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    Is Brexit Truly to Blame for the UK’s Problems?

    enSeptember 22, 2023

    Podcast Summary

    • Impact of Monetary Policy on Inflation and Interest RatesJohn predicts no rate hike due to economic slowdown, panelists expect rates to stay high due to inflation outpacing them, historical trends and economic indicators crucial for predictions.

      Economists John, Solea, and David discuss the impact of monetary policy on inflation and interest rates. John predicted the Bank of England would not raise interest rates, citing signs of economic slowdown and the connection between money supply and inflation. The panelists believe interest rates are not likely to decrease soon as the economy moves towards a state where interest rates are higher than inflation, leading to real wage rises and savings with real returns. They emphasized the importance of considering historical trends and economic indicators in making such predictions.

    • Historically low mortgage rates with high inflationMortgage rates are currently low but may not go much lower due to high inflation. Inflation needs to be addressed to prevent future economic instability.

      Despite the current low mortgage rates, it's unlikely they will go much lower and inflation remains high. Historically, the base rate has averaged around 5%, with mortgage rates around 2 percentage points higher. However, with competition among banks high and fewer transactions being written, current mortgage deals offer a good spread. However, given that inflation is currently over 6% and the target is 2%, it's crucial to get inflation down and keep it there for a considerable period to reach a long-term average of 2%. This could mean several years of below-2% inflation. The last time this happened was during the post-2008 era, and the concern is that we might not fully address inflation this time around, leading to potential future economic instability.

    • Brexit's Impact on the UK Economy: Less Severe Than AnticipatedExperts agree that Brexit's impact on the UK economy has been less severe than initially feared, with some negative consequences but no significant declines in GDP, inflation, or labor market.

      Despite the initial fears and expectations, Brexit's impact on the UK economy might have been less severe than anticipated. Julian Barnes and Robert Peston, economic experts, agree that while Brexit introduced new barriers to trade and free movement of people, the actual impact on the economy has been less than predicted. There have been some negative consequences such as increased uncertainty and risk premia on British assets, but there is no solid evidence to support the claims of significant declines in GDP, inflation, or the labor market. The impact on immigration has also been a subject of debate, with some seeing the post-Brexit migration regime as a success due to the focus on higher skilled workers. Overall, while Brexit has had some impact, it seems to be less relevant to the UK economy than many believed.

    • Impacts of Post-Brexit Migration Policy on UK EconomyPost-Brexit migration policy led to real wage growth, labor rethinking, and terms of trade shocks, with similar challenges faced by European economies due to pandemic and high energy costs.

      The post-Brexit migration policy has had both positive and negative impacts on the UK economy. While there have been challenges in certain sectors due to the switch from European to global labor markets, overall, real wages have risen, and this has forced companies to rethink their labor usage. However, there have been terms of trade shocks due to the friction on trade with the EU, and the UK's labor market struggles are not unique to the country as many European nations face similar issues due to the pandemic and high energy costs. Despite these challenges, the UK's situation is not an outlier when compared to other European economies. While some argue that Brexit is the sole cause of the UK's issues, it's important to consider the role of external factors such as the pandemic and global economic trends.

    • The UK economy had issues before BrexitDespite Brexit challenges, addressing long-standing economic weaknesses is crucial for the UK to demonstrate benefits, while potential EU collaboration can also drive growth.

      While Brexit has presented challenges for some industries and individuals in the UK, it's important to remember that the UK economy had significant issues long before the vote to leave the EU. Productivity and real wages have been stagnant for over a decade, and the government's slow response to Brexit opportunities is a concern for many. However, there are some positive signs, such as new trade deals and regulatory reforms. Yet, the UK's economic growth still lags behind the US and other European economies. To truly demonstrate the benefits of Brexit, the government needs to address these long-standing economic weaknesses and show tangible progress in the coming years. Additionally, it's crucial to acknowledge the European Union's own challenges and the potential for collaboration between the UK and EU on issues like digital services and technology.

    • Factors fueling US economic growth vs UK challengesThe US economy benefits from lower taxes, easier regulations, and shale energy, while the UK faces high energy costs, increasing taxes, and low productivity in key sectors.

      The US economy is thriving due to factors such as lower taxes, easier building regulations, and the shale energy revolution, leading to a shift in growth from high-tax areas to low-tax ones. This internal competition is something the UK lacks, and high energy costs in the UK could hamper long-term growth unless more generating capacity is built. Additionally, the UK faces challenges such as increasing taxes, particularly corporation tax, at a time when major European competitors are lowering theirs. Public sector productivity, particularly in the NHS, is also a significant issue due to the lack of internal competition and market pressures. The US, with its greater flexibility and sound underlying fundamentals, serves as a useful comparison. However, the US economy is currently experiencing a fiscal boom that may not be sustainable, leading to concerns about its credit rating.

    • Government's role in investment hindered by fiscal rules and inconsistent policiesFocus on supply-side reforms and strategic tax cuts to encourage investment, fostering a business-friendly environment for a larger economy and increased tax revenues.

      Both the public and private sectors have underinvested due to unfavorable frameworks and inconsistencies. The government plays a crucial role in providing public goods and creating a stable tax regime, but current fiscal rules and inconsistent policies hinder investment. In the private sector, high taxes and regulations discourage companies from investing. To improve the economy, it's essential to focus on supply-side reforms and strategic tax cuts rather than raising tax rates, which may not yield the desired results. By fostering a business-friendly environment, we can encourage investment, leading to a larger economy and increased tax revenues.

