Eight years on

Eight years on from the Brexit referendum, the world looks a very different place. While in 2016 it was the UK which had to deal with an onslaught of rampant populism, it is now a feature of the political landscape across the industrialised world. The European Parliament elections made it clear that electorates across the EU are running out of patience with centrist governments which have failed to deliver on promises to make life better for long-suffering voters (chart above). Meanwhile on the other side of the Atlantic, Donald Trump has every chance of getting back into the White House as he feeds on the discontent of an America unsure of its place in the world.

As we head towards a UK general election that looks set to banish the Conservatives into the political wilderness, it is possible that the UK may be one of the few western democracies about to swing back towards the political centre. Yet it is notable that the policy which helped Boris Johnson win an overwhelming majority in 2019 has not even figured on the 2024 campaign trail. The Tory party cannot bring itself to admit that its signature policy has failed while the Labour Party is so fearful of alienating voters in Red Wall seats that it simply will not go near the issue of Brexit. But it is the Tories who will have to carry the can, since this is a policy with which they are closely associated, and spent so much political capital delivering the hard Brexit that many of us warned against that it has become an albatross around their neck. Moreover, it absorbed so much political bandwidth that the party was unable to deal effectively with the other tasks involved in governing. This included managing the pandemic and ensuring compliance with the basic standards required for governance in modern democracies which is one reason why they lag so far behind in the polls (chart below).

Look beyond the 2024 election

However, just because the electorate is about to hand the keys to Downing Street to a party of the centre-left does not mean that they are about to repudiate some of the more extreme versions of nationalist politics. If the performance of Reform UK in the polls is to be believed, quite the opposite. Recent history suggests that political turnarounds are very much in fashion. Back in 2021, not long after Labour had taken an election hammering and lost one of its safest seats in a by-election, it seemed that the centre-left was on the ropes. When the SPD unexpectedly won the German election in 2021, it was not long before sentiment turned against them, while Emmanuel Macron’s 2022 election triumph is a distant memory as the right-wing Rassemblement National is currently the most popular party ahead of the snap French parliamentary election. Life, as they say, comes at you fast. And just as Brexit was a cry of rage against the prevailing status quo in 2016, so we should interpret any (potential) Labour landslide as a rejection of years of Conservative government incompetence rather than a general buy-in of what Labour are offering.

If a week is a long time in politics, as former UK PM Harold Wilson once remarked, a couple of years is an aeon. Thus, to the extent that politics is a long game, we have to look beyond the upcoming election and think about what the future of politics will look like. Labour’s ability to deliver any form of economic improvement over the next five years will determine whether they stand a chance of winning a second term. Labour will have to manage expectations in such a way that they can deliver some progress and that they are not swept away in a tide of disappointment later in the decade. But if they do not deliver, what might the options look like in five years’ time? This in turn depends on how the Conservatives respond to what currently looks like being a very heavy defeat. Will they double down and move further towards the populist end of the spectrum? Or will they do what Labour did in the wake of their heavy defeat in 2019 and tack back towards the political centre?

It is currently difficult to envisage the latter option, partly because many of the more moderate members of the parliamentary party were purged by Boris Johnson in 2019. The alternative is thus a shift towards right-wing populism of the sort espoused by many prominent government ministers of recent years, and the non-negligible possibility of a tie-up with Nigel Farage’s Reform UK. It may sound far-fetched – a wild fantasy dreamed up the political commentariat – but as the rise of RN in France and the AfD in Germany illustrate, if the traditional parties cannot enthuse and inspire voters, they will look for alternatives.

The case for tax reform

It is thus evident that Labour will have to deliver something tangible in order to pacify the electorate and generating faster growth is a priority. In contrast to 1997, the economy's trend growth rate has slowed considerably (chart below) which is excerbating the fiscal constraints under which the government will be forced to operate. Labour's manifesto offers nothing particularly interesting in terms of economic thinking, with a very limited set of fiscal promises. Obviously, Labour does not want to give too many hostages to fortune but if I were the new Chancellor, one of the first things I would do is to announce a review of the tax system, building on the excellent and under-appreciated Mirrlees Review of 2011. One reason for doing this is that the government needs to quickly find some fiscal space. In much the same way as the Blair government announced reform of the monetary policy framework in 1997, a fiscal reform is overdue. It may not deliver a significant amount of revenue immediately but if a new government is serious about tax reform, it may be able to open the fiscal taps halfway through its first term on the basis that the returns will come through later.

What might tax reform look like? It certainly will not be a radical big-bang on day one. It is likely to take the form of a Royal Commission which will report after two years with a view to implementing changes in 4-5 years’ time. A more detailed look at possible measures is a subject for another day, but one idea whose time may have come is a land value tax which is a more economically efficient form of property tax than is currently in place today. There is also scope for reforms to the taxation of savings, carbon, wealth, corporates – you name it, and it can be done better. There is also a political dimension to this. Shifting even a tiny bit of the burden away from wage earners (i.e. voters) onto less heavily taxed areas of the economy would go some way towards making voters feel a bit better about things, without necessarily reducing the tax take.

Last word

But whatever the next government wants to do on the economic policy front would be made a lot easier if there were fewer trade frictions with the EU. Although Labour has promised that the UK will not rejoin the EU, it does want to “reset the relationship and seek to deepen ties with our European friends, neighbours and allies.” While it has ruled out rejoining the single market, it does want “to improve  the UK’s trade and investment relationship with the EU, by tearing down unnecessary barriers to trade.” Whatever one’s views on Brexit in 2016, and whether or not they have subsequently changed, the UK does need closer economic and political ties with the EU than we have had in recent years. Those politicians who promised a brave new post-Brexit economic world have been found out. It is time to hit the reset button.