The twin blows of Brexit and the pandemic have devastated the UK economy, leaving a legacy of slow growth, debt and deficits.
Since the 2016 vote to leave the EU, the economy has grown by just 1.8%. By comparison, the US economy expanded by nearly 9% over the same period. As both public and private investment has dried up, living standards have fallen and public infrastructure and services have deteriorated badly.
UK productivity has also fallen, being overtaken by Germany, the US and even France (not renowned for its productivity).
Public debt is just under 98% of GDP (90% excluding Bank of England borrowing) and last year’s budget deficit was 4.4% of GDP.
With tax levels set to hit the highest in Britain’s post-war history, it will be hard to find revenue to reform the National Health Service or education sector, or to invest in Labour’s promised investments in ageing public infrastructure and tackling climate change. New taxes on oil and gas companies will not be enough.
Starmer and the Chancellor of the Exchequer, Rachel Reeves, will be mindful of what happened when Liz Truss and her Chancellor, Kwasi Kwateng, tried to spend unfunded money. Truss is the shortest-serving Prime Minister in British history, lasting just 49 days. Raising debt is not a realistic option.
The challenges facing Starmer and his colleagues may not be of their making, but they are daunting and constrained by the UK’s financial constraints.
The same is true in France, but France’s debt and budget deficit are unlikely to stop Marine Le Pen’s Résemblement party or the NFP from embarking on a huge spending spree, even if they win a majority.
France’s budget deficit is 5.5% but was expected to fall to 5.1% this year after President Macron made steep spending cuts, some of which have yet to be implemented, well above the European Union’s 3% limit.
The debt-to-GDP ratio is 112% and rising, compared with 65% in Germany and about 90% on average in the euro area.
NFP’s far-left leader Jean-Luc Mélenchon declared victory and vowed not to negotiate on the coalition’s policy platform, which includes lowering the retirement age from 64 to 60, significant spending on education, health and climate change, a higher minimum wage, higher civil servant wages, pensions linked to the minimum wage, and a freeze on energy and food price indexes and prices.
The results of the two elections, one well expected and the other surprising, and the fiscal situations of both countries preclude radical policy options.
The government would pay for the measures with a wealth tax, an inheritance tax, an exit tax on those who move their tax residency outside of France, and 14 new tax brackets with a top rate of 90 percent. An excess profits tax would be imposed on French companies that make above-average profits, and corporate tax breaks would be rolled back.
Mr Mélenchon’s faction is not large enough to sway the outcome within a coalition of three roughly equal groups (the other two are more left-leaning than far-left).
What is more likely is that if a functioning government is formed (and it is far from certain), a pragmatic deal will be struck between Macron’s renaissance and the more moderate left, demanding left-leaning policy concessions as the price of cooperation.
A slow, gradual and, for Macron’s political fortunes, French retreat from efforts to stabilise France’s finances would invite a response from the European Commission, which can impose sanctions on EU countries that lose fiscal discipline.
UK productivity has also fallen, being overtaken by Germany, the US and even France (not renowned for its productivity).credit: AP
The European Central Bank also has the power to intervene – or not – in bond markets if investors become worried about the economic direction chosen by France’s new parliament.
The fear of EU intervention itself imposes a degree of discipline, as demonstrated by the right-wing, eurosceptic government of Giorgia Meloni in Italy, which is on track to keep its budget deficit below 3% even as its debt and debt-to-GDP ratio continue to rise.
The results of the two elections, one well expected and the other surprising, and the fiscal situations of both countries preclude radical policy options.
That’s probably a good thing, given how extreme some of the more extreme agendas have been for France and Europe.
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Something more than a piecemeal approach of fiscal constraints seems necessary to wake the UK from its post-Brexit lethargy, but this is unlikely to come to fruition.
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