capitalist slump and they are the ones bearing the main brunt of its effects. Of course, the overwhelming majority of workers and the poor are all worse off because of the crisis. But the by far the biggest victims are youth, especially Asian and black youth, as well as women. They are the real left behind.

Brexit cannot have a favourable outcome

.850ZyesBrexit cannot have a favourable outcomeBy Tom O’Leary

There is no realistic possibility of Brexit resulting in a favourable outcome. Following Brexit, the living standards of the population will be lower. In addition, the capacity for government spending on public services will fall along with its capacity to invest. As a result, it is likely there would the continuation of current trends, where there is a government-sponsored rise in racism, hate crime and xenophobia, in order to distract from the crisis created by government policy.

Forecasting Brexit effects

Economic forecasting is an inexact science. But its findings are also often presented and understood inexactly too. Forecasts can be presented as a range of probabilities but should nearly always be conditional, as outcomes depend on a series of factors outside the main elements of the analysis. So, for example, it is certain that prices will rise much higher than they otherwise would because of the Brexit-induced slump in the value of the pound. But the precise level of consumer price inflation in 2 years’ time must be an unknown without foreknowledge of the level of global commodities’ prices, knowledge of the ability of firms to reduce profit margins, the response of consumers and so on. Yet there is still the certainty that prices will be higher, and that any tariffs will make prices much higher still. Real incomes and living standards will fall.

So it is with GDP forecasts. There are two main documents setting out the central projections for the economy if Brexit goes ahead. The first is the analysis from the UK Treasury, the second is from the grouping Economists for Brexit. Both have been subjected to critique and readers interested in those can find them here and here.

There are some surprising similarities in the analyses and some huge differences. There are also some important omissions.

Taking first a point of agreement, in discussing versions of ‘Hard Brexit’ which would involve the unilateral removal of all trade barriers by the UK, all sides are generally agreed that incomes fall significantly, although the Treasury is the least concerned with this important matter. However, in the model formulated by the principal author for Economists for Brexit Patrick Minford prices will fall much further than incomes, as the UK economy enjoys the fruits of an unfettered and largely unregulated free trade. As a result, in this scenario real incomes rise significantly. This is flatly contradicted by the UK Treasury analysis and the Brexit economists’ critics. Finally, there is widespread confusion about the role of investment in the economy, which means even the most apparently pessimistic scenarios may underestimate the negative effects.

Falling prices?

Patrick Minford did not receive as much publicity as Alan Walters in terms of his influence on the Thatcher governments. This was almost certainly a mistake as his work was crucial in formulating the ‘supply side miracle’ of Thatcher’s efforts to create unfettered markets in goods, capital and labour. Everything from banking deregulation and Big Bang through to privatisations of state -owned industries, the end of the ‘closed shop’ and now zero-hours contracts all owe something to Minford. He is an important figure in recent British economic history. 

He also bears some responsibility for the entire economic debacle of this period and now the crisis caused by the Brexit vote. This is not an ad hominem attack, but is used to show that Minford’s ideas have already been tested in the real world and they have been disastrous. He begins with the reasonable proposition that barriers to trade impose a cost to the idea that the removal of all barriers must be a benefit. This is clearly logically false. There is a cost to imposing fire safety standards on all new homes and public buildings. But there is a far greater cost if buildings frequently burn down and lives are lost.

The Minford claim that prices will be lower after Brexit rests on two spurious propositions. The first is that prices are on average 10% higher in some EU countries (or were 14 years ago when the data Minford relies on was collated!) so that these must arise from non-tariff or regulatory barriers inside the EU, which will no longer apply if his ‘Britain Alone’ model is adopted. Secondly, he argues, ignoring both geography and history, that other countries will supply those same goods or services to the UK at prices equivalent to the non-tariff EU prices. Notably in his view, all of this benefit will lead to the elimination of British manufacturing and the huge growth in inequality, even while the economy as a whole is boosted by 4% over the long run. 

