Brexit Rallying Cry Exposes a Nation Divided by Austerity

(Bloomberg) -- It was meant to be a defining moment, a U.K. election to unite a confident nation behind their leader before she negotiates a deal to leave the European Union.

Instead, the campaign has exposed a very different Britain for Prime Minister Theresa May, whatever the result of Thursday's vote.

U.K. Election: Full Coverage

The disunited kingdom on display is divided among English and Scottish nationalists, young and old, migrants and natives, London and the rest, and is deeply unsure of its political and economic future. It's also enduring a terrorist campaign of a frequency and scale not seen for decades, with two attacks in London, a deadlier one in Manchester and five foiled plots in less than three months.

Even if May should secure the landslide for her Conservatives suggested in opinion polls when she decided to call the election, she will govern a country that agrees on little while facing an unprecedented array of hard choices. From trade, tax and debt to immigration and security policy, they come with the U.K. adrift between an estranged EU and unpredictable U.S.

“The country is facing an existential challenge of the kind it faced in 1940,” when confidence collapsed in the government to lead the nation in World War II and Winston Churchill took over, said Hugh Pemberton, a historian of contemporary Britain at Bristol University. “And yet it is busy pretending that challenge does not exist.”

May, 60, declared the core issue of the election to be picking a team and vision to negotiate Brexit, a process due to begin this month. Yet neither her Conservatives nor the Labour Party have said anything of substance about it. Polls show they will share as much of 80 percent of the vote between them.

Not only have the ranks of both parties been divided over Europe since before Britain joined the European Economic Community in 1973, said Pemberton, but “it's in neither of their interests to reveal that they fundamentally don't know what to do.”

Dominant Issues

Brexit remained the top issue people in Britain say will dictate how they vote after funding the state-run National Health Service. That institution, once referred to by a Conservative grandee as the closest thing the English have to a religion, faces an estimated 30 billion-pound ($39 billion) deficit.

The picture, though, is likely to change after election day. A GfK consumer survey has seen Brexit and immigration disappear as significant concerns since last year's referendum on whether to leave the EU. Terrorism and the cost of living have risen to the top alongside health.

The result may well be decided by how many young voters, who overwhelmingly support Labour, make it to the polling stations. In a vast manifesto, Corbyn pledged re-distributive economic policies that hark back to the 1970s, taxing the better off to spend liberally on students and others who lost out from the years of austerity measures that followed the financial crisis. Pensioners, who tend to vote -- and vote Tory -- were protected.

May's big misstep of the campaign came when she tried to address the growing wealth divide between the generations.

She threatened her most loyal supporters, the elderly, with losing their homes to pay for long-term care rather than burden younger tax payers. Branded the “dementia tax” by opponents, Corbyn responded by saying that May's “only offer to pensioners is insecurity and cuts.”

Whoever wins will have to navigate the funding shortages caused by an aging population just as the economy loses steam, as well as negotiate Brexit.

After leading the Group of Seven economies in growth last year, the U.K. was at the bottom of the pile in the first quarter of 2017. The euro region, particularly derided in Britain, is finally picking up. Inflation, stoked by a sharp drop in the value of the pound after last year's Brexit referendum, is eating away at disposable income as wage growth fails to keep up. The housing market, a key ingredient for consumer confidence in the property-loving U.K., is stagnant amid falling prices.

As a consequence, tax revenues are likely to be squeezed. With debt still above 90 percent of economic output and productivity stuck 16 percent below the G-7 average, there could be some tough decisions as the government is called on to invest in underfunded hospitals and police. At the same time, money will need to be spent on the expertise and infrastructure the U.K. will need to thrive outside the EU.

“The outlook for the U.K. economy is dire, and the election is unlikely to change that meaningfully,” begins a stark June 1 research note from Fathom in London. “Brexit in our view will just weigh further on the economy,” said Joanna Davies, a senior economist at the consultancy firm.

Failing a burst of inflation and higher interest rates to cut the national debt and cull “zombie” companies kept afloat by low borrowing costs, the U.K. faces a Japanese future, she said.

Back to 1970s

Of course, economists and historians have in the past proved poor soothsayers. The U.K. economy survived the decision to leave the EU better than most expected, including the Bank of England. And May has taken an upbeat view of what the next few years will bring.

“The promise of Brexit is great -- the opportunities before us enormous,” she said in a recent speech aimed at reviving her election campaign after the polls narrowed to a single-digit lead.

The pro-Brexit economist Roger Bootle describes Britain's decision to leave as a “great escape.” It will liberate the U.K. to make better free trade deals when it loses access to those negotiated by the EU, and to hitch its fortunes to faster growing emerging market economies, he's said.

It all gives the U.K. on polling day a faint echo of the 1970s about it. Back then, the country was also torn over whether to join and then remain in the European project, faced the terrorist threat from the Irish Republican Army and had an economy so broken it had to be bailed out by the International Monetary Fund.

Election manifestos then, as now, portrayed a nation on the brink and in need of a new business model.

“People know Brexit is important, but they also know we are leaving so the question becomes: Whom do you trust to protect your personal interests?” said Peter Mandler, professor of modern cultural history at Cambridge University. “That seems to reflect the reality of this election campaign, which was supposed to be about Brexit, but turned out to be about austerity.”

To contact the author of this story: Marc Champion in London at mchampion7@bloomberg.net.

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net, Rodney Jefferson