Saturday, October 12, 2019
The long and the short of Johnson's Brexit deal
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.

The shift from extreme pessimism to optimism in recent days over an early agreement on the terms of Brexit was as sudden as it was welcome. Sterling, that reliable Brexit barometer, led the celebrations, with tis best two-day performance in a decade, though I note it is only back to where it was when Boris Johnson succeeded Theresa May as prime minister.

A lot has changed. It seems there will be a customs as well as regulatory border in the Irish Sea, though complex arrangements will still allow Northern Ireland to benefit from an tariff reductions negotiated by the UK in trade deals. The Democratic Unionist Party will not have a sole veto on regulatory alignment between Northern Ireland the EU. The Johnson backstop is a variation on May’s but may yet be workable - and indeed is similar to what the EU proposed some time ago - and for the first time the prime minister has shown some statesmanship. We will see this week whether there are further lurches on the rollercoaster.

The government, sensibly, wants to avoid a no-deal Brexit, as do Ireland and the EU, and the Institute for Fiscal Studies reminded us a few days ago why. Its green budget, in conjunction with Citi, showed that no-deal would lead to recession, and an economy 2.5% smaller than otherwise after three years. Add that to the effect on the economy of the referendum itself, and there is a 5%-6% hit to gross domestic product over six years.

Under a no-deal, the government would also borrow a lot more. The IFS has added the extra public spending announced by Sajid Javid to the effects on the public finances of a no-deal, to estimate that by 2021-22 the government will be borrowing around 4.5% of gross domestic product (GDP), or more than £90bn, and government debt will be up to more than 90% of GDP.

The short-term matters; the long-term even more. Amid all the excitement over the cliff-edge, and the need to avoid falling over it, the long-term consequences of the kind of future trade deal with the EU envisaged by the Johnson government, if it is around for long enough to negotiate one.

I am indebted therefore to the think tank, The UK in a Changing Europe, which has filled an important gap in our understanding. Its report, The Economic Impact of Boris Johnson’s Brexit Proposals, will be published this week. It has been written by Hanwei Huang, Jonathan Portes and Thomas Sampson, with contributions from Matt Bevington and Jill Rutter. The think tank is based at King’s College, London, but the report also used the trade model developed by the Centre for Economic Performance (CEP) at the London School of Economics.

The Johnson proposals differ from those envisaged by Theresa May’s government in a number of important ways. While she committed to maintaining similar regulatory standards for agriculture and manufactured goods, and a “level playing field” on labour and environmental standards, the Johnson government has said it wants flexibility. May would have kept the whole of the UK in a customs territory with the EU.

Taking these and other differences into account, the think tank concludes that while the May government could have negotiated a future “Canada-plus” (or even plus-plus) trade agreement, or perhaps something even closer such as Turkey’s deal with the EU, the Johnson red lines will only allow a “bare bones” trade agreement, which they describe as Canada-minus. The UK, in other words, would have a trade agreement which is less comprehensive than that negotiated between the EU and Canada. Tariff would be eliminated but significant non-tariff barriers would be in place. It would be a long way from what business currently enjoys as a result of single market membership.

You do occasionally hear some economically illiterate nonsense which suggests that the EU single market has not been good for Britain. Those who argue this should not be allowed anywhere near statistics. The fact that, for example, trade between China and the EU has grown faster than that between Britain and the rest of the EU since the single market came into being in the early 1990s simply reflects the reality that one (China) started from a very low base while the other (Britain) began from a position in which there was already a high degree of trade and integration.

The single market matters for trade and Britain’s ability to attract inward investment. Losing it will come at a cost. Simulating the effects of Johnson’s proposals is not straightforward, given that there has been a lot of vagueness about them. The economists are keen also to point out, as I always do when reporting these exercises, that they are not conventional forecasts.

They cannot tell you precisely what will happen to the economy over the next 10-15 years, which will depend on many factors. But, just as a doctor can tell you that if you smoke 50 a day and eat a lot of fatty food, you will be less healthy than otherwise, they can tell you that if you take actions which inhibit trade, your economy will be smaller than otherwise. One of the things you might do, negotiate trade deals with other countries, will by the way have a relatively small effect; 0.1% to 0.2% of GDP after 15 years according to the government’s own long-term assessments.

There are three separate elements to this new assessment of the Johnson proposals. The first is the impact on trade of imposing greater barriers on trade with the EU than currently exist. The second is the related effect on productivity, with a clear relationship between reduced trade intensity and productivity. The third, and this is where the Johnson proposals could offset some of the negative effects of the first two, is immigration. Immigration, particularly immigration of skilled workers, boosts productivity. The more that it is restricted, the more that productivity and living standards will suffer.

The overall conclusion is that the future relationship envisaged by Johnson is worse for the economy and the public finances in the long run than the May plan, though not as bad as a no-deal Brexit.

So, the first two factors produce the result that after 10 years, income per head is 6.4%, or £2,000, lower than it would be if we stayed in the EU. That compares with 4.9% under the May plan and 8.1% under a no-deal.

The more liberal immigration regime hinted at by the prime minister would bring that fall in per capita incomes down a little, to 5.8%. But if he was as restrictive as May intended to be, the drop would be bigger, at 7%.

As for the public finances, the IFS has warned of short-term no-deal damage, and the UK in a Changing Europe report calculates that even a deal along the lines Johnson suggests would do some significant damage in the long run. Depending on whether the future immigration regime is liberal or restrictive, annual borrowing in 10 years will be between £40.5bn and £48.8bn higher, compared with £38.8bn under the May plan and £60.7bn under no-deal.

These are significant sums. Brexit is about more than economics, as the think tank says, and some people do not care too much about the long-term. But they should.