Matthew Elliott, Senior Political Adviser
With the US President being both the Head of State as well as the Head of Government, there is not an equivalent to Inauguration Day in the UK. Coronation Day is not comparable because we have a constitutional monarchy, where The Sovereign no longer has a political or executive role, and the ability to make and pass legislation resides with Parliament. And the moment in the early hours of the morning, after a General Election, when the leader of the largest party makes their acceptance speech in an unflatteringly-lit sports centre in their constituency, with Lord Buckethead standing beside them, is a stark contrast to the pomp and ceremony of a US Inauguration.
In normal times, Inauguration Day honours the peaceful transfer of power from one President to the next or acknowledges the renewed mandate of a re-elected incumbent. Barack Obama accepted this tradition – a necessary facet for a functioning democracy – when he welcomed a slightly dazed looking Donald Trump into the White House after his victory in 2016, albeit with a stony-faced Hilary Clinton looking on at the ceremony. Sadly, some may say disgracefully, President Trump will not be attending Joe Biden’s Inauguration today, marking the end of the most divisive Presidency of the modern era, but not necessarily the beginnings of greater political unity.
The transfer of power from the Republicans to the Democrats is certainly important for the US, but it also has consequences for the UK. Here are five thoughts on what it means for the British economy and businesses.
1. The return of greater certainty (touch wood)
After 2020 and the coronavirus pandemic, it takes a brave person to predict the return of economic certainty. But after a highly uncertain five years, with Brexit, Trump and Covid, it finally appears that we are seeing a return to normality (or ‘normalcy’, as US presidential candidate Warren G. Harding’s 1920 election campaign slogan called it, referring to a return to the way of life before World War I and the Spanish flu pandemic).
In the hours leading up to Christmas Day 2020, the EU-UK trade agreement was concluded, meaning a no-deal end to the transition period was avoided, even if there are some important outstanding matters (e.g., financial services) and notable ‘teething’ issues (e.g., for the retail sector and its supply chains in Northern Ireland). Turning to Covid, since we are leading the world with the rollout of the vaccine, bar Israel, with every adult in the UK set to be vaccinated by the end of June 2021, we can hopefully look forward to a more normal summer this year.
Looking to the United States, the election of President Biden and the success of the Democrats in January’s Georgia runoffs mean that a new political order takes control of the White House, the House and the Senate, heralding an end to divided government, and a return to stability in US politics – hopefully. This in turn means that international politics, from the G7 to NATO, from the UN to the WTO, will be far less unpredictable, and much more multilateral, so bringing the possibility of greater certainty and cooperation to international affairs over the coming years.
2. Closer trade ties between the US and UK shouldn’t be ruled out
Some commentators (myself included) were sceptical about the prospects for closer trade ties between the US and UK under a Biden Presidency. President Trump was seemingly keen to agree a US-UK trade deal, and good progress had been made by our Secretary of State for Trade, Liz Truss, cheered on by Ambassador Woody Johnson. However, in reality we were not close to a deal, and an agreement with the US led by President Trump was always going to be a tougher sell domestically, than one with a Democrat-led administration.
I am still doubtful whether there will be a bespoke US-UK agreement before the midterm elections in 2022 – the immediate focus for Biden’s team will be on tackling Covid and restoring the US economy. But there are two wider trade agreements that might facilitate closer trade ties between the US and UK at some point in the next four years.
The first – a longer shot – is if President Biden returns to TTIP – the Transatlantic Trade and Investment Partnership between the US and EU – which was launched in 2013 (under the Obama/Biden Presidency) and abandoned without conclusion in 2016 (when Trump was elected). Might Biden insist on the UK being incorporated in a new tripartite version of this deal? He could, of course, seek to place the UK at the back of the queue, as intimated by President Obama, leaving Europe’s second-largest economy adrift, but the EU is a ponderous entity when it comes to trade deals and striking one with the USA is not akin to the Canada agreement – there are too many points of contention.
Hence, the second, more likely, option is if the US joins the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which the UK is also on track to join. The CPTPP provides a free-trade zone for the Pacific Rim, between established economies (Australia, Canada, Japan, etc) and emerging and growing economies (Chile, Mexico, Vietnam, etc). It currently accounts for 13 per cent of global GDP, and if the UK joins, it will account for 16 per cent, making it as large as China economically, and an important geopolitical counterbalance.
Closer trade ties might have come sooner had President Trump been re-elected, but they shouldn’t be ruled out under President Biden. They might take longer to establish, but if they come, they will likely come as part of a bigger deal. That said, the perennial problem with getting a trade deal through Congress should never be underestimated, especially when the margins between the Democrats and Republicans are so tight in both the House and Senate.
3. Continued broad alignment with the US on China
Before we pivot back from the Indo-Pacific to domestic affairs, it is worth touching on US foreign policy towards China. Like the Cameron/Osborne Government, the Obama/Biden Presidency was markedly Sinophile, but it would be a mistake to assume that the departure of the most vocally anti-Chinese President of recent times means a return to business as usual. These days, the Democrats are as hawkish as the Republicans, as demonstrated by the public hostility from Team Biden to the Comprehensive Agreement on Investment agreed by China and the EU over Christmas, which the UK may like to take some time studying and discussing with their US counterparts; one wonders where the Sino-EU agreement rests with policy consistency on Hong Kong and the Uighurs?
