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The double blow of Brexit and the epidemic has severely damaged the British economy, leaving it with the shadow of low growth, debt and deficit.
The UK economy has grown by just 1.8% since the Brexit referendum in 2016. By comparison, the US economy has grown by nearly 9% during that period. As public and private investment has dried up, living standards in the UK have fallen and public infrastructure and services have seriously deteriorated.
Britain’s productivity has also fallen to the point where Germany, the United States, and even France, which is not known for its productivity, perform better than it.
Public debt is just under 98% of GDP (90% if you exclude borrowing by the Bank of England), and the budget deficit was 4.4% of GDP last fiscal year.
With tax levels on track to reach their highest level in the country’s postwar history, it will be hard to find revenues easily to fund reforms of the National Health Service and education sector, or to finance Labour’s promised investment in crumbling public infrastructure and measures to tackle climate change. Proposed new taxes on oil and gas companies are not enough.
Starmer and his chancellor, Rachel Reeves, should know what happened to Liz Truss and her chancellor, Kwasi Kwarteng, when they tried unfunded spending. Truss was the shortest-serving prime minister in British history, serving just 49 days. Adding more debt is not a realistic option.
The challenges facing Starmer and his colleagues may not be of their own making, but they are still daunting and the UK’s fiscal constraints are limited.
The same is true for France, but even France’s debt and deficit would prevent Marine Le Pen’s French National Assembly or the NFP party (if they win a majority) from embarking on a massive spending spree.
France’s budget deficit is 5.5%, though it is expected to fall to 5.1% this year after Macron implemented some substantial spending cuts, some of which have yet to take effect. That’s well above the European Union’s 3% limit.
The country’s debt-to-GDP ratio is 112% and is still rising. The figure for Germany is 65%, and the eurozone average is about 90%.
Jean-Luc Mélenchon, leader of the far-left Liberal Party, declared victory and vowed not to negotiate on the coalition platform, which includes lowering the retirement age from 64 to 60, investing heavily in education, health and climate change, raising the minimum wage, increasing public service wages, tying pensions to the minimum wage and an index, and freezing energy and food prices.
The government will pay for its policies through wealth and inheritance taxes, an exit tax on those who move their tax residence out of France, and the creation of 14 new tax brackets, with a top rate of 90%. A super-profits tax will be imposed on French companies with above-average profits, and tax breaks for businesses will be scrapped.
In the alliance, Mélenchon’s faction has three factions of equal strength, and the other two factions tend to be left-wing but not extreme. Therefore, Mélenchon’s faction is not large enough to determine the election results.
More likely, if a functioning government is to emerge (and it is not certain that it will), Macron’s Ennahda party and more moderate figures on the left will reach a pragmatic deal in which they demand some left-leaning policy concessions as the price of their cooperation.
If France abandons its slow, gradual, even painful efforts to stabilize its finances, which is critical to Macron’s political future, the European Commission will respond and has the power to impose sanctions on EU member states that lose fiscal discipline.
The ECB also has the power to intervene, or not, in bond markets if investors become concerned about the economic path chosen by France’s new parliament.
As Giorgia Meloni, the leader of Italy’s right-wing and eurosceptic party, has shown, the fear of Brussels meddling itself requires some discipline on the part of the government. Italy is on track to keep its budget deficit below 3%, even as its debt and debt-to-GDP ratio continue to rise.
Britain’s productivity has also fallen to the point where Germany, the United States, and even France, which is not known for its productivity, perform better than it.Credit: Associated Press
The results of the two elections were one expected and the other unexpected, and the fiscal conditions of the two economies also ruled out the possibility of radical policy choices.
This is perhaps a good thing for France and Europe, given how radical some of the extreme agenda options are.
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Some suspect that if Britain is to wake up from its post-Brexit torpor it will need more than the incremental approach dictated by its fiscal constraints, but that is unlikely to happen.
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