Why a weak government might be good for our economy

You might need a strong government to push through unpopular measures if the country were facing a serious economic downturn – but the UK isn't in that situation

Theresa May has been forced to form a minority government, with support from the DUP (Reuters)

Weak politics may make for good economics. This is contrary to the proposition that the Government presented to the British electorate, that the Government needed a strong mandate to negotiate Brexit. Now, among the myriad uncertainties facing the country there is one certainty. The UK will have a weak government, led by a weak Prime Minister. How could this possibly be good?

Let’s push Brexit aside for a moment and come back to it later. Were it not for Brexit the economic outlook would be unusually favourable. You might need a strong government to push through unpopular measures if the country were facing a serious economic downturn. But it isn’t. Unemployment is the lowest it has been since the 1970s, and still falling. Employment and labour force participation rates are the highest they have ever been. The fiscal deficit remains high but is under reasonable control. Inflation is acceptably low. The currency is undervalued, useful for maintaining competitiveness at least in the short run. And while there are long-standing issues about productivity – the flip side of the huge increase in employment – that is something that can be tackled swiftly by any government, however large its majority.

Even more important, the UK will benefit from global growth, recently revived up by the IMF, and in particular by stronger growth in Europe. At some stage in the future there will be a global downturn, but it is unlikely that is imminent. Maybe two years away things will look different, but not right now.

Weak governments will not be able to make big changes in economic policy. But that is good, not bad. Think about the three aspects of economic policy: monetary, fiscal and structural.

Monetary policy is out of the hands of central government, with a reasonably independent Bank of England. Weak government may mean a slightly looser fiscal policy, for there will be special interest groups to be bought off by higher spending and it will be harder to raise tax rates. But this is marginal. More careful scrutiny of public spending decisions could probably offset specific additional spending needs. We may get slightly higher growth as a result of a looser policy and the additional revenue will help narrow the fiscal gap.

On the tax side there will be much less scope to fiddle about with changes, because these will be politically unpopular. The coalition government between 2010 and 2015 had to focus on big issues and, in the main, it avoided the relentless chopping and changing of taxation that took place under Gordon Brown. When the Tories got a majority they reverted to making lots of little changes, many of which had to be reversed. Remember the “omnishambles” budget of George Osborne? Remember the national insurance U-turn of Philip Hammond?

If weak government means spending money more carefully and leaving the tax system alone, bring it on.

What about structural policies? The term covers such a wide area that it is hard to generalise, but many such policies involve changes in regulation and legal provisions. For example, in labour market policy the big issue concerns the terms under which companies can hire foreign workers. This was about to become much more complicated under the Tory plans. If it is too weak to push those through, that is surely all to the better. The Tory manifesto was quite hostile to business. If weakness forces the government to listen more and legislate less, that is for the better too.

Might the uncertainty associated with weak government reduce investment confidence? I suppose in theory it might but in practice investment takes place because would-be investors see profitable demand. Sudden changes in policy undermine that. Look at the impact of changes in buy-to-let taxation that have damaged the rental market, and the threat of a cap on utilities pricing.

Of course, none of this is definitive. You could envisage a weak government that was all over the place with its policies. But if weakness leads to greater caution before making policy changes, then it can certainly be positive – at least in normal times.

Brexit, however, is not normal. It is reasonable to fear that a weak government will be unable to negotiate as good a deal with Europe as a strong one. But I can think of at least three reasons why such fears might be unfounded.

The first is that these negotiations are the start of a process that will last for a generation or more. There will be some sort of initial agreement, but that will be reshaped and modified as the UK and European economies change. That is what has happened to Switzerland’s relationship with the EU. If weakness by the UK makes the initial arrangement particularly unfavourable, then it won’t stick. If it makes the disengagement more gradual that will be less disruptive and maybe better for all.

In other words, a weak UK government may make the initial deal worse for the UK, but it is quite possible it may make it better in the long run.

The second is that Britons talk about the deal in terms of what the UK might want: hard or soft Brexit and all that. But what will really determine the outcome will be what Europe wants. What sort of access does it want to the UK market? What access does it want for its people to the UK labour market? Does it want full access to the London capital market? What sort of long-term relationship does it want from the UK altogether? Whether the UK has a politically secure government may affect its negotiating position, but I suspect not.

And third, in purely economic terms the UK was gradually disengaging from the EU anyway. Back in 2002 as much as 55 per cent of UK exports of goods and services went to the EU. It has been falling steadily ever since. Now it is below 45 per cent and on present trends will be below 40 per cent by 2020. This is not a result of Labour, coalition, or Tory policy, or of strong or weak government. It is simply driven by economics, with the rest of the world growing faster than Europe. This is not an argument for leaving the EU. It is simply to point out what has been happening for the past 15 years.

I know it is almost heretical to say that weak government can be better than strong government. But if strong ones mess things up, then let’s have weak ones, for sure as eggs is eggs that is what we have got.