The worst possible scenario looks like this. The UK already has a persistent and sharp balance of payments deficit that has been funded by flows of capital investment. Primarily into London. We also famously do have a budget deficit which even the most avid anti-austerity campaigner accepts that we will have to eventually balance. Assume that some foreign investors start to worry about these fundamentals and the value of their assets in the UK and start to sell them off. The pound falls. Prices of imports rise. At the same time orders for UK firms slow up because of uncertainty and concern on access to markets. The balance of payments worsens. Unemployment rises at the same time as inflation. The sharp slowdown makes the UK national budget deficit get worse. Political turmoil continues. The sales of assets held in Britain continue and get worse. An unpopular austerity budget gets implemented by the new Brexit Chancellor. That puts the economy further into recession resulting in further political turmoil and that in turn further weakens UK economy. At the same time investors weigh up the increased risks across the EU and the sovereign debt crisis spreads there. We re-run the 2008 financial crisis in worse circumstances with fewer tools at our disposal to deal with it.
The alternative view that has been offered us is that there will indeed be a bit of temporary disruption. But markets always go up and down. Sooner or later they'll find a level. A lower pound will help exports. Our neighbours will want to continue trading with us so will let us have access to the single market whilst not requiring free movement of labour. Getting rid of all those pesky regulations, rights, safety and environmental controls will mean that the rest of the world will be queuing up to buy our products and we can fix the deficit with the legendary £370m a week whilst still making the same payments to farmers and the regions.
I am tempted to say that the truth is likely to lie somewhere in the middle. But it isn't that easy or simple. Extreme events can and do happen. We are no longer in a predictable safe economic environment where you have a top side forecast, a bottom side forecast and you almost always end up somewhere pretty close to the average. Unpredictability has been the name of the game since the unresolved 2008 crisis. We are now in a deeply ideological world where many people are believing what they wish to be true rather than examining facts & thinking logically.
So what can we be reasonably confident of?
1. The trade negotiations will be problematic
The UK and the EU will, of course, wish to continue to trade with each other. The UK will ask for access to the single market. The EU will insist that the price for that is continued financial contributions and free movement of labour. The Brexit vote would suggest that very few Conservative politicians will find it politically possible to agree to free movement of labour or indeed any budget contribution at all. The next government will therefore be forced to start work on negotiating some kind of free trade agreement with the EU outside the single market. In an atmosphere of anger and suspicion on both sides that won't be easy or simple. Expect employers and investors to get very nervous as deadlines approach and deals aren't getting struck easily. Put another way it is wise to assume that, whatever the outcome of the negotiations, investment from the private sector will be lower than anticipated for at least two years in what is left of the former United Kingdom. More likely than not a great deal lower with the decline starting early and getting steadily worse.
2. The new Brexit administration will impose an austerity budget
Whatever faction of the Conservative Party forms the next Government it would be wise to expect the Chancellor to come from the ranks of those who believe that austerity is the only way to steady the ship. Personally I expect Michael Gove to be Chancellor whoever is Prime Minister. It is extraordinarily unlikely that such a Chancellor could seek to balance the books via an expansionary investment programme, or via tax rises. There will therefore be major cuts to government spending. Expect sharp cuts to subsidies for green energy. Expect cuts to northern powerhouse spending once the Chancellor who talked it up goes. Expect HS2 and other rail investment projects to be cut. Expect wage freezes or even cuts for public sector workers and reductions in numbers. Bet the house on a rise in unemployment.
3. Trade with the rest of the world
People only buy things that are cheaper, better made, more modern, better designed or better marketed than the alternative. That applies at home and it applies abroad. I have never bought anything because a politician told me it was made in the 5th biggest economy in the world and came from a great trading nation. I expect the UK to be able to get most countries in the world to agree to continue allowing us to trade on the same basis as we did inside the EU for a period of time whilst new arrangements are sorted out. I do not expect us to sell anything new to those countries unless and until we have something new or better that they want to buy. It is possible that the pound will decline enough to make the UK exports attractive. Unfortunately it is also the case that most of our "exports" currently consist of financial services. It is more than probable that earnings from this sector will decline as the EU uses its freedom from the UK veto on measures to disadvantage the city of London and to advantage Frankfurt.
All three of the above points seem to indicate a nasty rise in unemployment and further austerity for the poor. The alternatives to this ugly litany are two-fold. One is for the Great British Public to decide that they really didn't know what they voted for and want to try again. This time on the basis of the actual deal that is offered rather than nice promises of what might be offered. If that happens great but it would be deeply unwise to rely on it. The other is as follows:
1. Use our independence to subsidise investment in the science, industry and commerce of the future. I think this means Green Energy companies, a modern steel industry based on recycled metals not raw materials, the creative industries, design and marketing.
2. Invest in an educated workforce and connect that educated workforce with the world of work much better and vice versa. Identify spin offs from our knowledge economy and invest on fostering successful new small business.
3. Introduce strategies to cut consumption of imported raw materials and fuel to help resolve the balance of payments crisis and ease pressure on the planet.
4. Cut the cost of living and the cost of employing people by helping housing associations and councils to build new homes using money cut from the help to buy programme to provide deposits to back public borrowing. Start work on the long job of providing young people with secure access to decent homes.
5. Invest in efficient local transport links in a co-ordinated nationalised rail service across the northern powerhouse, the Birmingham-Black Country powerhouse, the NE and other neglected parts of the country. Target the former EU regional subsidies on long term change projects to rebalance the UK economy.
6. Target farming subsidies on developing diversified small farm businesses, organic producers and those developing added value produce such as cheese. Remove all subsidies from large scale open field mechanised agriculture.
7. Develop a national investment plan
Combine the power of state and local planning with free enterprise to implement a coherent change agenda designed to get the UK economy adapted to the next phase of low energy low raw material technology. Identify future developments early and don't be scared to consciously plan to make those developments happen. It should not be forgotten that the most successful economy of the last 30 years is China and throughout that time it has used a combination of state planning and private enterprise to great effect. The UK has tried an experiment with free market extremism and as a result is in a mess.
No doubt everyone reading this will have some better variants of the 7 measures I am proposing. What I hope most people will agree is that they are an attempt to offer a much more positive version of exit than anything we are likely to get from the new Chancellor. I think what people with a Green awareness or an understanding of why austerity is such bad economics should now be doing is making sure that we offer that positive alternative. As the Brexit promises unravel the people who voted for them are likely to become even more angry and to look for an alternative way forward. I expect extreme English Nationalists to offer one very nasty option to them and for outright racists to increase in strength. I think those with a more optimistic view of humanity owe it to what will be left of the nation to make sure that a more positive alternative is clearly and frequently articulated.