Sunday, October 06, 2019
This deal isn't flying, but no-deal still has to be grounded
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

By now you will be pretty fed up of hearing about the Irish backstop, and I do not intend to prolong the agony for too long today. Boris Johnson promised to get rid of it but, as was always likely, has instead suggested a revised version of it.

The government’s proposals are thoughtful, and in some respects ingenious, and when the inevitable general election comes will be regarded by many voters in the UK as reasonable, and any rejection of them by Ireland and the EU as unreasonable, which is perhaps the intention, but it is also pretty obvious what the flaws in them are.

Voters in Northern Ireland wanted to remain in the EU and a majority was in favour of what the Johnson government called the “undemocratic” backstop. Northern Ireland businesses were even more in favour of both. So we should listen to political parties other than the Democratic Unionists and to businesses in the province when they strongly oppose the government’s “two borders” approach in its new backstop; a regulatory border between the mainland and Northern Ireland and a customs border, if not actually at the border, between north and south.

We should also take note of the fact that allowing the Northern Ireland assembly a veto, then approval or disapproval every four years over whether Northern Ireland maintains regulatory alignment with the EU, does not respect the integrity of the single market.

Agreeing on permanent Northern Ireland membership of the single market would, I think, provide it with an enormous economic benefit, enough to result in similar demands from Scotland, and possibly Wales. If that were to happen, for Northern Ireland, support for the deal from the DUP would evaporate, but the EU would have less reason, though still some reasons, to oppose it.

Anyway, we will see how it goes. The closer you get to a date, the riskier it is to predict events. When Theresa May was prime minister, “nothing has changed” became a cliché and a bit of a joke. For those who watch Brexit developments for the financial markets, however, the Johnson backstop proposals are not a game-changer.

Malcolm Barr of J P Morgan, one of the City’s most assiduous Brexit-watchers, sees only a 5% probability of an orderly Brexit on October 31 based on the Johnson proposals and a 10% chance of a no-deal Brexit. The prime minister says he will die in a ditch rather than delay Brexit beyond the end of the month but that leaves an 85% probability that the Article 50 process will in fact be extended, whether he asks for it or not. Most of that 85% is based on the expectation of a pre-Brexit general election later in the year. A second referendum is given the same overall probability (10%) as an early no-deal Brexit.

All of which raises the question of when, if ever, the country should ready itself for a no-deal Brexit. There is a chance, as noted that it happens in 24 days’ time, and Downing Street is looking for ways to frustrate the Benn Act, intended to prevent it, and leave “do or die” on October 31. But most observers think the Act is watertight and, while there is some evidence from surveys that factories are engaging in some stockpiling, it is on nothing like the scale of earlier this year, in the run-up to the original March 29 Brexit deadline.

We should not, however, dismiss the possibility of a no-deal Brexit, though at a later date. The circumstances in this would be most likely to arise would be a general election which results in a Tory majority – more or less what the polls are suggesting this time – and with at least some of the anti no-deal Tory rebels no longer in the House of Commons. This would give the prime minister a much freer rein, which could include taking the UK out of the EU without a deal at the end of January.

If so, then whenever it happens, according to Sajid Javid, there will be a policy response ready and waiting. The eyecatching announcement in the chancellor’s Tory conference speech was a commitment to raise the national living wage to £10.50 an hour over five years, which attracted a mixed-t-hostile reaction from business.

He also said that he had “tasked the Treasury with preparing a comprehensive economic response to support the economy”, and that “working closely with the Bank of England, we’re ready to draw on the full armoury of economic policy if needed”.

That makes sense. Compared with the breezy assurances from other ministers, including the prime minister, that it will be alright on the night, the chancellor is at least acknowledging that there will be a no-deal economic shock to be countered, and is examining ways of doing so.

Though the economic impact would not be on the scale of the financial crisis more than a decade ago, some of the elements of the policy playbook from that period could be deployed. So the Bank of England would cut interest rates, as is now acknowledged by most members of its monetary policy committee, may unveil another round of quantitative easing (QE) and ensure there is an adequate supply of liquidity in the system.

Unlike in 2007, however, the scope to cut rates is limited; then they were at 5.75%, now 0.75%, and QE, then a novelty which had an impact, has now lost much of its power.

As for the Treasury, a decade ago it cut VAT by 2.5 percentage points, had a car scrappage scheme and announced some immediate additional infrastructure spending. These days, it is said, there are more “shovel ready” infrastructure projects ready to go than then. But it is not clear that trying to boost consumer spending by cutting VAT would be the appropriate response when a demand shock to the economy is accompanied by a supply shock. This is also why Mark Carney has warned people not to expect too much of monetary policy in the event of a no-deal Brexit.

This is why a “comprehensive economic response” to a no-deal Brexit would have to include direct support to businesses, and to farmers, to ease them through the immediate impact of a no-deal Brexit. Indeed, the government has a name for this, Operation Kingfisher. Alongside Operation Yellowhammer it suggests, if nothing else, that somebody in government is a bird fancier.

The trouble is with this that for many businesses, and farmers, short-term support will not be sufficient to cope with something that has broken their business model. The Johnson version of the backstop has not taken a no-deal Brexit off the table. Something needs to do so.