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No one can know how the British economy will perform in coming years, since we do not know what the international environment will be, nor what impact government policies will have. As the respected, non-partisan Institute for Fiscal Studies (IFS) said today, both major parties’ manifestoes leave voters in a fog about likely levels of taxes and public spending. But the economy itself is providing some clear indications about the circumstances during which Brexit will be implemented. They are not good.

Growth figures covering just three months are notoriously unreliable. Initial estimates are often revised later, in either direction. Nevertheless, those from the Office for National Statistics (ONS) for 2017’s first quarter, released yesterday, did confirm some trends that should surprise no one:

  • Rising inflation (an annual rate of 2.7% in the latest month) is eroding real incomes and thus consumers’ spending power. The pound’s post-referendum devaluation has returned UK inflation to a higher level than elsewhere in Europe.
  • Growth in GDP per head, the best indication of overall living standards, is flat – and GDP growth itself is a measly 0.2%, thanks to Britain’s combination of population growth and weak productivity.
  • The business investment that would be required to raise productivity remains weak, probably thanks to the uncertainty about regulatory and economic conditions created by Brexit. Inflation-adjusted business investment did return to growth in the quarter for the first time in a year, but only modestly.

As far as Theresa May is concerned, this week did bring one positive feature: net immigrationdropped by 84,000 to 248,000 last year. But that is still nearly two-and-a-half times as high as the maximum the Tories are promising in their manifesto. 

What’s more, the IFS points out that lower migration will reduce a Conservative government’s tax revenues. As the IFS’s Carl Emmerson says, the Office for Budget Responsibility “has already downgraded its forecasts for receipts by £6 billion in 2020–21…due to lower expected net immigration. Meeting the Conservatives’ commitment to reduce immigration to the tens of thousands would hit tax revenues by a similar amount again.” On that basis, the Conservatives will be about £12 billion short – if they hit their immigration target, that is.

With a new YouGov opinion poll showing Labour narrowing the gap with the Conservatives to only five percentage points, the pound has again been sliding. May could well say that this just goes to show what a danger Jeremy Corbyn would pose as prime minister. A more balanced assessment would be that more falls will keep pushing inflation up. 

Moreover Brexit, especially given Corbyn’s ambiguous attitude to it, is itself responsible for making a Labour victory worrying for investors: removed from the constraints of EU treaties, post-Brexit Labour would be able to reintroduce state aids to pet industries, especially nationalised ones, and pursue protectionist trade policies.

None of that is in Labour’s manifesto, of course. But then neither party’s manifesto looks a reliable guide to what it would actually do.

by Bill Emmott | 26.05.2017

Edited by Hugo Dixon


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