Wednesday, February 1, 2023

Brexit’s comeback year | Financial Times

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This article is an on-site version of our Britain after Brexit newsletter. Sign up here to get the newsletter sent straight to your inbox every week

Good afternoon, and first things first, happy holidays!

This is the final newsletter of 2022, a tumultuous year in which Brexit — far from fading from the news agenda — if anything returned to prominence as the mounting economic effects of leaving the EU single market became clear. It is certainly not “done”. 

To illustrate the point, almost 12 months ago the first 2022 edition of this newsletter looked forward to the government finally “getting Brexit done”. It talked of Liz Truss “working in earnest” to get a deal on post-Brexit trading arrangements for Northern Ireland in the first three months of the year. And it warned of the belated introduction of new UK border controls on imports from the EU.

Nearly a year later and the column remains entirely valid, just substituting the name of Rishi Sunak for that of Truss.

As we enter 2023, we are still waiting for another “big push” for a deal on the Northern Ireland Protocol (with hopes of getting a deal in the first three months of the year) and the UK government has still not imposed border controls on goods coming from the EU.

On the border, this creates a very one-sided arrangement in which UK exporters face friction, while their EU competitors do not. And British industry has been primed to expect a further year’s delay on introducing UK border controls, to be announced in early 2023.

As for Northern Ireland, well, that January edition concluded with an observation that still stands, if you substitute Sunak for Truss:

“Any deal Truss strikes will crystallise a trade border in the Irish Sea that [Boris] Johnson has always been in denial over. And to sell that back home, Truss will need wins that measure up against the UK’s benchmarks, not the EU’s.”

The diplomatic mood music has improved markedly under Sunak, but the political constraints remain. Only when the two sides move beyond backslapping and start bottoming out each others’ real red lines will we see how far the dial has really moved.

For what it’s worth, the expectation in Whitehall seems to be that a deal, if it comes, is more likely to land in April in the run-up to the 25th anniversary of the Good Friday Agreement, than in January.

As for the trade picture, well, as we reported this morning via a British Chambers of Commerce report marking two years since Lord David Frost’s ultra low-ambition trade agreement came into force, the “Brexit Trade Deal [Is] Not Delivering” — that’s the BCC’s verdict, not mine.

What is now becoming clear, having initially been masked by Covid-19, is that the EU-UK Trade and Cooperation Agreement creates structural impediments to trade that aren’t improving (why would they?) and the government isn’t doing much about it.

The BCC’s requests for deals on import VAT, a veterinary deal and agreements on professional services and conformity assessment are all sensible and desirable, but presume a lot of goodwill on the EU side.

It’s always worth remembering that the EU got much of what it wanted from the deal — a zero tariff, zero quota deal for goods, in which it runs a surplus with the UK, while giving next to nothing on services, which is the UK’s strength.

The longer the TCA remains unchanged, the more supply chains and consumer choices will simply reorientate from the UK, which has now put itself at a permanent marginal structural disadvantage to competitors operating inside the EU single market.

On a brighter note, there was progress in 2022 on the UK’s post-Brexit subsidy control regime, which will replace the EU’s cumbersome state aid regime. The new arrangements come into force from early January and should provide less bureaucratic routes to subsidies for local authorities and other grant-giving bodies.

Whether it will, or not, will depend on the administration of the scheme and whether scrutiny of smaller awards in particular is proportionate, or not. We’ll watch this carefully in 2023 since the jury is out following the UK’s publication of a limited list of streamlined exemptions.

If the UK gets it right, it could be a rare Brexit benefit.

So, in theory, could the UK Shared Prosperity Fund, which is designed to replace EU structural funds in a manner more tailored to local needs but, like lots of other funds, has got gummed up in the pipes of Whitehall.

As for the rest of those famed “Brexit opportunities”, 2022 has not done much to convince industry that deregulation will provide the “productivity boost” that Brexiters like Jacob Rees-Mogg so ardently believe it can.

There has been a reform package for the City, but as my colleague Dan Thomas wrote back in October, the City wants “better regulation not deregulation”, a view that can be applied across a host of industries from cars to chemicals.

Time will tell whether Solvency II and other reforms can offset the costs of the UK being outside the EU, but in many ways “Big Bang 2.0” reflects the reality that the City is being squeezed both by Brexit and global forces.

More depressingly, this year has seen the continuing political turmoil in the Conservative party, which in many ways continues to be consumed by Brexit divisions that are driving the party into increasingly indefensible positions. This deters investors.

The Northern Ireland Protocol bill that threatens to rip up the UK’s international treaty commitments; Dominic Raab’s “bill of wrongs” and the absurd and ideological Retained EU Law bill are all contributing to the picture of the UK as being “uninvestable”.

The commitment to “review or revoke” all EU-retained law by the end of next year is unrealistic and undemocratic. Sunak’s Tory leadership campaign video with his shredder is one of the cringe moments of 2022, a perfect example of how Brexit has a strange capacity to reduce apparently sensible people to absurdity.