    • High taxes and burdensome regulations discourage labor and entrepreneurshipThe UK's high taxes and excessive regulations hinder labor supply, entrepreneurship, and economic growth. A more strategic and surgical approach to regulatory decision-making is needed to address this issue, but it may face challenges due to public demand for more regulations.

      High marginal tax rates and burdensome regulations are discouraging labor supply and entrepreneurship in the UK economy. The discussion highlighted the issue of punitive taxes, which can negatively impact the incentive to work and start businesses. Additionally, the lack of attention paid to the impact of regulation on businesses and consumers is a missed opportunity for growth. The UK has underbuilt on housing since the 2nd World War, resulting in difficulty matching talented people to productive jobs, further hindering economic growth. The focus on Brexit has been distracting, but the real issue lies within the domestic regulatory system, where there is a lack of strategic and analytical consideration of the impact of regulations on businesses and consumers. The public's constant demand for more regulations and the lack of institutional resistance to regulating add to the problem. To address these issues, there is a need for a more strategic and surgical approach to regulatory decision-making, which may involve more resources and attention to the impact of regulations on businesses and consumers. However, this may face challenges as the most pro-growth measures are often the least popular, making it a complex issue to address.

    • Powerful voter demographics can hinder economic reformsThe aging population's opposition to new taxes and lack of progress on housing targets can make economic reforms unpopular and difficult to implement.

      The political will for significant economic reforms, such as implementing a Value-Added Tax (VAT) or addressing the housing crisis, can be hindered by powerful voter demographics. The aging population, who own their homes outright and have defined benefit pensions, are a significant voting bloc that is largely immune to economic pressure. Their opposition to new taxes, like a VAT or wealth tax, can make such reforms unpopular and difficult to implement. Furthermore, the lack of progress on housing targets and infrastructure development can hinder economic growth and add to political uncertainty. A possible solution is to prioritize infrastructure development before housing construction, as this can help build community support and reduce resistance to new projects. Overall, addressing these economic challenges requires careful consideration of voter demographics and effective communication about the long-term benefits of reforms.

    • Brexit's Challenges and OpportunitiesPolitical uncertainty from Brexit negatively impacted UK economy but made assets cheap, business investment was held back, and policy making became more difficult, but it also presented opportunities for global investors, the impact will continue to be felt for years, and party affiliation has shifted, making it harder to bring sides together.

      The political uncertainty surrounding Brexit has had a negative impact on the UK economy, but it has also made UK assets, particularly equities, unusually cheap. This uncertainty has held back business investment and made policy making more difficult, but it may also present an opportunity for global investors. Looking ahead, it's uncertain whether people will view Brexit positively, negatively, or have forgotten about it in 10 or 20 years. Some may continue to be obsessed with it, while others may move on. Regardless, the economic inflection points in the UK's history may be seen as 1979 and 2008 rather than 2016 or 2019. Party affiliation has shifted since the Brexit vote, with more people identifying as Tory or Labor rather than Remain or Leave. However, those on the Leave side are likely to keep the issue alive, making it harder to bring the two sides back together. Overall, Brexit has presented challenges and opportunities, and its impact will continue to be felt for years to come.

    • Political instability hinders economic growthPolitical instability from Brexit and potential US recession can cause uncertainty, lack of investment, and hinder economic growth

      Political instability, such as the ongoing Brexit situation in the UK and the potential for a recession in the US, can negatively impact economic growth and stability. The fake paperwork issue in the US and the constant political rows about Brexit in the UK have caused instability, leading to a lack of investment and discounting of assets in these countries. Despite some initial resilience in the markets, the lack of political will to change course in Washington and the instability in Europe could have long-term consequences. The uncertainty created by these situations can hinder economic growth and make it difficult for businesses to thrive. The stability of institutions and a strong political environment are crucial for growth, and prolonged instability can lead to significant economic downsides.

    • People's responsibility and focus on growth post-BrexitPolicymakers must understand and address concerns of risk-averse population to achieve economic growth.

      The responsibility and sovereignty in the country lies with its people, and the recent political events served as a reminder of this fact. While there was embarrassment and disappointment, there was no epic depression or major catastrophe. Now that the Brexit issue is resolved, it's time for the country to focus on its day job and implement policies that promote growth. This includes having a less complicated and lower tax regime, dealing with the regulation problem, improving infrastructure, and addressing the education system. However, there's a concern that a significant portion of the population, particularly the aging population, may be risk-averse and unwilling to support growth-oriented policies, which could hinder the economy's ability to grow. This is a complex issue, and it's unclear whether it's truly a demographic issue or a perception issue. Regardless, it's crucial for policymakers to understand this dynamic and work to address it if they hope to achieve meaningful economic growth.

    • The expanding role of the government during financial crisesThe belief that governments should provide more support during crises is driven more by the growing role of the state than demographic changes

      The increasing role of the government in response to financial crises has led to a perception that it serves as a safety net for individuals, beyond just bailing out banks. This trend, which began long before the COVID-19 pandemic, has contributed to the growing belief that the government should provide more support during times of crisis. This shift in perspective, according to the speakers, has more to do with the expanding role of the state than demographic changes such as an aging population. This perspective was discussed on the Meryn Talks Money podcast, where guests debated the implications of this trend on economic policy and its impact on voters. The Big Take DC podcast also covers similar topics, examining how money, politics, and power shape government and its consequences for the public.

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