On June 23 British voters decided to leave the European Union. For the better part of the following week, turmoil reigned in the U.K. political system. Prime Minister David Cameron abruptly – and appropriately – resigned. Curiously, the leaders of the victorious Leave campaign – including UKIP head Nigel Farage and putative Cameron successor Boris Johnson – followed him to the exits. All three have since left public life – normal for the loser, bizarre for the winners.
The financial markets reacted predictably, as they always do when actual events conflict with the consensus of the pundit class. Stock markets around the world fell precipitously, then rebounded nearly as fast, after dire predictions of economic calamity faded into the dull monotony of waiting for something to happen. The markets are still waiting.
As the country braced for the potentially radical consequences of the changes the electorate had demanded, the Conservatives elected the country’s second female prime minister. Even though Theresa May, a “quiet” Remain supporter, assumed office with a firm hand, she has taken a “go very slow” approach to Brexit, promising not to begin the formal process to exit the EU until next year, probably not until March. Despite the sword of Damocles hanging over the country, the U.K. appears to have returned to normal.
That normalcy exists, however, only on the surface. I recently spoke with a number of British tax experts at the 70th annual Congress of the International Fiscal Association, the world’s largest organization of tax professionals. They shared the view that the sense of calm emanating from Britain masks a growing anxiety about the future. After all, they explained, given the state of the Brexit effort, it makes no sense for anyone to make a long-term investment in the U.K. No prudent business would invest millions of pounds building a facility or locating a company in Britain without a strong indication that it would have access to the European single market after a Brexit.
But if government pronouncements are any indication, it is unlikely that Britain will retain that access. May recently declared that she had no interest in negotiating a Norwegian-style arrangement with the EU. Such a deal, in which the U.K. would have access to the single market in exchange for accepting free movement of individuals across national borders, would contradict the principal reason the voters wanted out in the first place. She knows who pays her salary.
As, one by one, businesses decide not to commit capital to the U.K., the pace of economic activity is slowing. And the government’s promise to cut the U.K. corporate tax rate from 20 percent to 17 percent post-Brexit cannot possibly stem the flow of capital away from the U.K. After all, if a British business lacks free access to the European single market, the tax rate it will pay on profits it may never earn may be the least of its concerns.
Which brings us to the once-mighty pound. Shortly after the Brexit vote commentators remarked on the strength of the pound in the face of adversity. As it dropped to $1.35 and then to $1.30, pundits assured a leery public that the pound would never reach $1.25. As of this writing, however, it has slipped to $1.26, and continues to trend downward. The pro-Brexit voters would do well to temper their unbridled optimism over the future, as the pound slowly goes to the dogs.