Friday, 29 October 2021

Wanted: a serious post-Brexit policy

Over the last few years, one of the most acute commentators on Brexit has been Jonathan Lis, and in a recent article he concludes that the three fundamental consequences of Brexit are that “if you erect trade barriers, trade will be harder. If you gut the workforce, there will be fewer people to do necessary jobs. If you leave a club, you no longer enjoy the perks”.

Once, these would have been warnings. With those warnings ignored, they are now accomplished facts, although what should flow from them is a matter of legitimate political debate. What matters, therefore, is no longer to argue about whether Brexit was right or wrong but to respond to the realities it has brought.

Of course those two things can’t be entirely decoupled. For it is politically impossible for the present government to acknowledge that most of the country’s long-term economic problems either derive from, or are intertwined with, or have been exacerbated by, Brexit. Its entire existence is bound up with the Brexit project, and it demands fealty to that project from its members.

So it is both astonishing yet unsurprising that this week’s budget statement did not contain any acknowledgment of the problems Brexit is causing, referring instead to global issues and the pandemic in relation to supply disruptions and inflation as being “not unique to the UK”. This was, at best, disingenuous in ignoring the additional role of Brexit, which is unique to the UK. It also ignored that, as stated by the head of the Office for Budgetary Responsibility (OBR), the long-term negative impact of Brexit on GDP will be twice that of the pandemic. In fact, the actual word ‘Brexit’ was not used once during the statement, although there were a couple of mentions of having left the EU.

However, these will have disappointed anyone expecting that by now, surely, we would be reaping the dividends of doing so. Indeed, the only announcements of things which might be described (by some) as such were about a trivial tax break for merchant ships flying the red ensign (£) and the cutting of air passenger duty on domestic flights (a strange decision in the run up to COP-26). There was also a claim that the restructuring of alcohol duties was in some way a result of leaving the EU, but it wasn’t clear which elements of it this referred to, not least as Chancellor Rishi Sunak said that many of the anomalies being corrected had built up over 140 years, long before the EU even existed.

The budget statement is just the latest manifestation of the more general way that for months now Brexit has either been left unmentioned, or not addressed honestly. The result is that the UK doesn’t currently have anything like a serious policy response – by which I mean one that is realistic, pragmatic and effective – to any of the three core consequences of Brexit that Lis identifies.

Trade: no serious policy

Aggregate figures for international trade are a mess because of the pandemic, because of multiple and changing measurement methodologies, because of data lags, and because the transition period only ended ten months ago. So it’s still possible to quibble about the numbers. But although not mentioned by Sunak in his speech, the latest figures from the OBR which accompanied the budget show that UK goods trade with the EU is down by 15% and with non-EU by 7% since 2019. This suggests a very considerable negative Brexit effect above and beyond that of the pandemic.

There’s also some evidence (£) that as trade recovers globally from the pandemic the British recovery is lagging behind that of other countries because of more restricted trade with the EU. And there is compelling firm-level evidence that trading with the EU is more difficult, although, as an excellent new review by Dr Anna Jerzewska of the UK Trade Policy Observatory shows, there is a lot of variation in how firms are affected by, and respond to, these difficulties.

In any case, the full picture of what Brexit is going to do to trade isn’t yet available for the simple reason that the UK has twice postponed introducing full import controls, and won’t do so until July 2022 (unless there is another postponement). And whilst the EU’s import controls were in place from the beginning of this year, there was a grace period on the provision certification of product origin (i.e. of whether a sufficient percentage of a good is made in the UK to qualify for tariff-free trade). This expires at the end of this year, and there are reports (£) that many British firms are not ready for this new complexity. Thus the figures are likely to get worse because there are still significant Brexit trade frictions to come on top of those which have already depressed UK-EU trade.

However, even before watertight data are available and even before full implementation, we can be certain that UK-EU trade will be less than it would have been as a result of Brexit. As Lis indicates, there is nothing complicated about it: Brexit introduces new trade barriers, so by definition there will be less trade than there would otherwise have been. In a similar way, whilst a government spokesperson said it was “too early to draw conclusions” about it, the news that Welsh ports like Holyhead are declining because Irish freight to other EU countries is re-routing was inevitable. Like water, trade will find new routes if existing ones are constrained.

Of course the Brexiter claim and the current government’s policy is that this will be offset by increased trade with non-EU countries as a result of new trade deals. If it is, then at best that would be damage limitation. But it almost certainly won’t be. Free trade agreements with faraway countries simply won’t be large enough, as the much-trumpeted deal in principle with New Zealand (NZ) which will add virtually nothing to UK GDP shows.

