UK Struggles with Economic Illiteracy as Crisis Worsens

26 Nov, 2020

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Britons’ grasp of basic economics is tenuous at best and more likely than not, virtually inexistent. A report commissioned by the Office of National Statistics (ONS) found that most people in the UK lack the ability to assess economic performance and are unable to judge how well, or badly, the government is doing. Economic illiteracy means that concepts such as national debt, deficit spending, inflation, and GDP are alien to most and often considered part of the mumbo-jumbo proffered by experts who are almost universally distrusted.

The findings of the Economics Statistics Centre of Excellence, an ONS-linked thinktank, are disconcerting and go a long way to explaining the public’s lack of interest in the dire economic consequences of Brexit. A YouGov poll conducted on the eve of the 2016 referendum on the UK’s membership of the European Union found that over half of the respondents supporting the ‘leave’ camp would switch to ‘remain’ in case Brexit would imply in a personal loss of income of just five pounds.

Earlier this year, an analysis by the London School of Economics (LSE) concluded that the economic cost of Brexit could be two to three times higher than the impact of the Corona pandemic. Using models similar to those employed by the government, LSE researchers put the long-term economic hit of a no-deal Brexit at 8% of GDP – equivalent to about £160 billion – or £2,400 per person. Even the Bank of England’s short-term forecast of an additional 1.7% contraction in economic output attributable to Brexit next year, equates to a per capita loss of around £600 – or 120 times the maximum ‘leavers’ were willing to pay for their love of sovereignty and determination to ‘take back control’.

LSE researchers cautioned that the consequences of the UK leaving the EU are likely to be felt over a much longer period as the country’s business climate deteriorates due to added administrative burdens and trade friction. The authors of the report also warned that EU-based businesses will seek to avoid exposure to UK suppliers and markets in an attempt to steer clear of red tape.

Aversion to Data

However, these and other considerations repeated ad nauseam failed to impress British voters suffering from economic illiteracy. According to the ONS study, only 47% of the over 1,600 people queried for the survey were able to properly explain the meaning of gross domestic product. The less enlightened respondents thought GDP was a measure of exports, wages, taxes, or the value of the pound.

Senior fellow Johnny Runge of the National Institute of Economic and Social Research said that economic jargon was a ‘turn-off’ for most people who usually flip the page, change the channel, or otherwise tune out at the first mention of GDP. Runge blamed his peers for being unable to present their thoughts and data in a manner that captures and holds the attention of their audience.

The prevalence of economic illiteracy also helps explain the baffling lack of alarm and urgency felt on the street as the United Kingdom struggles with its biggest economic crisis in three centuries. The Office of Budget Responsibility (OBR), the country’s fiscal watchdog, predicts a contraction of national output by 11.3% for 2020 in its ‘central forecast’ which balances the institution’s more pessimistic and optimistic predictions. The OBR warns that any post-pandemic recovery would be significantly slowed in the case that Prime Minister Boris Johnson fails to secure a trade deal with the European Union – slicing at least two percentage points off next year’s economic growth.

In a sign of mounting frustration, EU Chief Negotiator Michel Barnier signalled earlier this week that he no longer considers the talks either useful or meaningful and said that he’ll call an end to the negotiations if no progress is made over the coming days. EU officials privy to the talks said that Barnier is particularly irked by the apparent lack of interest on the British side to strike a deal.

Trust Trounced

Meanwhile, European Commission President Ursula von der Leyen emphasised the need for ‘robust regulatory safeguards’ and a strong governance system to ensure compliance. After the British government moved to unilaterally suspend articles of the Withdrawal Agreement it signed with Brussels late last year, the European Union has become much more insistent on the need for a fail- and fool-proof dispute settlement mechanism to immediately resolve any future regulatory divergence between both parties. The matter gained urgency after members of the Johnson Cabinet insinuated that the UK may yet opt for a low-regulatory business environment that would skew the playing field and give the country an artificial competitive edge.

Though Barnier has actively sought to address British concerns regarding external oversight of its post-Brexit industrial policy, the negotiator was warned not to cede any ground after a number of EU member states expressed discomfort about concessions reportedly offered to the UK. The Netherlands and France in particular, celebrating a remarkable détente since the UK’s departure, reminded Brussels that outside access to the union’s single market is to remain dependent on a strict alignment of environmental and social policies and must also include restrictions on state aid to industry.

The almost-consensus in London is that Prime Minister Johnson will not budge. Johnson expects Brexit’s impact to pass relatively unnoticed as a footnote to the much larger economic crisis caused by the Corona pandemic.

As Chancellor of the Exchequer Rishi Sunak set out his spending plan in parliament, he revealed that government borrowing is set to reach a peacetime time record high of £394 billion, raising the national debt to well over £2 trillion or almost 101% of GDP – a level not seen since the early 1960s when the country was still paying off its war debts.

Chancellor Sunak fears that 2.6 million people (7.5%) will be out of work when the UK economy bottoms out in Q2 2021. Sunak expects his exchequer will need to borrow an additional £164 billion next year as well. The dire outlook and widening fiscal deficit did not prevent the government to earmark an extra £24 billion for investments in defence over the next four years, the biggest sustained increase of military spending in three decades.

Admittedly, the Conservative government did have a change of heart on culture, providing more funding for libraries, museums, and art galleries. Since 2010, successive Tory-led cabinets have slashed the budgets of local councils, causing the closure of more than 800 public libraries and resulting in a discrete yet tragic burning of books. After a library closes, usually up to 90% of its collection is destined for the incinerator, possibly adding to the ignorance of public affairs.