Now that Brexit has finally been done, it is vital that Boris Johnson’s new government quickly grasps all the policy opportunities that are there in the post-Brexit environment. They are of two main sorts: the ones that carry out Brexit policy itself, in trade and regulation, and the other ones that are needed to make a success of the post-Brexit economy.
First, take the Brexit-related policy changes in trade and regulation.
The first key need in trade is to remove the existing EU protection which the UK has been forced to share by urgently striking trade agreements with major non-EU countries, while maintaining zero trade barriers with the EU.
The EU has created large trade barriers against non-EU competitors, both in agriculture and manufacturing, therefore negotiating wide Free Trade Agreements (FTAs) with non-EU suppliers so that they gain free access to our markets will bring UK prices down 20 per cent to world levels. This, which is equivalent in its effects to unilateral free trade, will according to the Treasury’s own trade model raise long-term GDP by 4 per cent; and by a lot more according to our Cardiff research.
Astonishingly and incredibly, the Treasury, in its pre-election Brexit report, denied all this and to boot, assumed that large trade barriers would spring up along the UK-EU border after Brexit, costing us 5 per cent of GDP: the EU ‘would refuse’ to recognise that our exports satisfy their standards, and would institute trade-clogging border checks. However, both these things are illegal under WTO rules, let alone under the trade deal we will sign with the EU, which it desperately needs to avoid paying the large tariffs we will be levying without a deal.
Second, take regulation: we must break free decisively from the EU’s interventionist, and rather socialist, philosophy. To achieve social objectives the EU has blatantly used union and other employment ‘rights’ which are essentially subsidies to workers paid for by implicit employment taxes on firms. In general product market standard setting, the EU has allowed industry lobbies to suggest what suited them.
In finance, our biggest industry, the EU has intervened intensively, in a way generally unpopular among UK practitioners. These regulations have given rise to an army of ‘compliance’ executives, which have raised costs substantially, but the supposed gains to consumers have been unclear; in other major markets, such as the US, similar interventionism has been avoided.
In environment and climate policy, the EU has regulated strongly to force the adoption of non-fossil-based energy, instead of pushing for new technology; this has needlessly raised energy costs. In the regulation of technology, especially in agriculture and pharmaceuticals, it has given primacy to the precautionary principle, and held back technological innovation.
To the gains we would get from these policy changes in trade and regulation we can add that of avoiding uncontrolled EU unskilled immigration, which the UK taxpayer has subsidised by around 20 per cent per migrant, costing 0.2 per cent of GDP, mainly paid by poorer UK taxpayers. This will be avoided by the points-based system the government has already announced, which will also encourage the entry of the skilled workers that bring key gains to the economy. On top of this we of course eliminate the annual net payment to the EU budget, 0.6 per cent of GDP. The overall long-term gains we estimate from the proposed trade, regulation and these other changes come to around 7 per cent of GDP.
On all these widely discussed policies the government knows what it has to do. We now come to the new policies it needs to undertake to ensure the economy’s success in the post-Brexit era.
The first, key area is in managing the economy through fiscal and monetary policy.
There needs to be a new emphasis on fiscal expansion – that means bigger budget deficits, contrary to the orthodoxy we have been used to in normal times – to push interest rates up to normal and so revitalise monetary policy, finally throwing off the long-lingering after-effects of the financial crisis. The fact is we are not in normal times, and a new approach is needed until we have restored normality,
To restore monetary policy effectiveness, we need interest rates to rise back to normal, well away from the zero lower bound where they still are. The only way for policy to deliver this is via a fiscal expansion. We have calculated that the Chancellor can run budget deficits rising to £100 billion a year and keep debt well under control in the long term, close to 50 per cent of GDP. The reason is that interest rates are so low that lenders are paying the government to borrow; furthermore, the extra spending and tax cuts that will be financed will spur growth and bring in higher revenues as a result.
With its newfound budget freedom, the government also has a golden opportunity to reform the tax system by bringing down the marginal tax rates that obstruct incentives and discourage business investment and innovation, now it will have removed the regulative barriers to entrepreneurship and entrepreneurial innovation. Overall, the government needs to readopt Mrs. Thatcher’s pledge to make Britain safe for entrepreneurs.
While these changes will stimulate growth and resulting tax revenue, we still need to keep the costs of public spending down to the most efficient operating levels. The public sector’s operation needs to be reformed, to be efficiently ‘joined-up’: local and central government should be coordinated through better information-sharing. In effect the UK government is a giant firm with a mass of local subsidiaries. Its management is poor, and yet the technical ability of central agencies to communicate and use information efficiently now exists, and with it the ability to coordinate decentralised efforts. Social care for example could be transformed by this, eliminating the NHS waste in caring for old patients who could be at home.
Last but not least there is the North-South policy challenge, to bring the North’s income up to the level of that of London and the South. Yes, a good start would be to improve the infrastructure of the North, which has lagged behind the South’s, especially in transport. But also, if the government follows our advice on fiscal expansion, then this reversal of austerity will disproportionately benefit the North where public services are under huge pressure. Tax cuts too will have their biggest percentage effects on GDP in the North because that is where the economy has most spare capacity in people and land. This is yet another reason for Boris Johnson to ignore the many voices of ‘conventional prudence’ at this point in our history.