Let’s Make Brexit Work!
Friday 2nd June: That will happen if Westminster uses power wisely, says the economist, Dr. Gerard Lyons*.
Let’s get Brexit done! The indications are that that will be the voters’ instruction to the new government at next week’s general election.Leaving the EU will allow powers to be returned to Westminster. Because the UK has remained outside the euro area, it has maintained control of the main macro-economic levers of power. But now, in addition, the return of competencies from Brussels across a host of areas including regional policy and the ability to exercise full legislative powers in Westminster, will give the UK additional room for policy manoeuvre. This is potentially very exciting. But what matters is what Britain will do. We could, for instance, massively change competition policy and rescind the EU’s precautionary principle that restrains research. We could strengthen further workers’ rights, if we choose.It is this future empowering of Westminster that could mean this new Parliament and Government have the potential to be one of the most important in recent history. This election matters. It is not just about who wins, but about their underlying principles and policies. For that will set the direction of travel for the country for some time to come. Let’s hope we set off in the right direction.
For Brexit to succeed, it is not just a case of leaving. In fact, it is not only about “the” deal. Three areas of policy overlap and reinforce each other – domestic policy, the UK’s relationship with the rest of the world and the negotiation with the EU itself. All three are important. Economics is key to each and defence, trade and the social agenda also matter. Making Brexit work will involve rewarding the domestic UK population and positioning the UK to succeed in a changing and growing global economy.
On leaving the EU, the UK will have greater scope to pursue the domestic economic policy that the electorate chooses. When it comes to domestic policies, it is significant how much of a shift has been evident in this campaign. The Labour manifesto is geared towards far more state intervention and nationalisation. It is hard to argue with increased government spending to invest in major national projects vital to the country’s infrastructure and economic success. But the scale and the manner of how it is financed may spook the gilt market, to begin with, were Labour to win. Meanwhile the Conservatives, too, have put forward the case for more intervention. Some, such as price caps on energy bills, have been criticised within the financial markets. Others such as a greater focus on regional policy should be welcome from a macro-economic perspective. The government looks set to play a greater role. But it must get the balance right. This should not be about interfering in markets and picking winners, but about investment in the UK’s infrastructure, and promoting an enabling environment in which people and firms can succeed. More investment and innovation are needed.
That takes us to the fiscal numbers. Tax cuts have not really figured in the election debate, whereas tax hikes have. Is it really true that we need to have much higher tax rates to fund better public services? We certainly need good, well funded services, but we need to have globally competitive taxes too. Income taxes need to be lower. Property needs to be taxed properly. And in a globalised world economy, corporation taxes need to be low too. We also need to focus on building far more houses to ensure that rental and housing costs are kept as low as possible.
Perhaps the scale of the budget deficit and the huge demand on resources within the NHS help explain current thinking. But the budget deficit may surprise on the positive side in coming years. Global reflation is taking place – and debt dynamics are improving for a number of countries including ourselves. If the growth in nominal GDP (growth plus inflation) stays well above short and long term rates then the inroad into reducing debt can be good. This means policy makers must ensure market expectations about both future inflation and government fiscal policy are held in check, to keep government borrowing yields low.
What if anything has the election taught us about our policy towards Brexit? The Conservatives have reaffirmed the pre-election message of the Prime Minster: the UK will leave both the Single Market and the Customs Union, while seeking a comprehensive trade deal. This shows continuity from both January’s Lancaster House speech and the March Article 50 Letter. It makes complete sense.
This keeps open the possibility of the UK walking away without a deal, although the impression is that the PM is reluctant to suggest that too much while negotiations are in their early stage. More likely is a deal, plus a transitional arrangement are on the cards. A Labour Government would be far more nuanced on Brexit; they would still leave, although the future relationship would be significantly different, and would likely evolve into one similar to Norway, with a the UK in a poorer position of being rule taker, but not a rule maker.
Then there is migration. Last year’s referendum showed that returning sovereignty and having an economic model that favoured the many across the country were high priorities for people, as was controlling migration. The right migration is good for an economy, but not unlimited migration and open borders, as distinct to a policy of welcoming those with the education and high skills the UK economy needs. To suggest that having a sensible migration policy is economically illiterate, as some have during this campaign, is itself nonsense. Thinking needs to evolve. The UK needs to be open for the creative and skilled staff we want from across the world. But there is also a need to encourage firms to invest more in training UK based staff – although that too needs to be seen alongside the needs as identified in recent years for more vocational training.
Finally, the one thing we should hope for next Thursday is another good turn-out, regardless of how people vote. This would follow on from last year’s referendum. For Britain to succeed, we not only need to think beyond Brexit and have a vision for the future, we want as many as possible to engage in this debate about making Brexit work.
*Dr Gerard Lyons is Chief Economic Strategist at Netwealth Investments. He is a UK economist specialising in global financial markets, economic and regulatory policy with a focus on international banking. His forthcoming book, co-authored with Liam Halligan, Clean Brexit, will be published in July by Biteback.