If you want a proper assessment of why the REUL bill is so profoundly poor, it’s worth reading this evidence to the Lord’s Secondary Legislation Scrutiny Committee from Hansard’s Ruth Fox and former top UK government lawyer Sir Jonathan Jones.

As Jones pithily observes, the bill is a triumph of “dogma over real policy”. 

The word “uninvestable” is a horrid coinage, but it is used a lot by CEOs and is perhaps the word that sums up “Britain after Brexit” two years on.

As for the Labour party, you might think they’d be making political hay over this mess of their opponent’s making, but for now the official opposition remains, as one shadow minister told me at the party’s annual conference, “scared of its own shadow” on Brexit. My colleague George Parker explains why.

The only real policy on EU membership that I can see is a commitment to get a Swiss-style, high-alignment veterinary deal, which would help sort out the Northern Ireland Protocol and is perhaps a gateway to a better deal.

The Tony Blair Institute has had a stab at what that might look like, but much of Labour thinking still presumes that being nice to Brussels and changing the mood music will change the basic trade-offs of Brexit. I’m not really sure why it would.

So, finally, for all Labour’s tactical timidity, where does that leave public opinion on Brexit two years on? Well, the dial has shifted somewhat this year, with a majority of British voters now saying they’d vote to rejoin the EU, according to a new poll this week.

The final Redfield & Wilton Brexit tracker poll for 2022 for the UK in a Changing Europe think-tank found that if a referendum on rejoining were to take place tomorrow, 56 per cent would vote for the UK to join the EU, while 44 per cent say they would vote to stay out.

This contrasts sharply with public opinion at the beginning of 2022, when rejoining the EU was supported by just 45 per cent of voters, but as last week’s chart showed Tory voters’ attachment to Brexit remains entrenched. So for now, the politics of Brexit is stuck.

And on that cheery note, here’s wishing everyone a very merry Christmas, if that’s a feast you celebrate, and happy holidays in any case until 2023. I’ll be back on January 5 with a look ahead to the looming Northern Ireland Protocol negotiations. We are where we were.

To coincide with the publication of Martin Wolf’s new book, The Crisis of Democratic Capitalism, join Martin and others online for a subscriber-exclusive event on January 31 to debate the major changes required and how they might be put into effect at a time of great global uncertainty. Register for free.

Brexit in numbers

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

This week’s chart comes from the latest assessment of the effects of Brexit (up until June 2022) by John Springford at the Centre for European Reform think-tank. The headline number is a 5.5 per cent (£33bn) negative hit to GDP in the second quarter of 2022, when compared with remaining in the EU single market.

Springford arrives at these numbers by comparing the actual post-Brexit UK economy against a “doppelgänger” UK, which is created by synthesising the performance of similar-sized economies that were not subjected to the effects of Brexit.

The method has been criticised by some leading Brexiter economists, but has been cited by the Office for Budget Responsibility. Of course, we can never actually live the counterfactual of remaining in the EU, but you can read more here about why Springford (and others) say this method is useful in measuring the effects of Brexit.

The chart that stands out for me (reproduced above) is the impact on investment in the UK, something that we’ve dwelt upon in previous editions this year, but which speaks to the secondary effects of Brexit, beyond simply building non-tariff barriers to trade with the EU as documented in the BCC report referenced above.

The way in which the UK conducts itself after Brexit — for example, threatening to break international treaty commitments via the Northern Ireland Protocol bill, or racing pell-mell to remove all EU derived law and thereby destabilising the regulatory framework — all negatively impact investment.

These political choices do matter (we can make things worse than they need to be) and, Springford says, provide worrying reasons to think that some of the higher estimates of the effects of Brexit caused in part by secondary, or “dynamic” impacts, are plausible.

Assessment of “static” impacts range from a 2-3 per cent hit to long run GDP, while more dynamic modelling, such as by the LSE’s Centre for Economic Performance, which tried to include the impact of secondary effects, came up with a much bigger number of between 6.3 per cent and 9.5 per cent.

Springford points to the flatlining of investment in the real-UK after 2018 as clear evidence of these more dynamic impacts, with the actual UK underperforming the “doppelgänger” by 11 per cent (or £12bn) in the second quarter this year.

“You can see the Brexit effect most clearly in the investment figures,” he tells me, “The UK has a decent recovery until 2016 and then it flatlines, which doesn’t happen in other economies.

“Such a terrible investment performance is a reason to believe the numbers generated by static forecasting were probably understating the long-run impacts of Brexit, and support the higher numbers generated by models like mine.”

And, finally, two unmissable Brexit stories

  • Business leaders need to start talking about the likelihood of big tax rises, my colleague Chris Cook argues, over and above the ones already announced given the dire state of public services.

  • Something seasonal to end 2022? William Wallis delves into the recent census finding that, for the first time, less than half of the population of England and Wales describe themselves as Christian. Clergy members, academics and campaigners give their views on how to arrest the decline.

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