Sunday, June 26, 2016
I'm not going to sulk - we have to make the best of a bad job
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

For many people reading this, Friday morning will have dawned as a moment of triumph, of liberation. That was not how I saw it, as you might have gathered from my series of pre-referendum pieces. But, admittedly after a dishonest campaign, the voters decided otherwise. Democracy does not always throw up the outcomes we would like, or think sensible. We face a poorer and more uncertain future.

Despite his “no regrets” statement in Downing Street on Friday, I doubt if David Cameron now thinks that of the referendum that is bringing an end to his prime ministerial career. You only ask a big question of voters if you are sure of the answer. Downing Street thought it was sure of the answer as late as Thursday evening but it was wrong. As it is, a Tory prime minister Sir Edward Heath is most remembered for taking Britain into Europe 43 years ago, and Cameron will go down in history as the prime minister responsible for taking us out.

The Cameron-George Osborne double act, meanwhile, does not have much further to run. As with the referendum outcome, people will have mixed feelings about this. The chancellor has had more than his fair share of setbacks, particularly since last year’s election. As he joked himself, his version of the 5:2 diet is one in which in two out every five budgets he has to eat his words.

Osborne wanted to be remembered as the chancellor who took over at a time of crisis and, while courting unpopularity, fixed the public finances, alongside some long-term reforms, including pensions. Now, the abiding memory will be of the warnings on the economy that he commissioned or co-ordinated not being enough to persuade voters. Indeed, if the evidence of the polls is anything to go by, those warnings backfired with many voters. It is not hard to think who might succeed Cameron as prime minister. A successor to Osborne is rather harder to think of.

Osborne’s efforts were not enough, and neither were those of the overwhelming majority of economists, including highly respected bodies such as the Institute for Fiscal Studies (IFS). Businesses, big and small, were much less influential than expected, even locally. Nissan’s presence was not enough to prevent a big vote for Brexit in Sunderland, nor Honda in Swindon, nor Airbus in Flintshire.

I noted last week that economic arguments would not be enough to prevent a big vote for leave and a very close outcome on Thursday, and so it proved.

Many have said that those of us inside the “bubble” were unaware of the anger out there from the economic have-nots, some of which pre-dates the global financial crisis. I was well aware of such anger, particularly in Wales, the poorest part of the UK, where most local authority areas voted for Brexit. But the Brexit vote, as I also know, included many usually non-political, comfortably-off middle-class voters in the south-east.

One thing I do not have the slightest regret about is setting out the strong economic case for staying in the EU. I doubt it swung a single vote but I would have felt permanently guilty if I had not done so, particularly towards the young, many of whom feel they have just had part of their future snatched away by leave-supporting older voters. The baby boomers have done it again.

Many divides were thrown up by the referendum, but the inter-generational one is perhaps the most regrettable. Many young people, including those in my family and their friends, were almost inconsolable after the result became known.

The other thing that my series of pieces did was to provide a road map for the kind of post-EU response we should have. The first response to calm the market reaction, from Mark Carney on Friday morning, managed to make a nasty situation somewhat less toxic without saying all that much, other than that the Bank of England is prepared for all eventualities.

There will be important decisions from the Bank in the coming weeks. In one sense, it is good that Carney and his colleagues have the experience of 2007-9 to draw on, a period in which the authorities’ reaction was less than surefooted.

Whether the Bank needs to cut rates (or raise them to support sterling) and whether it needs another round of quantitative easing (QE) will become clearer in the coming weeks. The Bank’s preferred response will be to content itself with supporting financial stability, riding out the storm without adjusting rates or engaging in another round of QE, which was why there was no knee-jerk reaction on Friday.

What about the fiscal policy response? One campaigning line which Osborne was unwise to pursue was the idea of putting up taxes or slashing spending in the wake of a Brexit vote. That was when he departed from economic logic. If your economy takes a hit, as Britain’s will do, the sensible response to it is not to amplify that hit. Deficit-reduction is appropriate, when needed, in a growing economy, not one that has just been hit by a sock.

The public finances will have to take the strain. Osborne’s deficit targets were slipping anyway, partly because of the pre-referendum slowdown in the economy. His successor will have to decide whether to aim for a budget surplus. There will be downgrades of Britain by the ratings agencies, because of Britain’s record current account deficit, as well as the budget deficit, but that is probably one of the least of our worries.

More important than the short-term monetary and fiscal response are the decisions that need to be taken in the coming months to limit the long-term economic damage from Brexit. Despite silly attempts to disparage it by Vote Leave campaigners, the single market is hugely important to Britain’s economy. It is important for goods, and it is important for services, including financial services.

It is too much to hope for a deal in which Britain could be fully part of the single market while being outside the EU but something as close to that as is feasible has to be the aim. The UK, like Norway and Iceland, will need to be in the European Economic Area but with enhanced arrangements for the City. There will be a price to be paid in terms of what will effectively be a contribution to the EU budget but that would be a small price compared with significantly restricted access to our most important market.

What can be achieved on the single market will be key to Britain’s ability to continue to attract foreign direct investment (FDI). This will be the test in the coming years. Will multinationals automatically choose to access the single market from EU locations, or will it be possible to neutralise the impact of exit by replicate as close as possible existing arrangements? FDI does not come without a huge effort, and those trying to attract it to Britain will fear they have one hand behind their back.

The final area is immigration. We have a system for non-EU migration which does not work well, and an apparent plan to apply that to EU migration as well. In all the debate over immigration, and “taking back to control”, it is often forgotten that it is not just doctors and engineers we need but also in many sectors, unskilled workers.

So, this was not a result I wanted but congratulations to those who did and I am not going to sulk. The task now is to make the best of a bad job.