Possibly, the Chancellor of the Exchequer, Sajid Javid, spent New Year’s Day in No 11 Downing Street, working on the budget which Boris wants ready for February when the UK has left the EU. If so, he will be aware that preparing the budget will be tricky because no one knows what the terms of the UK’s future trading relationship with the EU will be. Although Boris talked of a deal being signed in a year, business leaders and civil servants in the UK and many in the EU feel that this was unrealistic, given how long trade deals take to negotiate and the UK’s failure to reach the target for the number of trade deals promised during the referendum campaign. One can argue that, given the increase in protectionism in recent years, a close deal is vital, especially since the potential new markets are relatively small, compared to our trade with the EU.
Philosophically, the government has a potential problem with the right of the Conservative Party favouring a free market approach with tax cuts and reduced regulations, while many new MPs elected in former Labour seats are looking for measures to help their constituencies which contained new Conservative voters, won over by the promise of Brexit, but whose jobs are at risk from increased competition from manufacturing companies in Asia, the loss of exports to the EU and a possible UK slowdown after Brexit. Many of these areas, with significant aerospace, chemicals and food production industries, rely heavily on exports to the EU and have to meet EU rules and regulations. If the future trade deal did not allow such exports to continue and instead allowed the EU to impose tariffs and implement customs checks, the consequences for some areas would be significant. The Flintshire and Wrexham area has an Airbus factory and a thriving pharmaceuticals industry and 87% of all goods made are currently exported to Europe. Elsewhere, in Derby North, where there is a Rolls-Royce factory, over 25% of the economy is linked to sales to the EU.
There is general agreement that the UK has spent too little on both business and infrastructure investment and encouragement for businesses to do the former and a determination by the government to do the latter will help improve UK productivity – a major UK issue. Incentives to help people, particularly first-time buyers, buy housing are important but, just as important as increasing demand, is the need to increase supply, possibly by encouraging more building on brown field sites. Another major area of need is the level of skills in the workforce and the need to bring UK vocational training up to the standards of other countries.
Fortunately, there is scope to boost the economy since the new government has adopted looser fiscal rules than its predecessor. In 2016, then Chancellor George Osborne’s fiscal rule was to eliminate the deficit by 2019/20 which was relaxed by Philip Hammond, who moved the target to 2025. What the current government has promised was to ensure that they raised enough in tax revenue to cover day-to-day spending but would borrow to invest. However infrastructure, such as building new roads, schools and hospitals takes time and very few projects are ‘shovel-ready’. This is worrying since growth started to stagnate and the labour market weakened before the election but possibly, following the clear election result, businesses and consumers might become more confident and increase their spending. Something to wish for at Xmas!