By Ross Alexander Hutton
“This is going to be a fantastic year for Britain” – these were the words chosen by a characteristically optimistic and unwisely bullish Boris Johnson at the beginning of the decade. Now a frequent source of amusement on social media, the famous prediction shone a light on just how quickly events can turn sour. Aptly, this lesson on the unpredictability of events in the socio-economic-political sphere is best depicted by the late British prime minister Harold Macmillan in his well-known mantra: “events, dear boy, events”. Indeed, for as long as the beauty of hindsight remains unreachable, unforeseen events will test the resolve of leaders and society alike. For all the uncertainties, known and unknown, the British government has several significant certainties, intertwined with uncertainty, on its radar in 2021. From the grave health-economic emergency of coronavirus to momentous constitutional affairs to tight-rope foreign policy, this will be a defining year for Britain – and its place in the world. With the aim of regaining his footing at home and abroad, Prime Minister Johnson will need all the luck he can muster together in order to prevent history repeating itself this year.
A prognostication of 2021 is merely a conjecture without thorough consideration of the preceding year. For a year intended to be the U.K.’s opportunity to shine on the global stage, after entering the departure lounge from the E.U., 2020 became the antithesis of those very ambitions. A raging pandemic took hold of the country, causing unprecedented damage to the economy and to the health of its agents. Eventhough the battle against Covid-19 appeared to be won in the summer, the later months of the year were marked by an emergence of a more transmissible strain of coronavirus – setting the scene for an arduous 2021. Such mutations of the virus in the U.K. and further afield present an even more complex dimension to the crisis facing Britain, as the virus redefines the parameters of the national fight. In response, all the U.K. administrations were forced into reintroducing restrictions on social life, much to the regret of the Chancellor as the British economy has already suffered the largest fall in output for 300 years, raising fears of an entrenched economic depression with implications for long-term unemployment and the very fabric of the economy. The bleak midwinter has inevitably confined the governments’ room for manoeuvre on the road to recovery but all is not lost. Society has the upper hand: vaccines.
As of writing, the U.K. government has access to three life-saving vaccines thanks to the extraordinary effort of scientists around the globe. With this profound pharmaceutical power, the race against the virus has begun. That is, the race to inoculate the population – especially those most vulnerable – faster than the virus can infect. Essentially, this is a race against time. Until the population reaches a sufficient level of immunity, the economy will remain in paralysis insofar as lockdowns are the government’s only strategy to curb the spread of the disease. Hence, Johnson’s administration is de facto entering an implicit contract with the British people: in return for their patience and willingness to obey the lockdown measures, his administration must succeed in its unparalleled mission to vaccinate at scale and speed. One cannot stress enough the extent to which the economic recovery from this crisis is entirely predicated on the efficacy of the U.K. government’s oversight of the NHS vaccination programme. Treasury economists are fully aware that the longer lockdown restrictions are in place, the deeper the cracks in the economy become. Although, in the interim, the Treasury is focussed on keeping the economy afloat, soon the attention of policymakers will turn to the looming fiscal, monetary and structural post-Covid economic realities.
Assuming the U.K. succeeds in beginning to transition its economy to a post-Covid era towards the end of this year, the Chancellor will undoubtably face pressure from his backbenchers to address the country’s dire fiscal position in the medium-run. Having already committed to “protecting public finances”, Sunak faces the politically difficult choice of either hiking up taxes or reducing government spending, since borrowing in the medium to long-term is expected to become more expensive as interest rates rise. Yet, such contractionary fiscal policies, without the conventional assistance of monetary policy which is already historically loose, does not bode well for an economy seeking to regain its footing. However, the IMF currently recommends advanced economies place their debt concerns on the back burner by ramping up public investment for the time being. Ultimately, this will become a political calculation concerning the trade-off between a recovery from a year of lockdowns and just how much debt Sunak can stomach. In any case, the decisions made by the Chancellor this year will have momentous ramifications for the country’s fiscal position for years to come. Of course, Sunak is not alone in this dilemma as western economies face the chilling prospect of another decade of sluggish growth and the ensuing socio-economic-political consequences.
Be in no doubt, the British economy is not plagued for years to come – it will bounce back. However, the extent and composition of a recovery is where the story lies. Part of the realisation hitting governments around the world, is that a recovery cannot merely be confined to returning output back to pre-Covid levels because economies are already on the road to a new post-Covid normal. Rather, governments must recognise the accelerated forthcoming trends across western economies. Whether it be the need for structural upskilling in response to the decline of bustling high streets or the rise in homeworking, it is crucial that policy is aimed to accommodate such evolutionary events as opposed to circumventing acknowledgement of their certain existence. ‘Remoteness’ is the future. In fact, it is already here. The change has already happened. Hence, the question is not when will change to the way British society lives and works arrive but, whether, on a macro level, the fabric of the economy will revert to its pre-Covid patterns. Will society merely observe cosmetic changes or will the internal threads of the economy regenerate? ‘Animal spirits’, as Keynes would contend, will determine the answer.