Moreover, especially because the government is so keen to make such deals for the symbolic reason of ‘proving’ Brexit benefits, they come at a hefty price. In the case of the NZ deal this will be paid especially by British lamb farmers, as NZ reporting of the deal shows, and shellfish producers (£). In both cases, these industries have also already suffered in their trade with the EU, so the NZ agreement is actually a double blow, not a mitigation.

This isn’t to say that no one benefits from any of this. For example, lawyers and architects will be able to work in NZ a bit more easily. Northern Ireland could have new opportunities, for example in hosting distribution hubs to service both UK and EU markets. But, overall, in what for the UK is the key economic domain of international trade, we have a policy that makes no economic sense - even viewed as damage limitation, seeking improvements to the trade agreement with the EU would make more sense. Worse, it is a policy which is concealed by vapid boosterism and, at best, misleading claims.

Labour and supply: no serious policy

Back at home, there is no end in sight to the labour shortages which, in turn, are contributing the supply crisis of which distribution of chemicals for sewage treatment is the latest high profile manifestation. Lack of HGV drivers is central to that and, as noted in my previous post, whilst increasing wages may gradually ease the problem it is already creating new shortages of drivers of buses and refuse wagons. That is just one example of a wider picture – another is the way that the better wages and conditions now being offered to warehouse staff or hospitality and retail staff are sucking workers away from social care, which is already in dire crisis.

One of the false arguments for Brexit, often made by Lexiters and recently embraced by Johnson’s government, was that immigration from the EU drove down wages. From that point of view, wage rises now (to the extent that they are happening) are a vindication that the argument was correct. But it conflates two different things. The idea that immigration drives down wages is founded on the ‘lump of labour’ fallacy – that there is a fixed amount of work to be done in the economy, so more workers means lower wages. The reason it is a fallacy is because immigration produces new economic activity which creates new jobs. That’s only a general principle, but empirical evidence as regards EU migration to the UK suggests that any negative impact on wages was small, whilst the net fiscal benefit is well-established.

On the other hand, what cutting off immigration does do is to create a ceiling on the amount of labour available. So wages may go up in response, but so do prices (negating the real effect of the wage rise) unless there has also been an increase in productivity, whilst some work goes undone – meaning shortages of goods and services. In fact, the Institute for Fiscal Studies expects real wages to remain stagnant until 2026. At the margin, it could be that some people who are able to work but were previously unemployed or under-employed are brought into the workforce, but despite longstanding myths of shirkers making unemployment a lifestyle choice because of generous benefits, the numbers are not large enough to make much difference.

This can’t be detached from the consequences of being a country with a rapidly rising proportion of the population who are over 65 and a declining fertility rate. There simply aren’t enough workers for the work needed, and it’s going to get worse, not better. Nor is training up the answer – for all that it may well be desirable in itself – as it just shifts the labour shortage from higher skill to lower skill occupations. And, in any case, the government’s immigration policy, which favours “the brightest and the best”, as re-iterated in Sunak’s budget, is actually predicated on the default of lower skill and lower pay jobs being done by British workers.

There’s clearly a lot more that could be said about all this. I’m not pretending for a moment that it is a simple issue, but the point is precisely that the complex interactions of immigration, demographics, employment, productivity, skills, wages, and inflation mean that simply ripping up freedom of movement overnight, and making immigration in general more difficult and less appealing, is a recipe for chaos. That is exactly what is unfolding, with hardly a sector of the British economy not suffering from labour and skills shortages, and job vacancies at a record high.

And if all this sounds rather abstract then consider a couple of recent stories. First, Polish journalist and lorry driver Tomasz Orynski’s explanation of why EU lorry drivers are unlikely to be tempted back to help out with the supply crisis (see also comedian Matt Green’s take on this kind of issue). Or, second, that Sunak’s announcement of £5.9 billion of capital funding for the NHS to deal with the treatment backlog caused by the pandemic is likely to founder on the lack of staff, such as anaesthetists, needed to operate the new equipment and facilities.

In these and similar cases, the ultimate pain of a lack of serious policy is felt by all of us whose lives get gradually harder and meaner as shelves stay half-empty, operations are postponed, building work is delayed, or social care is unavailable to ourselves or our relatives.

