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Sean Rickard - Independent Economic Analysis
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Theresa May’s summoning of EU diplomats to the opulent Long Gallery of Lancaster House spoke louder and more clearly than her speech.   Redolent of Britian’s once powerful global position, it provided an anachronistic setting against which to deliver a rather unworthy and pathetic threat.   Although her speech commenced with language about establishing a new partnership with the EU in her finale she abandoned the veil of diplomatic niceties.   Her audience was told that if Britain did not get the trade deal it wanted she would not only turn Britain into a low-tax ‘Singaporean’ economy – my phrase – but also Britain’s defence and intelligence contribution to Europe might be reduced.

 

Predictably, this tone delighted the EU phobic zealots and the tabloids who anointed Mrs May the new Iron Lady conveniently overlooking that she has no mandate for such a threat.   Ironically, the Lancaster House setting and more generally the constant allusions to the UK’s glorious past by government ministers eg, Johnson and Davis, when referring to Brexit belies the lack of a contemporary vision; indeed, it smacks of desperation.   At the end of her speech the complex issue of our future relationships with the EU remains uncertain and if anything more worrying.   The likelihood of the UK emerging poorer, more divided and with much reduced global influence has increased.   Unbelievably our PM in threatening a Singaporean economy is not only offering the UK the very worst aspects of globalisation – very low corporate taxes almost certainly accompanied by much reduced employment protection – but also the greatest harm for the low paid, who she professes to want to help.   I doubt that the majority of those who voted for Brexit believed they were voting for such a bleak future.

 

Rational negotiators will be well aware that unless a threat is credible it is worthless.   Mrs May’s threat to erode the tax base would do nothing to lessen the government’s struggle to reduce its £76bn annual deficit not to mention the adverse impact on the NHS and social care.   The impact on Britain’s public finances of cutting corporation tax to 12.5 per cent (to qualify as a tax haven) would be disastrous.   According to the OBR this would reduce UK government revenues by £63 billion over five years.   Threatening to do yourself harm if you do not get your way is not much of a threat.   Indeed, Wolfgang Schäuble, Germany’s Federal Minister of Finance speaking at the World Economic Forum not only dismissed the threats to turn the UK into a Singaporean economy but also opined that such a threat was beneath a great nation.

 

At Lancaster House Mrs May confirmed that part of Sir Ivan’s resignation letter where he indicated a panglossian muddle and a lack of direction at the heart of government on the issue of Brexit.   This over-optimism overlooks the attachment of European governments to the EU project.   Each of the remaining 27 members has its own political priorities and may, in the event be unwilling to play ball.   The negotiations will be far from straightforward, and could turn hostile.   It also suggests ignorance on the part of the Brexit ministerial trio regarding the complexities of contemporary, service based trade agreements.   Why am I not surprised to learn that that our excruciating foreign secretary Boris Johnson helped shape the text of Mrs May’s speech.

 

It is tragic that at such an important time the UK lacks a credible opposition.   The Supreme Court may have upheld parliament’s right to vote on beginning the Brexit process but I doubt it has changed the government’s manifestly undemocratic mindset regarding the Brexit negotiations.   It is tragic in the extreme that just when Britain needs the House of Commons to fulfil its traditional function of scrutinising legislation and holding the government to account we have an ineffectual opposition.   Jeremy Corbyn’s leadership of the Labour party on this matter is a disgrace.    The Liberal Democrats and the Scottish Nationalists deserve credit for their attempts to confront the government’s hard Brexiters.   It may now be too late but Labour may just be able to stem the haemorrhaging of Remain supporters by making it clear that parliament must have veto power over the final Brexit deal.  

 

It is ironic that so much is being made of the UK’s ability to negotiate free-trade agreements with the EU and third countries.   I suspect that part of the (muddled) backlash by Leavers against the political mainstream was free trade with the EU.   The one thing all economists seem to agree on is that free trade increases net social welfare.   However, by its very nature it necessarily involves a reallocation of between trading partners resulting in losers as well as winners.   The gains from trade tend to go to those who work in export industries – studies show earnings are generally higher in export industries.   The knock-on effects for the wider economy, such as lower priced goods, are not so readily appreciated and for those who lose their jobs to trade competition the cost can be high.   Thus, free trade can increase economic inequality.   It has been the failure of successive governments to acknowledge this and to target taxation and industrial policies at compensating the losers that has caused the EU and its single market to become such a contentious political issue.  

 

This raises two concerns.   Firstly, I have no doubt that in the fullness of time the UK will negotiate a number of free trade deals around the world but I am also well aware that not one of them will be as beneficial for the country as membership of the single market.   Secondly, unless there is a substantial change in taxation and industrial policies, leaving the EU is more likely to increase inequality and the number of JAMs.   Speaking alongside Wolfgang Schäuble at the World Economic Forum, our somewhat sidelined Chancellor, Philip Hammond, said that the transition process for leaving the EU was likely to make households poorer.   I would only remove the word ‘transition.’  

 

 

P A N G L O O S S I A N  M U D D L E

28th January 2017

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