2021 could mark the beginning of the reversion (at least on a part-time basis) from the office to the home as many organisations have come to the verdict that homeworking may not be so disastrous for productivity after all. Following such fundamental deviations from modern working norms will likely be mass internal relocation away from cities. If one can work from home, then why continue to live somewhere predicated on proximity to the workplace? Once forgotten towns and villages, with lower living costs supporting widely considered healthier lifestyles, will be forgotten no more. In essence, this is the opportunity for the government to foster a country-wide rebalancing of wealth to support its ‘levelling-up’ agenda. If the government’s fiscal response fails to accommodate these trends by investing in an economy that ‘was’ rather than ‘could be’, it will miss perhaps the greatest opportunity – one could even call it a silver lining – of the pandemic.
This year will be a true test of not only the British economy’s resilience to a year of hibernation and structural changes but of historic changes to the trading relationship with the U.K.’s closest trading partner. Dubbed the ‘Christmas Eve Agreement’, the U.K.-E.U. trade and co-operation agreement finally ends the uncertainty surrounding the U.K.’s withdrawal from the E.U. Given the exhausting wrangling and dispiriting deadlock associated with the trade talks, the avoidance of a disastrous no-deal and achievement of a tariff-free agreement will have united both sides with a collective sigh of relief. For the Prime Minister, the ratification of the treaty was not just any political win but a validation that he had – arguably, against significant odds – delivered on his promise to ‘get Brexit done’. Of course, there is more to it than Johnson would contend. On the surface, it appears Brexit is signed, sealed and delivered. But if one reads the fine print, it becomes clear that the issue of Brexit is far from being put to bed.
Just like with the withdrawal agreement, legal ‘fudge’ was deployed to get the deal over the line. For many of the most contentious issues, the negotiators essentially kept the door open to further talks. That is, if there is significant divergence which has a material impact on trade, then both sides may be subjected to appropriate rebalancing measures. In practice, this means countless committees and forms of independent arbitration – in other words, negotiations without an end. There is also the immediate concern of the obvious shortcomings of the deal: the increase in trade frictions. Not to mention the unresolved issues regarding the financial sector, such frictions are expected to cause border delays as well as increasing freight and administration costs – only time will tell the full economic impact of such arrangements.
Perhaps most troubling to the Prime Minister in his self-appointed capacity as ‘Minister for the Union’ is the consequences of his Brexit project for the future of the union. Since the Prime Minister didn’t peruse any real attempts to reach an agreement that recognises the disparity between the Scottish vote to remain and the U.K.’s vote to leave the E.U., his ‘hard Brexit’ has fed one of the central independence arguments that Scotland’s democratic views have been overruled. Add to the mix the renewed calls for self-governance because of the common perception that Sturgeon has handled the pandemic relatively better than Johnson. The combined effect of these two narratives is a growing crevasse between the Scottish people and Johnson’s agenda, translating into rising support in the opinion polls for Scottish independence.
Growing sentiment towards separation is at the crux of the Scottish Parliament election in May as Sturgeon is hopeful of winning an electoral mandate to demand a second referendum. To which the answer from Number 10 will almost certainly be a refusal to grant a Section 30 order thus, withholding legal authority to such a vote. Without delving into a debate over whether or not Johnson ‘should’ grant permission to hold another referendum, it is not clear what Sturgeon’s plan B is if her demand is refused. Pressure will undoubtably mount on the Prime Minister and support for independence may rise, but such legal waters are uncharted. Given that in the Scottish government’s paper ‘Scotland’s right to choose’ there is a commitment to an agreed legal process which will be accepted as legitimate by Scotland, the rest of the U.K. and the international community, without a Section 30 order Sturgeon’s next steps are one of Johnsons’ greatest known unknowns of 2021. Such a constitutional clash has been brewing for some time – 2021 will be the year it rises to the fore again.
Growing momentum for the break-up of the union could not come at a worse time for the Prime Minister as he prepares to a relaunch his vision for a ‘Global Britain’. For Johnson, 2021 is all about burnishing his tarnished international reputation. So far, his premiership has been marred by his poor management of the coronavirus crisis and half a decade of Britain looking inwards rather than outwards. But, 2021 presents an opportunity for Britain to show leadership on the world stage as the U.K. hosts both the G7 and the UN COP26 climate change summit in Glasgow. But hosting will not come without its challenges. By far and away the greatest test for the U.K. – and the international community – is whether nations will pull their sovereignty together in a world of rising nationalist instincts. Will sovereign nations be willing to be policed by an independent enforcement mechanism of climate goals? So far, the trend has been a retreat by nations into their shells. Yet, to address international problems, such as the coronavirus pandemic or climate change, this lack of co-operation undermines the prospect of any substantial progress.
With the backdrop of China’s rising power and influence, 2021 will challenge western democracies to remain the dominant success story of the 21st Century. Considering that the West hasn’t fared well against the Coronavirus pandemic, with little hope of overcoming the trend of sluggish growth, increasingly weakened democratic systems of government and a disruptive nationalistic sentiment, the stakes could not be higher. By all accounts, 2021 will be a year of immense challenges and promising opportunities. It will be a year that puts western democracies to the test – can they recover and thrive post-Covid? Can the UK prosper in a post-Covid, post-Brexit world? While the jury is still out, the government has work to do.
The views expressed in this article are the author’s own, and may not reflect the opinions of the St Andrews Economist.
Image Source: Politico