3.1 Brexit as an Economic Disruptor
In 2016, the UK held a referendum on the continued
participation of the United Kingdom in the European
Union, and Brexiteers narrowly won. The subsequent
withdrawal from the EU in 2020 caused immediate
and long-term economic disruptions. Since then, as a
significant world economy, the UK has been deeply
shocked.
The first and most tangible change is that the trade
between the UK and the EU has been reduced. After
Brexit, the tariff and non-tariff barriers are on the rise.
The UK and the EU no longer enjoyed the original
zero-tariff free trade arrangement, even with the
Trade and Co-operation Agreement (TCA), which
went into effect in 2021. Tariffs on certain goods,
such as automobiles and agricultural products, raised
operating expenses for enterprises in the UK. Besides
customs inspections, certification of rules of origin,
sanitary and quarantine standards, and other
processes have become more cumbersome, leading to
a decrease in trade efficiency. According to a survey,
the non-tariff barriers have increased average
business costs by 15-20%, with small and medium-
sized enterprises being hit hard (Bloom et al., 2019).
Secondly, Brexit also caused investment uncertainty.
Foreign direct investment (FDI) dropped, as firms
delayed expansion due to regulatory uncertainty.
Finally, as the UK no longer belonged to the EU, the
free flow policies of the labor market were no longer
applicable to the UK. That caused EU migrant
workers to decline, exacerbating shortages in
healthcare, agriculture, and logistics.
The referendum on Brexit being approved has
directly led to the resignation of Prime Minister
David Cameron, who was in favor of remaining in the
EU. After the resignation, Theresa May became the
new Prime Minister. In the early period of her tenure,
May made the moderate Brexit and maintaining
economic stability her target. In March 2017, she
announced the official start of the process of Brexit.
However, the key point of contention in the first
version of the Brexit deal was the Northern Ireland
border Backstop option, whereby Northern Ireland
would remain in the European Union customs union
to avoid a 'hard border' if the UK and EU did not reach
a future trade deal. This option was seen as a
'permanent trap' by the Brexiteers in the British
Conservative Party, agreeing to be rejected three
times in the House of Commons. The Democratic
Unionist Party of Northern Ireland opposed her
handling of the border and saw her as compromising
too much to the EU. Business leaders, they criticized
her inability to secure a stable transition, worsening
economic anxiety. Under these circumstances, May's
intention to deliver her Brexit proposal to Parliament
for the fourth time in May 2019 has been even more
controversial and has been the impetus for her
downfall. Under pressure, she announced on 24 May
that she would resign as leader of the Conservative
Party.
With Theresa May's resignation as Conservative
leader in June 2019, Boris Johnson then declared his
candidacy. Johnson capitalized on public frustration,
winning a landslide in 2019 by promising to finalize
Brexit. However, his strict stance increased economic
instability. Brexit exposed how economic shocks may
paralyze the government and lead to changes in
leadership and restructuring of party politics.
3.2 The Covid-19 Pandemic and Fiscal
Stress
Since 2020, the Covid-19 pandemic has caused
economic depression, exposing the UK economy's
dependence on services and supply chain
vulnerabilities. On top of that, the pandemic triggered
unprecedented fiscal interventions. After the
pandemic, the UK's GDP plunged 20.4 % in the
second quarter of 2020 from a year earlier, the biggest
drop since records began in 1955. Preliminary
statistics released by the Office for National Statistics
(ONS) on 12 December showed that the UK's GDP
contracted by 9.9 % in 2020, the biggest annual fall
since records were kept. As for the unemployment
rate, it rose from 3.8% to 4.8% in 2020 (ONS), with
youth unemployment reaching 16% at one point
(Resolution Foundation).
To make matters worse, while initially stabilizing,
the UK's response to the COVID-19 epidemic had
serious long-term effects, especially in terms of
public debt and inflation, which changed political and
economic stability. The first challenge was that the
massive public spending caused debt surge and fiscal
risks. To avert widespread unemployment, the
government spent £70 billion to pay 11.7 million
workers 80% of their earnings. However, this resulted
in a large increase in the national debt. Apart from
that, the government has provided grants and loans to
enterprises to keep them alive, which has resulted in
fraud and zombie corporations. All these actions
made the debt-to-GDP ratio skyrocket, rising from
85% in 2019 to 104% in 2021, the highest level since
the 1960s (Gopinath, 2022).
All these situations marked economic
mismanagement, eroding the citizens' trust in the
government. At that time, the British anti-epidemic
policy led to the banning of most gatherings.