This is nonsense. Minford’s analysis takes no account of the quality of products. Take housing, the single largest component of household expenditure. The UK housing stock is much more dilapidated than the EU average. Approximately half the proportion of homes in the EU are more than 70 years old compared to Britain. Price should be adjusted for quality, and Minford makes no effort to do that. Higher prices can just as easily denote higher quality goods.

But the assertion that other countries will meet the removed EU goods and services is outlandish on two grounds. The British economy is tied through a network of increasingly complex supply chains to the European economy. If those supply chains are severed, it will not be by US or Chinese firms inserting themselves. They cannot under EU rules pass themselves off as EU producers once the UK has left. Nor would they be interested in removing all the non-tariff barriers that protect their firms just to sell into the British economy, which is simply not that important on a world scale.

On this issue, the Economists for Brexit are wrong and their critics are right. Prices will rise post-Brexit. They are rising already. As all analyses accept that incomes will fall, this can only mean that living standards as whole will fall significantly.

Misunderstanding investment

The Economists for Brexit pay almost no attention to investment, despite frequent references and a chapter nominally devoted to it. Instead, it is simply asserted that investment will rise following the (spurious) forecast of vastly improved trade at lower prices. 

But the Treasury analysis, while much more serious in its examination of the effect on investment, is sorely lacking. In effect, the focus is almost exclusively on the negative impact on Foreign Direct Investment of leaving the EU. As FDI is defined as the ownership of 10% of equity or more, FDI conflates two different things, a change of ownership via overseas acquisition of equity and actual fixed capital investment.

The UK economy is in precarious position, with a record current account deficit. FDI inflows offset that, and without it living standards would immediately fall even further. This would be expressed as a further slump in the currency and rising long-term interest rates. 

This is a run-down of UK assets to finance UK consumption that exceeds UK production. It is only possible to begin to reverse that with actual fixed capital investment to raise production. 

However, Brexit itself makes this both less likely and less effective. Private sector investment becomes less likely with Brexit because investment is driven by returns, the key factors being the size and growth of the target market. Outside the EU, the UK economy is a far smaller market than a component of the Single Market. It will also experience slower growth. 

All UK investment also becomes less effective outside the EU. As Adam Smith demonstrated long ago the effectiveness of investment is determined by the size and scope of the market, including, but not confined to well-known factors such as ‘economies of scale’. As the size of the market in which the UK can operate is restricted, the efficiency of investment declines.

As a result, of the two main scenarios outlined by the Economists for Brexit makes little sense, while the UK Treasury analysis underestimates the long-term effects of leaving the EU. Things are likely to be worse than they suggest.

No ‘People’s Brexit’

It would be possible to overcome all of these negative factors if investment were to rise by a large factor. But as we have seen private sector investment will fall.

In effect, in order to offset these negative effects public sector net investment would need to both replace reduced private sector investment and increase the aggregate total to compensate for the lower efficiency of investment outside the EU. From about 1.5% of GDP, public sector net investment would have to rise to something like 20% of GDP. This is not a realistic possibility in the current economic and political circumstances in Britain.

All likely and realistic Brexit scenarios entail a significant diminution in the living standards of the population. This will include rising prices and lower real incomes, job losses especially in manufacturing and high value-added sectors as well as cuts to public services as government finances deteriorate. The Tory government over 6 years has not been able to generate popular enthusiasm for policies that have led to falling living standards. It has deliberately fostered racism, Islamophobia and xenophobia as a distraction, with some effect.

Labour cannot possibly stand on this ground. Aside from the moral bankruptcy and the economic illiteracy this would entail, it could prove fatal. The Tory party can and does subsist on promoting reaction. Labour would risk annihilation as its natural supporters, who overwhelmingly voted Remain, deserted it in droves.

The arguments used to support a ‘Lexit’ are spurious and misleading. Overseas workers cannot possibly drive down wages as on average they are more highly paid then UK workers. They are net contributors to public services, not a drain on them. They are not taking anyone’s jobs; record levels of immigrant numbers coincide with record low unemployment. 

There is no prospect of better protections for workers, greater environmental protections, better health and safety rules under any likely Brexit government. Unwilling to increase public investment to the required level, they will tolerate or even foster a race to the bottom. It is impossible to fight neoliberalism via Brexit. The UK will become an archetype of neoliberalism.

