How will Britain’s economic chaos pan out?

Britain is suffering mounting economic chaos as supply chains break down. The government shrugs – these are just teething problems, the Prime Minister, Boris Johnson, suggests, as Britain finds a new normal as a high-wage high-productivity economy. Is this the nonsense it seems to be at first sight?

It doesn’t help that reporting on the emerging problems is very superficial – simply the regurgitation of statements put out by interested parties with no attempt being made get to the bottom of things. The government chooses to dissemble rather than inform. The current petrol crisis, running into its second week here in Sussex, even if it is easing elsewhere, is a case in point.

The government blames it on consumers – or a surge in demand caused by “panic-buying”. After the first few days this was clearly nonsense. People were running out of petrol. Such evidence as we had from the queues outside petrol stations, admittedly anecdotal, was that most people had delayed filling up, and were now desperate. And yet nobody seems interested in trying to understand what was really happening. The government kept on repeating the tangential but irrelevant fact (if it is the case) that there was plenty of petrol at the depots, followed by the non-sequitur that if people simply behaved normally the situation would right itself quickly. This morning the BBC Today programme interviewed a forecourt manager in Kent – and suddenly things started to make a bit more sense. Instead of the normal four fuel deliveries in the last week he had received just two. The current situation had come about because supply problems over the summer meant that forecourt stocks had run low, so that the slightest blip was enough to knock the whole system out of kilter. He didn’t say, but it was easy to infer, that a continuing shortage of deliveries meant that the system couldn’t right itself. This is fundamentally a problem of supply, not demand. The government’s tactic of increasing the number of tanker drivers, including by the use of the army, starts to make sense. It wasn’t simply a confidence-building measure, as ministers seemed to be suggesting, but an attempt to fix a broken system.

And what is happening to motor fuel is being repeated across many other sectors. A lethal combination of a hard Brexit, restrictive immigration rules and the covid-19 pandemic is delivering a series of critical labour shortages. The most notable is that for heavy goods vehicle (HGV) drivers, which is behind the fuel crisis. But it is far from just this – there is an emerging crisis on the slaughtering of pigs, for example. Problems emerged in the summer, or before; businesses did what they could to manage, but at the cost of resilience; as difficulties arise, the system breaks down. A small uptick in motor fuel demand broke the distribution system and it requires an influx of additional resources to fix it; the large, seasonal uptick called Christmas is approaching, covering all manner of goods (though hopefully not motor fuel). Muddling through could easily tip into breakdown in many parts of the economy.

The government’s problems are both in ideology and competence. Ideologically the government wants to move to a different sort of economy, less reliant on cheap, imported labour. Its leaders also believe in the problem-solving capabilities of free markets and private enterprise, and the need for government to step back. They fully expected teething problems following Brexit and the roll back of immigration, but they expected that businesses would adapt and solve these problems without the need for government intervention. So they shrugged off the early warning signs. And for the most part ministers lacked the competence to see how problems could become unmanageable, and what the best interventions might be. It doesn’t help that the public appears unwilling to hold the government to account, and seems happy to accept that “stuff happens” and that it is all somebody else’s fault. So we have strategy but no tactics.

Does this strategy make sense? I always felt that the strongest case for Brexit was what I called “the hair shirt” one – that Britain had it too easy in the EU, and was relying on cheap imports of both goods and labour. Brexit could force the country to raise its game, and move to higher productivity. Living standards would fall in the short-term, but the result would be more sustainable. What other countries have succeeded in reaching this high-wage high-productivity model? Not the US, where high levels of inequality make cheap labour plentiful in many places, and where the currency can be kept at a high level to make imports cheaper. The most obvious examples of the are in Scandinavia, and Denmark and Sweden in particular. These are obviously not such good exemplars for Conservatives, as they have achieved this within the European Union. Switzerland may be a more a congenial example, though it has opted for a higher level of European integration than Britain has. However there are also the examples of Canada, Australia and New Zealand – which are doubtless more acceptable. Japan, perhaps, is another case. But all these countries have built their success on strong exports, in agriculture, manufacturing and mining. Britain no longer has the potential for agriculture or mining exports on the scale needed; its manufacturing has been hollowed out. There may be alternatives, perhaps based on the country’s world-class university sector. Various aspects of health technology seem to me to be the most promising – especially since the centralised structure of the NHS provides opportunities for data mining (if that’s the right word). There could be a path through to the sort of wealthier and more equal society that the government seeks, or says it does.

But it is hard to see how the country can get there without serious investment, led by government. The education system is an obvious case in point. Universities look to be in relatively good health, so long as the supply of foreign students can be maintained, which means allowing successful graduates to stay in the country if they wish. The obvious gap is in technical education, to fulfil the many mid-level jobs that a high-productivity economy needs, as well as making the best use of the country’s Human Resources. Clusters of technical excellence also need to be developed across the country – this is best led regionally by empowering regional and local government. I also think that a better-resourced health service is required, both to supply the quality of service a country of Britain’s income level should expect, and to be the anchor for an expanding private health economy, developing new treatments and technologies that can be applied worldwide. These investments would need to be financed. If a government had the courage of its convictions, it would do a lot of this through borrowing – as the investment should yield a bigger money economy to tax in future. But doubtless more tax income would be needed too.

And yet the government has no such clarity. Rishi Sunack, the Chancellor of the Exchequer, talks of fiscal prudence and even future tax cuts. Unless he means to do the opposite of what he says (a possibility that this government is quite capable of), this is a bad place to start. A period of cuts to areas that need more money is beckoning. Meanwhile the government urges businesses to overcome labour shortages by raising wages. This at a time when one of the government’s key policies is a public sector pay freeze. Wage rises may be a good thing, but they are also liable to lead to price rises for the goods that people buy – a process that could lead to intolerable pressure through the economy. It is all very well to hope for higher productivity, but this is hardly feasible in many of the areas under stress – such as HGV drivers.

Where is this heading? The government has already been forced to “temporarily” relax immigration rules for HGV drivers and some others. Much more of this is likely – the government will try to tackle the shortages of “low-skilled” workers though temporary immigration visas. This is a strategy that many countries have followed, and it rarely goes well. It either fails because the jobs aren’t attractive enough, or more likely, it will simply draw in an underclass of highly exploitable workers from poorer countries, which could form the basis of poorly-integrated immigrant communities of the future, as the idea of “temporary” gets ever more stretched. To its credit, the government is clearly alive to the dangers, but it may find it has little choice. Another safety valve for the economy is increasing imports – though this won’t reduce the dependence on HGVs – as the country proves too small to sustain productive supply chains by itself, it can make use of those from abroad. That can be financed by the sale of ever more assets such as property and businesses to foreigners – perhaps the real meaning of “Global Britain”. This will be no more appealing to patriots.

And meanwhile in one part of the country an interesting economic experiment is taking place. Northern Ireland has one foot in the EU single market, and an open border with the Union. This has created supply chain problems with the mainland and empty supermarket shelves. But they didn’t suffer from petrol shortages (or not to the same critical extent). As the province’s supply chains become more integrated with the Irish Republic, and thence the wider EU, perhaps it will find things easier than its compatriots over the water.

I shouldn’t underestimate the resilience of Britain’s economy. Perhaps the stresses will indeed push the country towards a more modern economy – electric cars certainly look more appealing now. But for once I’m not optimistic.

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