http://www.chathamhouse.org.uk/publications/twt/archive/view/-/id/2032/
The World Today, Volume 66, Number 6
Has Britain the resources to continue to play internationally in the first league of states? The new government needs to encourage growth and help the country to benefit from global recovery, only then can the nation discover new vigour. In contrast, if prosperity falters, much less appealing choices may have to be made.
As the British economy struggles to find new momentum, it is critical that the government chooses its policies wisely. Successful management of the economy, public finances and international relations over the next few years will not only determine whether a deepening debt crisis can be avoided - a disaster we can all see unfolding in Greece - but it will also have very significant effects on long-term economic prospects and prosperity, the country's position in the world and its ability to shape a global economy that works better internationally and for Britain. Long- term goals must not be sacrificed for short-term expediency.
Inevitably, the election debates only scratched the surface of the challenge ahead, but at least they produced a wider understanding of why it is necessary to act, and be seen to act, quickly and decisively to reduce the budget deficit and curb public debt. The emergency budget to be presented this month aims to boost confidence in the country's financial position, but it is also a severe test of competence in balancing the timing, scale and mix of tax increases and spending cuts.
With the election over, it is also essential to broaden the perspective: the government must rise above the largely parochial obsessions which tended to dominate the campaigns and swiftly get to grips with all the key issues, local and international.
The risks and policy challenges ahead are highlighted in a forthcoming series of Chatham House briefings, which are part of a project that will conclude with a conference in July.
To highlight the key economic issues, Britain is viewed from a scenario perspective that ranges from New Vigour to Lost Decade. In the most favourable circumstances, given the right decisions, the country can achieve New Vigour: the best-case scenario in which it successfully uses global growth to boost the economy's performance while also restoring healthy public finances.
This scenario would be similar to a replay of the mid-1990s recovery; it can be done. And it would serve to restore the country's international standing as a result of a return to economic growth. The stark alternative is budget failure and a Lost Decade in which there is a rapid loss of both economic power and global influence, creating a downward spiral in the nation's prosperity and finances. This could be even worse than the decline in the late 1970s.
The task ahead
Strong leadership with a clear vision of the future is needed to persuade the population and financial markets to accept a credible and coherent plan to tackle the country's debt problems while safeguarding the still fragile economic recovery.
But to steer towards New Vigour, the new government must also aim to:
l enhance economic prospects by setting policy - including taxation - with a view to improving export performance, attracting foreign direct investment and retaining the best global talent. It must strongly support the key role played by London and the leading service industries;
- prioritise spending and strongly encourage private investment, to ensure that infrastructure is not neglected and that key projects are identified and completed. This is particularly important in energy and transport;
- l promote a sufficiently equitable distribution of growth across the country and support popular public sector services to avoid socio-political tensions, a voter backlash and opposition to free trade and openness;
- be aware of the alternative scenarios for the British and world economies and be prepared to adapt policies, possibly quite radically, should conditions change, to seek-out the most favourable terms and outcomes for the country.
The risks of failure are all too apparent, given the debacle in Europe over the Greek crisis and the now widespread impression of poor economic management in the eurozone, which is exacerbating the financial situation. Britain is not Greece, far from it, but it must heed the warning that the eurozone crisis represents, and take action to avoid being drawn into a similar fate.
Should a credibility crisis and collapse in sterling materialise, this would not only be destabilising in the short term, but would cause severe long-term restrictions on the ability of the state to sustain the infrastructure and environment that makes the economy tick and the country an attractive place to live. This attraction factor is becoming ever more significant given the worldwide competition to secure the best talent in an increasingly mobile global workforce.
It is also important to impress the fast rising emerging market economies with Britain's economic performance, skills and living standards; it has to be seen to be a place to invest and do business. It is therefore essential that policymakers look beyond the next few years' budgets to wider issues, and the longer run, before their choices are finalised.
Support from London
London inevitably plays a leading role in fulfilling national aspirations to turn global growth to its benefit, while its status as a global hub also supports the country's position in the premier rank of the world's most important and competitive economies.
It is critical to be seen as a successful economy with strong finances in the business sectors in which Britain specialises and has international competitive advantages. The international standing of both the country and London do matter, fostering confidence in business and professional services, as well as financial industries. This standing must be safeguarded.
To thrive over the next decade, the economy must develop and attract the critical industry clusters necessary to sustain creativity, innovation and a vibrant business base. And it needs an advantageous external environment and sound global governance to do so. In the past, Britain has had the influence to help foster such an outcome; it is in its own interests to maintain such a steering role.
The country's influence in the world has depended not only on the size of its economy but also on its relatively good growth record. Only with economic success will it have a chance of sustaining its standing in international economic affairs and global policy setting, enabling it to influence the global rules in ways that support its ambitions; these are inextricably interlinked.
One example of the need to influence events is the immediate prospect of global financial regulation and reform; another the risk of protectionist action against exports from developing countries.
Under a high growth scenario, it may be possible to return to business as usual in both economic terms and in foreign relations. Priority areas of government spending would be safeguarded. Britain could remain one of the world's top ten largest economies, a robust performer among advanced countries and a leading trading nation, especially highly rated as an exporter of high value-added services.
However, weaker growth scenarios, both domestically and for the global economy, would signal the need to consider policy changes that are not currently under discussion. This would force a review of all areas of spending for prospective deeper cuts, including sectors presently protected.
Maintaining influence
If British growth and economic management do falter over the next decade, this would raise the question of how to find ways to continue influencing global governance, for example, by engaging more closely with the European Union as the key instrument of international economic policy because Britain would no longer be taken seriously enough on its own.
However, to join an EU group in the International Monetary Fund or the G20 might require membership of the euro - hardly an attractive proposition for political parties given current events and voter opinions. Yet if Britain balks at a European approach, it might then be left drifting with no influence at either the global or European level.
If the eurozone does start to put its house in order as a consequence of the Greek crisis, this may actually present a convenient and influential entry point for Britain. It would offer the chance to create a stronger basis for the euro and reset the euro area agenda. The alternative future for the eurozone might be to break up, arguably offering Britain an easier route to using the EU - without euro entry - as a means of pursuing its global interests.
While some options may presently appear unpalatable, the scenarios under which these policies might be forced on to the political agenda are not implausible. Every attempt must be made to ensure a favourable outcome, but policymakers must also consider their response to the less appetising alternative scenarios, or to unexpected new opportunities, and be prepared to adapt accordingly.
Vanessa Rossi, Senior Fellow, International Economics, Chatham Hous
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