More technical arguments that, for example, EU state aid rules prevent a radical programme of nationalisation are equally spurious. Jeremy Corbyn and John McDonnell do not propose a large-scale programme of nationalisation, for very good reason. There are not the spare funds to purchase the equity of the energy, transport, building and other firms and the banks. And the political situation simply does not allow any nationalisation without compensation. It would just be posturing to suggest that court orders ruling in favour of private property rights would be overturned or physical seizures of property take place.

The limited retrieval of the rail franchises as they fall back into public hands that is planned is realistic and would not at all contravene EU state aid rules. On the contrary, after the Brexit vote the UK is now set to hand out state aid to major manufacturers simply to keep them here.


In the concrete circumstances of the UK economy Brexit can only lead to a fall in living standards. Prices will be higher, real incomes lower, and living standards will fall. All political forces who wish to raise living standards will have to fight against it, or overturn it if necessary. There can be no idea of embracing Brexit as a road to prosperity. That is an impossibility in the actual circumstances of British politics and the British economy.

No pointers to a successful Brexit

No pointers to a successful BrexitBy Tom O’Leary

Brexiteers’ crowing over the latest GDP data and the decision by Nissan to invest further in its Sunderland plant is utterly foolish. The negative impact of the vote will take place primarily over the long run, will be felt in terms of trade and above all in investment, and will accelerate after Article 50 is invoked and most especially if Britain actually leaves the EU and the Single Market, scheduled now for some time in 2019.

Yet even in the latest events there are clear signs of the problems that will mount. As a series of company announcements have already shown, the first is that prices will rise. By how much is not solely due to the 17% devaluation of the pound but will also be determined by the trend in global commodities’ prices. The certainty is that prices will be much higher than they otherwise would have been, lowering living standards and real incomes.


The GDP data also point to the problems ahead. Aside from the services sector, the rest of the economy fell into recession, as shown in Chart 1 below. Taking the growth rate from a year ago, services have expanded by 3%. But industrial production is just 1.2% higher, manufacturing is 0.4% lower, construction is down 0.2% and agriculture is 1.4% lower.

Chart1. GDP and Components Growth Rate in Q3 2016
Source: ONS

If the services sector itself is examined, it can be seen that the hotels, restaurants (the sectors that benefit from tourism) grew rapidly and along with the business services and finance. These two benefited from the sharp devaluation of the pound and the interest rate cut by the Bank of England. Together these two sub-sectors contributed 0.3% to GDP growth. The rest of the economy grew by just 0.2%. 

Over the long run, as Nigel Lawson was forced to discover, it is not possible to build a ‘candyfloss economy’ based entirely on services. Not only are the productive sectors high value-added, high productivity and higher paid, without them an economy becomes entirely subject to the gyrations of the world economy and world prices, the weakest link in any general crisis. As a result it is not possible to build prosperity over the long without manufacturing and production. In fact the entire British long-term economic crisis that culminated in the referendum vote is characterised by this decline of the productive sectors and the over-dependence on services.


The Nissan deal has been kept secret. The Times reports that Nissan was provided with a written assurance that it would face no detriment in its trading position in the UK. There is speculation that this could be financial compensation for any tariffs, a promise that the car industry will be exempt from tariffs, or a pledge for indirect subsidies via R&D or similar areas.

One of the fantasies of the Brexiteers is that leaving the EU will allow the UK to set its own rules. The ‘hardest’ Brexit of all is to fall back on WTO rules. But there is a clue in the name. The WTO has, among other things a plethora of ‘anti-dumping’ rules. Any subsidy to any particular firm or sector would breach those rules, leaving the UK open to penalty under WTO rules and anti-dumping suits by any country which was importing those goods. The same would apply to any government providing R&D subsidies. Nissan will be aware of all this, even if UK ministers for Brexit are not. It can only be imagined that it has received a promise that the government will do all it can to remain in the Single Market. We shall see.

