Economics & StrategyEmail
The past fortnight has not been the finest in the history of the Treasury. A series of evasive manoeuvres and policy U-turns gives the impression of a government department not in full control of events. This culminated in a delay to the budget, planned for November 6. The loss of omnipotence by Whitehall’s most powerful institution has been rapid and striking.
Symptomatic of the unease at the Treasury was the decision not to publish an updated Brexit impact assessment. This is a document that typically would assess the economic effect of the EU (Withdrawal Agreement) Bill, the legislation necessary to enshrine the latest Brexit deal in domestic law. In previous iterations of the withdrawal agreement, this exercise has been led by the Treasury. This time
Before looking into the reason that this is a strategic mistake, let us first dismiss a political red herring: that lawmakers do not have the evidence needed to make an informed decision. The impact can easily be estimated from the previous government’s analysis and from excellent impact assessments provided by independent researchers at UK in a Changing Europe and the Centre for Economics and Business Research. It would be safe to assume that the government’s analysis would come up with something similar: a material economic impairment. Furthermore, most MPs would not read an impact assessment. Far fewer would read it and then change their views. Most MPs would simply use its headline finding as a stick to beat the government with.
No, the real merit of an up-to-date assessment is to shed light on how the withdrawal agreement tees up the next stage of negotiations. It would help to prepare the electorate for the trade-offs that will emerge as the UK and EU define the terms of their new relationship, probably early in the new year.
“Get Brexit Done” is a seductive tagline, a Dominic Cummings masterpiece. Such messaging may contribute to a sweeping Conservative general election victory. The inference of closure to a painful chapter in the UK’s political history, however, is also misleading. Anybody who believes that Brexit will leave the national discourse after the UK’s withdrawal is in for a rude awakening in 2020. During the implementation period that follows EU withdrawal, the UK government needs to make some tough choices. Politically toxic issues such as UK territorial fishing rights and the sovereignty of Gibraltar will get thrown in together with debates over equivalent environmental standards, workers’ rights and regulatory standards.
An impact assessment that begins to socialise these trade-offs and lays out the government’s strategy will help businesses and the electorate to prepare for the end of transition, in December 2020 or more likely two years later. Greater trade opportunities undoubtedly will be possible should the UK abandon a regulatory level playing field, but in doing so there inevitably will be greater frictions to UK-EU trade and a more limited free trade agreement with the EU27.
Not a single business I have met complains about this potential for divergence. Rather they are frustrated at the lack of honesty in such decisions. The Treasury needs to be at the vanguard of making this two-sided case. If the past three years have taught UK ministers anything, it is that cakeism eventually turns stale.
Away from Brexit, the Treasury’s U-turn over the budget is not keeping business leaders awake at night. Many will welcome the stability of inertia in the tax system. The government is, however, on course to exceed its in-year borrowing target of £41 billion by as much as £15 billion. This raises questions over whether the UK is preparing to run “Trump-style” fiscal deficits. This would follow a decade of adherence to deficit reduction. Gilt markets seem relaxed about the prospect of higher government borrowing. Any change in that view, however, would mean a reduction in the finances available for schools and hospitals as the exchequer’s revenues get diverted to finance higher interest repayments. A new set of fiscal rules would help to allay the fears of those lending to the government.
There is also concern over the growth outlook. The recession risk is growing in an economy that has had stubbornly low growth in recent years, culminating in a contraction in output during the second quarter. It seems likely that the economy grew in the third quarter of the year, but the UK is not out of the woods, certainly if the global manufacturing recession spills over into the much larger services sector. The “Treasury view” on whether continued low growth necessitates a policy response is important information for households and businesses.
Finally, there are questions over who in the government is putting the case for business and free enterprise. Sajid Javid, the chancellor, said in 2016: “The only thing leaving the EU guarantees is a lost decade for British business.” It is fair to say that he has moved to take a politically pragmatic view of Brexit since. But what does that pragmatism look like? This is wider than the issues relating to Brexit. Does Javonomics take a libertarian approach to free markets? Does it use the government’s regulatory levers to correct for market failures? What are the principles that will guide the government to intervene? The opportunity to lay out these parameters is hugely valuable as businesses consider whether to restart investment spending that has fallen steadily over the past three years.
There is goodwill in business towards the chancellor. His path to the Treasury has involved success in business and overcoming barriers to social mobility. In a meritocratic economy, stories such as his have an important role. But many more fortnights like the last and accusations will grow that Sajid Javid is in office, but not in power.
A version of this piece was published in The Times.