In conversation with Chris Giles, Economics Editor for the Financial Times: Britain, Brexit and the Budget

May

Following the announcement on Wednesday evening that Mrs. May had finally agreed a draft withdrawal deal, the attention of the nation has been on the response of the Cabinet. Thursday saw the resignation of a number of senior ministers, including the Secretary of State for Exiting the European Union, Dominic Raab, who claimed that he could not support a deal ‘where the EU holds a veto over our ability to exit’. He is amongst the most senior of an onslaught of Conservative MPs to have indicated displeasure with Mrs. May’s proposal and it is expected that in the coming days a group of hardline Brexiteers, led by Jacob Rees-Mogg, will launch a vote of no confidence in the prime minister. That is not to say that she is without supporters, with the likes of Michael Gove and Liam Fox resolving to stay and work to ‘get this to a better place’, but even with moderate support from her Cabinet it looks increasingly unlikely that she will be able to pass the deal through parliament. The markets have not responded well to the news: two-year yields on government bonds have fallen below the base rate of the Bank of England, already pricing in an anticipated easing of monetary policy in the coming weeks. Friday morning saw the stabilisation of sterling after a drop of nearly 2% on Thursday to below $1.2724, the largest one-day drop in  the pound in over two years.

Few people, including Mrs. May herself, can predict what the next few weeks will bring, but one person who is better placed than most to comment is Chris Giles. Having held the position of Economics Editor for the Financial Times since 2004, he has extensive experience reporting on the numerous shocks to the British economy that we have observed over the past decade and a half.

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Asked about public reaction to the proposed withdrawal deal Mr Giles acknowledges that not many people will be happy with the outcome, even those who voted to leave. People were ‘told that there would be gains from leaving’ he comments, ‘whereas the reality is that this is not the case and long-term living standards will be lower than they would otherwise have been’. Official OBR forecasts predict that losses to GDP over a fifteen-year horizon from a deal that retains UK membership of a single market would be 2% lower, from a trade deal 5% lower and from no deal 8% lower. The scale of these losses is ‘unpalatable but not horrific’ according to Mr Giles, who points out that, under the likely scenario of a trade deal, losses are forecast to be only half the size of the realised effects of the financial crisis. ‘There is no way to be certain what the economic impact will be’ he insists, although he acknowledges that the closer our economic alignment with the European Union, the better off we will be in the long-term. The nature of the long—term arrangement with the EU is as yet undetermined, but the nature of the withdrawal deal will be sufficiently painful to both sides to ensure that there is an incentive to work out something better, he admits.
In a recent article on UK productivity Mr Giles noted the weakening pattern in growth that has been observed over the past decade, with Brexit uncertainty halving the productivity growth rate to 0.5%, according to research by economists at Stanford and Nottingham universities. Asked whether he thought that recent events were helping to disguise underlying structural weakness, he argued that these trends are consistent with a global slowing in productivity amongst developed economies and were the inevitable consequence of the combined effects of the financial crisis and reactionary regulation that blighted the growth of banking and finance, previously the powerhouse of UK productivity growth. Moving forward he stresses the importance of  ‘finding another rapidly growing sector, or else we won’t have wage growth and consequently no improvement in public finances, which we know from the experiences of the past decade is pretty bleak’.

Before the distraction posed by recent developments in the Brexit negotiations, attention was focused on the Chancellor’s Autumn budget, announced in late October, and the ongoing debate it had inflamed about the seemingly irreconcilable governmental commitments to end austerity and to eliminate the deficit by 2025. According to Mr Giles, the Treasury were very fortunate to receive the fiscal windfall that they did from changes to the Office of Budget Responsibility (OBR) analysis that enabled them to factor an additional £11bn into the forecast for public finances, enabling Mr Hammond to honour the £25bn spending commitment to the NHS without increasing taxes. That being said, he is keen to highlight that ‘what this has not managed to do is to fund the other areas where we will have to see increased spending if they are serious about ending austerity’. Moving forward another public forecast upgrade could favour the Chancellor again, but it is equally likely that he could be unlucky in this regard and, with ‘the interest bill on government debt forecast to go up, there is the big question of how to deal with this tradeoff in commitments’ he says.

One way that Mr Hammond has indicated that the Treasury may handle the squeeze on public finances is through the appearance of a ‘deal dividend’ from successful Brexit negotiations. On this matter Mr Giles explains that the Chancellor is not talking about a dividend in the conventional sense of the word: what this means is that ‘if we get a deal then the government will feel comfortable in borrowing more’, he comments. He goes on to add, ‘if we have a downturn, however, then we could run into issues in that regard’. This brings us on to the unanimous decision by the Monetary Policy Committee to maintain the base rate at the current 0.75%. When asked whether he thought it was likely that we will see a rate rise before Britain’s official exit from the EU in May 2019 Mr Giles noted how the trajectory for interest rates rested on the success of the withdrawal deal, as it is reasonable to expect that ‘some business spending has been held off in the face of uncertainty and this should be taken into account’ if a deal is signed. Despite rising wage inflation emerging from tighter labour markets, on the possibility of interest rate hikes following a recessionary Brexit outcome, he is sceptical. He argues that the position at the moment is dictated by that fact that Mark Carney does not want markets to think that there is a one-way bet on interest rates when in reality he believes that the Bank would ‘not want to take any risk that may make a demand shock any worse’. Thus, whilst there are certain circumstances in which a particularly chaotic Brexit may mean that in the medium-term, once the initial demand shock had worn off, the economy could heat up from unused productive capacity on the supply side, a rate hike is unlikely according to Mr Giles.

What we are likely to see unfold in UK politics in the coming weeks is hard to predict. A snap election, a vote of no confidence and a second referendum all no longer seem like the intangible hypotheticals that they once did. With Mrs. May ‘squeezed from both sides’ by Eurosceptics and Remainers alike it seems almost implausible that the deal will pass through parliament on first reading. According to Chris Giles this leaves us ‘in an interesting situation […] and it will be very difficult to predict what will happen then’. It appears that such is the uncertainty of our time that even experienced commentators like Mr Giles are unable to do much more than guess at what the future will bring.