Corbyn is right. Migrants don’t drive down wages

yesCorbyn is right. Migrants don’t drive down wagesBy Tom O’Leary

In his recent speech to Labour Party conference Jeremy Corbyn said, “It isn’t migrants that drive down wages, it’s exploitative employers and the politicians who deregulate the labour market and rip up trade union rights.” This is excellent and entirely correct. It is probably the best statement ever made by a Labour leader on this issue.
It used to be regularly argued, and not just by far right or fascist groups, that immigrant workers take British workers’ jobs. This has more recently been supplanted with the notion that migrant labour has driven down wages. Both are equally wrong.

The claims that immigrants take jobs became harder to sustain as the level of the overseas migrant population reached record highs in Britain at the same time as a record high level of employment overall and a record high for employment of UK-born workers. Even so, the most recent Tory party conference tried to revive the racist claims, with lists of foreign workers, removing overseas doctors from the NHS and prioritising immigration controls over economic prosperity. Some of these have already fallen apart while they would all be deeply damaging to the UK economy, as well as fanning the flames of racism.

In fact, as shown in Chart 1 the record number of migrant workers now coincides with a record employment rate for workers in the UK. Since the beginning of 1997 the number of migrant (non-UK born) workers in the UK has risen from just under 2 million to nearly 5.5 million in mid-2016. At the same time the employment rate of workers in the UK has risen from 70.8% to 74.5%, a new all-time high (the unemployment rate is also close to its all-time low at 4.9%). No-one is having their job taken by a migrant worker.

Chart.1 Record Employment Rate in UK, % & Record Level of Migrant Workers, 000s

Instead, the anti-immigrant rhetoric has more recently focused on the claimed negative impact on wages arising from immigration. As this false idea has some sway even in the labour movement it is worth dealing with the false economic logic which forms its basis.

Employment and wages

The false claim that immigration drives down wages has long been exposed as relying on the ‘lump of labour fallacy’ . The long history of capitalism in general is that more and more workers across the globe are brought into production. That is still happening to this day. At the same time, for the overwhelming majority of those workers their material conditions have risen enormously over the same period. The growth of the workforce has been matched by the growth in the work available. This is because of the growth of the productive capacity of the global economy, in which workers fight for a share. 

Instead the attack has switched to the alleged impact of immigration on wages. As the discussion of this issue is so loaded with emotion and confusion in a country like Britain, it is important to set out some clear points of reference.

Objectively, there is no difference between a worker who travels ten miles, hundreds of miles or thousands of miles for work. There is of course no difference in terms of their skin colour, religion, gender, sexuality or nationality. Wages in any city or town are not more or less affected by the immigration of a worker from the next county than from a different continent.

Yet the idea that wages are driven down by immigration, that the price of labour (wages) is determined by the increased supply of labour from migration is closely related to the lump of labour fallacy. They both depend on the notion there is a fixed amount of work or fixed amount of wages, and that in both cases these are adversely affected by increasing the supply of labour through immigration. For the lump of labour, now read the ‘pool of wages’. These are false notions.

Wages have an absolute floor and an absolute cap. The absolute floor is set somewhere below the minimum levels of subsistence for the continued existence of the workers. In some cases, where slavery existed within capitalist production such as in the Southern United States or the European colonial powers’ operations in Africa and elsewhere, the workforce had to be constantly replaced as lives were destroyed in the production process. 

The absolute cap on wages is set by the absolute level of value created by all firms (which each individual firm shares in). Firms cannot sustainably increase the level of wages beyond the total value created, otherwise all firms would go bust. In addition, the value created will tend to rise as capital is accumulated over time (even though, as now there may be distinct periods of crisis when there is little or no accumulation). As capital accumulates and the productive capacity of the economy rises, the absolute cap on wages will also rise.

Yet most wages are set well within those bounds and by different factors. It is widely understood that there are two principal destinations for the value created in an economy. In Marxist terms, these are the value created by labour a portion of which is claimed by the capitalists, ‘surplus value’. In mainstream economics there is instead a focus on the labour share of national income and capital’s share of national income. Income is not the same as value so these are an only approximate guide to total value created and the portion claimed as surplus value.

