National Institute Economic Review

Improving infrastructure

Infrastructure investment can substantially increase a nation’s capital stock and thereby boost productive, or supplyside, potential. It can also be useful as a tool in macroeconomic stabilisation, while public spending on quality infrastructure projects has been shown to have significantly greater multiplier effects than tax cuts – so the case for an increasing spend is not undermined by a country’s overall debt level.

Securing decarbonisation and growth

The need to decarbonise the economy in order to slow the pace of climate change is now recognised as one of the most pressing international policy challenges. While the UK cannot by itself materially affect global climate change, it has an opportunity to play an influential role, both by persuading others of the need for action but also by reshaping its domestic economy to benefit from a low-carbon transition. 

Formulating industrial policy

Alongside the challenge of maintaining economic competitiveness in the face of great uncertainty, Brexit brings an opportunity for the government to set out a new industrial strategy. The case for doing so rests on the need to address areas of persistent structural weakness in the UK economy, including low productivity.

Updating security and defence policy

Threats to the security of the UK are evolving with the changing nature of conflict and balance of power in the world. They are multiple and fragmented, and domestic and online as well as overseas in nature: principally state-based threats such as posed by Russian activity; terrorism; cyber-attacks; and serious organised crime. To respond, the United Kingdom will need flexible capabilities aimed at fostering infrastructural and societal resilience as much as conventional defence.

Reorienting foreign policy

After Brexit, the UK must show that it has a voice. It will need to re-earn international respect, and in particular establish the concept of a ‘global Britain’ on the basis of performance, not rhetoric. That means re-establishing a strong network of relationships around the world in support of its security and economic health, but also continuing to play a leading role in support of the international rules-based order.

Developing trade in services

Services are simultaneously the most important sector of the UK economy and the sector facing the biggest challenge as a result of Brexit. The prospective departure from the European Single Market reduces the UK to the status of ‘3rd country’ in respect of services. Accessing the internal market will depend on both subjective and objective conditions that differ from sector to sector, requiring detailed and highly specific arrangements for such industries as aviation and financial services.

Developing trade

The UK faces no easy options in determining how to develop its approach to international trade post-Brexit. If it finally decides to leave the European Customs Union and Single Market, it faces the possibility either of simply crashing out of the EU without a deal; trying to form market-access agreements and Free Trade Areas (FTAs) with the EU and other countries; or unilaterally reducing tariffs and liberalising trade with all countries. Each course raises significant practical difficulties, and entails major disadvantages compared with staying in the Customs Union and Single Market. 

Supporting dynamic economic adjustment

Economic policymaking in the UK has historically focussed more on the demand side than on the supply side of the economy. Yet it is on the supply side – the way in which an economy adapts to change while growing productive capacity on a sustainable basis – that medium- to long-term economic performance largely depends. There is an urgent need now to rebalance policy by focussing, in particular, on measures to enhance labour-force productivity, including radically enhanced support for training and skills development. 

Maintaining stable macroeconomic conditions

The UK economy faces more than usually uncertain times. Outside the European Union, and in an increasingly  challenging  global environment characterised by ageing populations, climate change, populism, protectionism, and more, the country needs to chart a new course. This may well require policymakers to consider unconventional approaches to monetary and fiscal policy and, at the very least argues for important modifications of the current policy regime, including the autonomous mandate of the Bank of England. 

Introduction to National Institute Economic Review no 250

Regardless of the particular form that Brexit ultimately takes, the UK faces an unprecedented set of political, economic, and social challenges. While the causes are many and complex, they amount to a crisis of confidence and popular trust that has overturned the normal logic of political practice and policymaking. The national interest demands a strategy for the decades ahead, capable of putting the country back on its feet.