Even though the British Prime Minister is less instinctively hawkish towards China (he went out of his way to underline this when he appeared in front of the House of Commons’ Liaison Committee last week), he is distinctly closer to the position of the US and other ‘Five Eyes’ countries than that of the EU, as demonstrated in the Telecoms Security Bill currently working its way through Parliament, which prohibits Huawei from the UK network. China is the top foreign policy concern of the new US Administration, and Joe Biden is set to be as tough as Donald Trump, but he will pursue a much more multilateral approach to applying pressure to Beijing, making Boris Johnson a potentially important ally to achieving his objective. Biden’s policy on Hong Kong and the Uighurs is something to keep an eye on.
4. A common post-Covid recovery plan – Building Back Greener
The second most important foreign policy priority for the new Administration will be tackling climate change, and this is another issue which President Biden and the Prime Minister have already begun to forge a close alliance on.
The concept of ‘Building Back Better’ has been a policy blueprint for post-crisis recovery for some time. Boris Johnson began using the phrase last spring, to help the country look beyond the Covid crisis, and Joe Biden also used it on the campaign trail, to lethal effect against his more laissez faire opponent. The phrase is peppered in Government statements, will undoubtedly come second only to ‘America United’ in Biden’s Inauguration Day address and, alongside ‘Build Back Greener’, it is set to be the leitmotif of the UK’s Presidency of the G7 this year, and their chairmanship of the COP26 conference in Glasgow in November 2021.
Despite the parallels often drawn between Boris Johnson and Donald Trump because of their unexpected electoral successes in 2016 (the parallels relate more to the anti-establishment forces at play, not their personalities), the Prime Minister’s political instincts are far closer to President Biden’s. They are both liberal internationalists. The Build Back Greener agenda suits both their personalities and their idealism. The President was strategic in picking London as the recipient of his first transatlantic call after being elected President, and it is rumoured that the UK will also be his first overseas trip after Canada.
As well as being central to our economic recoveries post-Covid, the joint focus on tackling climate change might also build back the special relationship between the UK and the US, which has held firm at the governmental level under President Trump but needs repair as far as the British public is concerned. As well as making progress on two important foreign policy objectives, this alliance could be pivotal for Britain’s place in the world post-Brexit; noting that when it comes to defence, at the end of the day, the UK is a much more fundamental ally of the US than just about any other major state and most certainly the EU.
5. Strong economic recovery with inflationary pressures to follow…?
The White House is not the only branch of government changing hands in the US. With the Georgia runoffs handing control of the Senate to the Democrats (they now have a majority with the Vice President’s casting vote), it is now clearer what US economic policy will look like over the coming months, and what this might mean for the UK economy and businesses.
Had the Democrats not won either of the Georgia Senate seats, or had they just won one of them, President Biden would have been forced to adopt a bipartisan approach to the budget, limiting the stimulus package to a previously expected $750bn to $1tr in Q1. The Democratic leadership has now made the call that a few months’ delay is a price worth paying to get a much larger spending package through Congress, of some $1.9tr.
Such a gargantuan package means a total fiscal stimulus of some $4.5tr over the coming year, made up of December’s fiscal package (c. $1tr), the 2021 additional Covid package (c. $1.9tr), and a bipartisan infrastructure spending component ($1.5tr). In terms of funding, this is likely to be almost all deficit financed – the position of Senator Manchin (D-WV) makes any significant tax hikes unlikely. And by way of comparison, the fiscal stimulus package enacted by the first Obama Administration in 2009 was around $750bn.
This $4.5tr stimulus package will undoubtedly be hugely beneficial for US growth in 2021 and 2022 – it will hit the economy just as their vaccination programme (which is some way behind the UK’s) will be allowing a normalisation of economic activity. After a year fighting Covid, US personal savings are also high (as they are in the UK), and there is most probably considerable pent-up demand, meaning high levels of consumer spending are likely, providing an additional stimulus. The big question is whether this will be a case of ‘too much money chasing too few goods’ (and especially services, in this instance), and whether the US (and other countries) will experience the return of inflation.
Ever since the Quantitative Easing programmes following the Great Financial Crisis, many economists have predicted the return of inflation, and have been proved wrong. But with this level of fiscal stimulus, a 3-5 per cent US inflation rate is a growing possibility. To cite another economic trope, ‘when America sneezes, Europe catches a cold’. This level of inflation, with its corresponding increase in interest rates in time, would hit the UK economy badly, and we will no doubt return to this concern in the coming months. Indeed, the UK will need to be well and truly on the ground and not sitting on the branches of the magic money tree if and when US monetary policy tightens, something that the Chancellor and the Bank of England need to be keenly aware of for the next two Budgets (the first is on the 3rd March 2021).
But for now, to end on a positive note, here’s to the end of the coronavirus crisis, to economic recovery, and future peaceful transitions of power.
Matthew Elliott tweets @matthew_elliott. He would like to thank Mark Bathgate (@m_bathgate) for his thoughts on the Biden Administration’s fiscal policy post-Covid.