These proportions or ratios of value/income are not stable over time. In the Western economies the labour share of national income has been falling for a prolonged period. Chart 2 below shows the OECD estimate of the labour share of national income in selected groups of OECD economies from 1969 to 2014.

Chart 2 Labour Share of National Income, 1969 to 2014

As the chart shows there has been a dramatic decline in the labour share of national income. This is sometimes and mistakenly attributed to the forces of globalisation, that somehow workers in poorer countries have ‘taken the jobs’ or driven down wages in the advanced industrialised countries. This is simply a geographic variant on the ‘lump of labour’ or ‘pool of wages’ notions.

Chart 3 below the level of labour productivity in the G20 economies and the real wage index from 1995 to 2013, which includes the period which is regarded as one of accelerating globalisation. If labour in the advanced countries was being undercut by labour in poorer countries it would be extremely difficult for there to have been a rise in labour productivity in those countries. Production, especially high-value production would have been shifted overseas.

Instead, the chart shows that the rate of exploitation in the G20 increased over the period. A greater proportion of the value created by labour was claimed by capital as surplus value; the capital chare of national income rose.

Chart 3 Labour Productivity and Real Wage Index 1995 in G20, 1995 to 2013


As the chart shows, the output per worker in these advanced economies rose more than three times as fast as the rise in real wages, which were close to stagnation. The workers in the advanced industrialised countries were not being undercut by workers in the ‘Third World’. They were being robbed even more by their employers in the advanced countries.

Within the absolute caps and floors set for wages by the value created by labour within all firms and the subsistence of the workers, the general and continuous contest between labour and capital over the share of that surplus is set by the class struggle. Over a prolonged period this is a struggle the capitalist class has been winning in the advanced industrialised countries.

In the OECD economies the proportion of workers in part-time employment has risen from 5.4% in 1960 to over 20% in 2015. Union densities were 35.6% in 1975 and had fallen to less than half that, just 16.7% by 2014. It is not workers outside the advanced industrialised countries who have lowered wages in the G20 countries. It is the capitalist class in the G20 which has robbed workers of a greater proportion of the value they create.

Of course, it is in the interests of those same capitalists to foster the idea that someone else is to blame. This partly accounts for the tenacity of these very false ideas. It also explains why far right and fascist groupings are tolerated or even promoted by big business, sometimes even funded by them.

But it is impermissible for the labour movement to adopt these ideas or even to adapt to them. This is not primarily a question of political morality, although that should enter calculations. The reason the labour movement as a whole should thoroughly reject any notion that jobs or wages are lost to migrant workers is primarily self-interest.
There is no example anywhere in history of a ruling class that offered to make one section of workers better off at the expense of others and that made good its promise to the former. Yes, it is possible to systematise discrimination against one of more sections of workers and make their lives an absolute misery, or even worse. But the distractions of racism, xenophobia, frenzied attacks on religious or national groups and so on are precisely that; designed to distract from the absence of any strategy to lead society out of its morass. The workers not directly under attack are only ever relatively better off. Their absolute conditions never improve as a result, and often worsen. The poor whites of Southern United States were immeasurably better off than the black slaves. But their living conditions did not improve, and ultimately the whole parasitic, bloodthirsty society had to be crushed by the industrial North.

If the labour movement pays the slightest lip service to these lies it does itself great injury. It disarms itself in the class struggle by agreeing that it is foreign workers, not rapacious bosses who have driven down wages, increased rents and increased prices. 

In fact the true position is that migrants add to net prosperity for the whole of society. Even if that view is not widely accepted in Britain, we may soon be provided with incontrovertible proof that it is correct. Unfortunately, this may well be a negative proof, as the Tory Government clearly aims to reduce immigration even at the expense of falling living standards. A position that used to be confined to UKIP’s cranks is now government policy. All our living standards will fall further as a result, if this policy is implemented. The labour movement has every reason to oppose its implementation.

Don’t be fooled: Tory austerity will continue

yesDon’t be fooled: Tory austerity will continueBy Matt Willgress

AT THE recent G20 summit, the new Tory Prime Minister Theresa May refused to rule out more austerity — including cuts to welfare — if the British economy suffers as we approach Brexit, and last week’s Conservative Party conference has confirmed that the new government is still tied to the failing, ideologically driven austerity agenda of the Cameron and Osborne years. 