Relationship with EU: no serious policy

Meanwhile, the UK is going to have to learn to live with the realities of being a third country to the EU. In principle, this should not be so hard, at least for Brexiters, since it is what they wanted. But from the outset, the consequences of Brexit have been treated as EU punishment, rather than Britain’s choice, and that sentiment still permeates the pro-Brexit press. It is also present in the way the government continues to grizzle about the Brexit deal it agreed. This in turn means that, rather than try to develop a harmonious partnership, the government continues to make bellicose demands, most obviously over the Northern Ireland Protocol (NIP).

So far as that is concerned, this week has seen the wearying re-play of the kind of thing we saw when the Trade and Cooperation Agreement (TCA) was being negotiated, with some reports suggesting the government would insist on all its demands being met, others that the EU would make no concession on what is now the core ECJ issue, and still others claiming that a compromise deal is in the offing (£). Each statement is picked over for signs as to what it means but, as at the time of the TCA talks, it’s a pointless exercise because it’s impossible to disentangle the substance from Boris Johnson and David Frost’s tedious gamesmanship.

The real point is that the UK’s choices, whilst they exist, are quite limited. The government can accept the latest EU proposals on checks and formalities, and perhaps get a fairly pointless fudge on the ECJ’s role. In which case, what do the theatrics achieve? Or it can make good on its ongoing threat to trigger Article 16 – but then what? Just more negotiations, but in an even more sour atmosphere. And then what? What is it actually hoping to achieve? The most hardline answer, presumably, would be to completely unpick the NIP and force the EU to put checks in between Ireland and the rest of the single market. But, even assuming that happened, it just leaves a permanently toxic legacy with the EU – not to mention with Dublin and, very likely, Washington.

As this goes on, and the same will be true in any future rows, the EU has plenty of ways of exerting pressure on the UK. It’s claimed by Bill Cash that the EU is delaying ratification of Britain’s associate membership of the Horizon Europe scientific research programme as leverage in the NIP negotiations. Suppose that’s true: welcome to the real world, in which the currency is relative power. What’s the UK going to do? Decide to pull out of Horizon Europe? That would be far more damaging to the UK than the EU. In this and countless other areas the EU can squeeze the UK in pursuit of its own interests, and the UK doesn’t have much to squeeze back with. That’s not ‘punishment for Brexit’, it’s the self-punishment Brexit has inflicted on the UK*.

We’ve left the EU, but we haven’t left Europe

Of course I understand the argument that there’s some domestic political dividend for the Tories in having an antagonistic relationship with the EU. But that isn’t a serious policy if the criterion of such a policy is national and strategic interest. That interest lies in having good neighbourly relations with the economic and regulatory hegemon next door. We have little clout because we’re no longer ‘in the room’ where decisions that affect us are made. That was the choice we (collectively) made. But the facts of geography, history, economy and politics mean that – whether Brexiters like it or not – we live just outside the room. We’ve left the EU, but we haven’t left Europe, to coin a phrase. So we need to be realistic about what that means, namely that we have a bit more clout as a trustworthy friend than as a dishonest antagonist.

Realistically, there’s almost no chance that the present government will develop serious, effective post-Brexit policies in any of the three fundamental areas. It’s possible that no UK government ever will. If that is so, it is a serious problem because the magnitude of Brexit means that ‘post-Brexit policy’ isn’t a discrete area, but shapes what can and can’t be done across just about every other policy area from health and social care to science and innovation.

This also has to mean that any political party which aspires to making a meaningful policy offer has to address Brexit. Clearly that includes the Labour Party, which remains largely unwilling to discuss Brexit as it response to the budget showed. The exception to that is as regards new trade deals such as that with NZ where Shadow Trade Secretary Emily Thornberry has been robust in her criticisms. Presumably that is because it is seen as not being directly critical of Brexit. But that actually applies across the board in that the debate now needn’t – and perhaps at this time shouldn’t – be in terms of whether Brexit should have been done, but must be realistic about the consequences of its having been done.

The danger, as I see it, is that UK politics is moving too slowly, if at all, towards such realism, whilst the economic and other consequences are happening much more quickly, and will be structurally ingrained by the time, if ever, that the politics catches up.

 

*It’s tempting to include in this the Jersey fishing rights row which as expected has now revived. But that row is more complex and nuanced than simply being a UK-EU stand-off. I’ll probably do more on this next week if, as is likely, it continues. For now, the comments and links from the post where I first discussed the issue (the sub-section entitled ‘Jersey row’) may be useful.

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