Sunday, December 10, 2017
A hurdle overcome - now to decide where we're going
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

In the past few days my thoughts, like those of the prime minister, often turned to Northern Ireland and I offer the following facts without comment. Northern Ireland accounts for 2.1% of Britain’s gross domestic product, significantly smaller than any English region, less than two-thirds that of Wales and just over a quarter of the economic clout of Scotland.

Northern Ireland’s fiscal deficit with the rest of the UK – the gap between taxation and spending – is £5,438 a head, comfortably outstripping anywhere else, and roughly twice that of Scotland. The voters of Northern Ireland came out 56% to 44% for staying in the EU in last year’s referendum.

For several days last week, it looked as though, notwithstanding all this, the issue of the Ireland-Northern Ireland border had scuppered Theresa May’s “deal to move towards a trade deal”, because of objections by the (pro-Brexit) Democratic Unionist Party, on which the prime minister’s parliamentary majority depends.

Friday morning’s breakthrough many not have entirely satisfied the DUP and, as expected, the deal on the Irish border is something of a fudge. But it is only fair to say that the agreement May came to was in most respects a very acceptable one. The so-called divorce bill has been kept to under £40bn and will be spread out over such a long timescale that in most years it would be the public spending equivalent of small change. Any role for the European Court of Justice in the rights of EU citizens in Britain will be time-limited and very much a fallback one, which should concern nobody but the Brexit ultras.

What was also significant about Friday morning’s breakthrough is what it says about the direction of future trade talks. The harder the Brexit, the more difficult, if not impossible, it would have been to avoid a hard border between Ireland and Northern Ireland. It may have been the tail wagging the dog but the border issue has undoubtedly pushed us in the direction of a softer Brexit, which is why some on the Leave side hated the deal.

Much of the kerfuffle over the Irish border could have been avoided if, as I have argued here on a number of occasions, the prime minister had not been so hasty in ruling out continued membership of the single market, the internal market. Britain came to the EU via being a founder member of the European Free Trade association (EFTA). These days three EFTA members, Norway, Iceland and Liechenstein are part of the European Economic Area and thus the internal market.

It is a rapidly diminishing hope, but there is still a very slim chance that, as we do move beyond the preliminaries and into the real talks, EEA membership will come back on to the table. As it is, it may be possible to argue that regulatory alignment between Britain and the EU, the current buzz phrase, is a sort of de facto EEA membership.

It may or may not, and the fact that nothing can be definitively ruled in or out goes to the heart of the government’s problem, and the frustration of those on the EU side. Where there should be a blueprint for Britain’s future trading arrangements with the EU there is a vacuum that vague words in prime ministerial speeches do not fill.

Two things have stood out in recent days, apart from the deal early on Friday morning. One was Philip Hammond’s admission that the cabinet has not yet had a discussion on the government’s desired Brexit end-point. The other was David Davis’s admission that the 58 sectoral impact assessments, on how different parts of the economy would be affected by different scenarios, do not exist.

I do not entirely blame Davis for his embarrassing admission on the impact assessments, though he deserves all the ridicule he has suffered for his “the dog ate my homework” excuses, and for giving the impression that his Rolls-Royce department, and indeed the entire civil service, had been purring away producing the best impact assessments money could buy. That was bluster, and he has been found out.

Such assessments are not that difficult to do. I have been reading two good ones commissioned, interestingly enough, by the much-criticised European parliament. One looks at the impact of Brexit on the remaining 27 EU members. The other looks at financial services and, contrary to what you might expect, is constructive and helpful.

Hard Brexit would result in some relocation of financial services from the UK to the EU, it says, but would also result in increased costs and fragmentation for all. This is one of the ways Brexit reduces efficiency. A new regime of regulatory equivalence would help mitigate some of these effects, it says, while: “The least disruption to the financial system and markets occurs in the EEA membership scenario.”

KPMG published its impact assessments earlier in the year and most of the other big accountancy firms have conducted similar exercises. Last week the National Institute of Economic and Social Research held a conference in which it took its estimates of the sectoral impacts under “soft” and “hard” Brexit scenarios and applied them to localities. Soft Brexit is defined as zero tariffs but with increased non-tariff barriers with the EU. Hard Brexit has tariffs and higher non-tariff barriers.

Most sectors of the economy suffer under both soft and hard Brexit, though a minority gain. The biggest losers are the chemicals industry, financial services, electrical equipment, mineral extraction and others. But agriculture gains, which must explain all those Vote Leave signs in farmers’ fields.

All local authorities lose economically under soft or hard Brexit, with the biggest losses in the City of London. Aberdeen. Tower Hamlets, Watford and Mole Valley in Surrey, and the smallest in South Holland (Lincolnshire), Crawley, the Isles of Scilly, Melton (Leicestershire) and Hounslow.

Such results are one reason why the government has not come clean with its own, and indeed now says they do not exist. No government wants to tell voters that the course it has embarked upon, at their behest, will make them worse off.

Sometimes, even to the government, warnings can be useful. The verdict of the House of Lords EU committee on Thursday was that a “no deal” Brexit “would not just be economically disruptive, but would bring UK-EU co-operation on issues such as counter-terrorism, nuclear safeguards, data exchange and aviation to a sudden halt. It would necessitate the imposition of controls on the Irish land border, and would also leave open the critical question of citizens’ rights.”

The good news about Friday morning’s compromise is that it should have put an end to the damaging bluster about walking away without a deal. In normal circumstances it would. We are not, however, in normal circumstances. The no-dealers may yet make a return if and when the coming trade talks encounter difficulties.

The other reason why official impact assessments have proved hard to do is because of that vacuum. Comparing EU membership with the government’s desired end-point should have been straightforward. In the absence of that end-point it has proved all but impossible.

Business has breathed a sigh of relief at the latest turn of events. Sterling, highly sensitive to the state of Brexit, steadied. But the clock is still ticking and the Brexit preliminaries took at least three months longer than they should have done. The first and next priority is agreement on transitional arrangements that effectively keep us in the EU. They could last a long time.