Even ex-chancellor George Osborne had announced in March that he had “no further plans to make welfare savings” before the 2020 general election. 

Last month May said: “Obviously we have to look and see what happens in the economy and how the economy does start to move — if there is any further movement post the Brexit result. 

“Obviously anyone will be looking very carefully at how the economic situation pans out.” 

May also made it clear that there will be no end to Tory austerity, saying: “What I’m clear about is we’re going to continue as we have done in government over the last six years — ensuring that we’re a country that can live within our means.” 

This followed the new Chancellor Philip Hammond saying that he may have to “reset” the government’s tax-and-spend policy if the economy starts to go downhill this autumn. 

Indeed, the government has also said that the decision on whether to make such changes to tax-and-spend policy will be made in time for the Autumn Statement on November 23. 

Contrary to many mainstream media reports that austerity is now over, which were repeated again throughout the Conservative Party conference, the government is not only refusing to offer any guarantees regarding further cuts, but it should also be remembered that this is despite the continuous Tory attacks and cuts since 2010, and the fact that deep further cuts are already underway or due to come.

Last week’s Tory conference further showed that the government is still tied to austerity and has no grasp of the scale of the challenge facing the British economy in terms of chronic under-investment. Take for example housing. 

The Tories then announced £2 billion of public money for housing and £3bn in private-sector loans to small builders. 

This would only build 33,000 houses over five years and is totally inadequate. This is in a situation where we need 200,000 new homes to be built a year just to stand still. 

In contrast to this approach, what most serious economic analysts are agreed on is that the economic uncertainty following the EU referendum result means that the British economy needs more investment, not more cuts.

Investment has fallen in all G7 economies, but British levels of investment are 4 per cent of GDP below the average. 

Just to make investment in Britain up to this level you’d need £80bn additional investment per year over a parliament. In contrast to the failed Tory approach, Jeremy Corbyn’s re-election and the policies set out at this year’s Labour conference have seen us stake out how a Labour government would deliver a £500bn public investment programme to build our infrastructure, manufacturing and new industries, moving us to a low-carbon economy, delivering good jobs and tackling the housing crisis.

This is the credible — and transformative — economic strategy that Labour needs for a general election victory and will raise living standards in Britain. 

Therefore, our urgent work in both opposing the cuts nationally and in our communities, and popularising a progressive alternative to ideologically driven austerity, becomes even more vital, alongside building electoral support for Labour. 

Following this summer’s leadership campaign and party conference, the Labour Assembly Against Austerity (which brings together support for the People’s Assembly Against Austerity movement within the Labour Party) will continue a series of campaign initiatives and events to bring about this change and win the argument that austerity is a political choice, not an economic necessity. Please join with us!

· The Labour Assembly Against Austerity is hosting a major national conference on Saturday October 22 entitled Winning With Jeremy — Labour’s Alternative to Tory Austerity. Initial speakers include: Jon Trickett MP, Diane Abbott MP, Richard Burgon MP, Catherine West MP, Professor Victoria Chick, Christine Shawcroft of Labour NEC, TSSA general secretary Manuel Cortes and Unite assistant general secretary Steve Turner. 10am to 5pm at Student Central, Malet St, London, WC1E 7HY. Register online at or on the door (Tickets £10/7).

This article was first published by the Morning Star, where it can read here.

Pounded by Brexit

Pounded by Brexit
By Tom O’Leary

The British economy is extremely dependent on inflows of overseas capital. As a result, it is one of the last countries that should ever contemplate leaving the EU without a serious plan for reviving the economy with investment and trade. As we now know, no such plan exists, serious or otherwise. Instead the theme of the Tory party conference was not ‘Britain open for business’ or a similar claim of questionable authenticity. The message from the Tories was simply ‘foreigners go home!’.

Unfortunately, for the overwhelming bulk of the citizens of this country wherever they were born, the practical understanding of economics by major international investors is considerably greater than the leadership of the Tory party. Those overseas investors whose willingness to lend to Britain is decisive for living standards understand that any country whose government insists on cutting itself adrift from the world’s largest trading bloc, is reckless about its economic planning and which is determined to push out a section of its workforce vital to its prosperity will not hold the same attractions for investment as previously.

Chart 1 below shows the financial balances of different sectors of the economy over the last two quarters. The Rest of the World represents overseas investors, by far the biggest lender in the economy as a whole. In the first and second quarters of this year overseas investors lent the UK economy £26.5 billion and £29 billion respectively, much larger than in the same period last year. Without this lending the other sectors of the economy combined would have to sharply increase their own savings/reduce their borrowings. This would entail a sharp reduction in expenditure, either falling Consumption or falling Investment or both in order to bring the domestic sectoral borrowing and lending into balance.

Chart 1. UK Net Sectoral Lending, Q1 2016 and Q2 2016, £bn
CG + Central Government, LG = Local Government, PC = Public Corporations, FC = Financial Corporations, PNFCs = Private Non-Financial Corporations, HH and NPISH = Households and Non-profit sectors, RW = Rest of World
Source: ONS
Net borrowing from overseas is the necessary counterpart of the huge current account deficits the UK economy has been incurring. The current account is the sum of all payments between an economy and the rest of the world, comprising its net trade balance and its balance on financial transactions. The current account deficit reached a new record low at the end of 2015 at 7% of GDP, although it has since recovered modestly (which may be a seasonal effect).

The sharp deterioration in the current account balance has arisen because the persistent trade deficit has combined with a fall in the level of payments from overseas that the UK economy receives from its holding of overseas financial assets. This seem to be linked to the shrinking and international retreat of the UK-based banks in the wake of the financial crisis and their forced sale of overseas assets, or their most profitable assets.

Chart 2. UK Current Account Balance, as % of GDP
Source: ONS

The UK economy is therefore extremely vulnerable to any decline in an overseas willingness to lend. If this occurs it must be countered by a relative decline in living standards, a forced reduction in expenditure (private or public, Consumption or Investment) and higher interest rates to attract overseas investment, or some combination of these.

There is of course no zero bound on the lending of overseas investors to the UK. Instead of merely reducing their lending and/or demanding a higher interest rate to do so, they may become net sellers of the considerable UK assets they have built up over previous decades, pausing only to pick up some newly cheap assets on the way. The Government’s resumed privatisation programme beginning with its remaining stake in Lloyds Bank might fit this description. But this in turn would cause further structural outflows from the UK economy as the yield on those cheaply-purchased assets flows overseas.

This is the importance of the sharp recent decline in the value of the pound and the rise on the interest rates on Government bonds (gilts). The rise in gilt yields means that taxpayers are forced to increase their interest payments, primarily to attract overseas capital. 

Sharp currency devaluations of this kind effectively reduce the international purchasing power of all income denominated in the domestic currency, in this case pounds. As a result, there will be improvement in the current account and trade balances, as imports become too expensive, some exports rise and the value of the yield on overseas assets increases when converted into pounds.

But this is in effect an enforced ‘improvement’. In popular phraseology, an economy living beyond its means has been forced to tighten its belt. Net domestic savings are negative, and overseas investors can choose not to lend to the UK economy. The occasion of this is the outcome of the Brexit vote and the Tory leadership’s determination to pursue ‘hard Brexit’.

It should be absolutely clear now to all except the wilfully ignorant that the current crisis actually impoverishes the overwhelming majority. All of these are Brexit effects, even before Brexit happens. The Tory party conference signalled that the priority would be anti-immigration, not pro-growth through the Single Market. Blocking access to the Single Market and attempting to lower immigration will both have the effect of lowering living standards further, even when the pound eventually finds a floor.

The alternative is equally clear. The UK should not leave the Single Market and should embrace its essential component Freedom of Movement as both are decisive for future prosperity. Logically, it would be foolish then to leave the EU which simply means having no influence or vote in future developments and would probably entail a sharply increased Budget contribution. Brexit is making us poorer.