Thursday, 27 April 2017

The return of Gordon Brown thinking?

The more we get into this, the more that Brexit seems like a bad idea. The more the Tories obfuscate and delay, the more it seems they are either rubbish and ill-prepared, or realise just what a bad hand this is. I say Tories, what I mean is those having to deal with it, not the gang who are so fixated on leaving they would seemingly be happy to impoverish the whole country to prove a point, or increase their perception of self-worth.

Anyway, I’ve been thinking about the relatively infamous session of the select committee where David Davis said the dog had eaten his homework  when asked what the cost to the UK would be of leaving the EU without any sort of deal. He, sort of, admitted that crashing out in this way would mean, amongst other issues, loss of passporting rights for financial institutions, loss the European health card, open skies as well as a range of tariffs on goods and services. All things that would hurt us, but, you know… #takebackcontrol

His excuse to the teacher was that he needed to consider department by department, industry by industry what the impact could be and how it could be mitigated. One example of such mitigation was the a new computer system would be able to authorise goods moving across borders in a matter of seconds, not days or weeks as might otherwise happen, which to some companies would off-set any issue of tariffs which would also be imposed.

I see his point, I’m sure it would help and might even make the difference when it comes to a 10% additional tariff to sell into the EU. Would it against a 30-40% tariff as agriculture would get hit with? I don’t know, I don’t run my own international business, but it seems like a much larger hurdle to offset.

The other issue is you’re still selling into the EU so you have to meet the standards and rules set by the EU and a system which allows access into the EU in seconds, can also reject it in seconds too. So if you don’t meet the requirements, no trade, oh and we won’t have any say on those standards either, but, you know… #takebackcontrol

So how else could the Government mitigate these tariffs?

Something along the lines of the Government rolling out the lower corporation tax regime they are touting? The idea of lowering it would be to help attract companies to set up here and offset the tariffs raised from being outside the single market. A low rate also aims to reduce the benefit of legitimately avoiding paying tax. Apparently lowering tax rates, and presumably being consistent about their level into the future, increases the tax you receive as companies and people pay fewer accountants to find schemes to shelter their income from the taxman. The UK corporation tax level is currently 19% - too low, too high? Who knows, lower it further could see an increase, or it could start to reduce the tax take if it’s currently at the right level.

The other fiscal levers the government can pull is personal tax rates. They’ve already raised the tax free rate to £11.5k pa and you can stick £20k into an ISA.  There was a promise in the 2015 general election to raise the level where you pay the higher rate to £50k, though I imagine that might get lost in the upcoming manifesto.

If the government lower tax rates for the rich to incentivise them to stay in the same way as for companies, then the issue is what happens when the next recession occurs? Unemployment is very low, participation rates are really pretty high, tax rates are low and potentially going lower, but the deficit isn’t forecast to be gone for another few years.  

If something were to trigger a recession in those next few years, like, I don’t know, a botched negotiation by May, then how does the government stimulate without borrowing massively? What other levers are there to pull – interest rates, not at the moment, cutting taxes, apparently not, more government austerity, after 7yrs, seems unlikely to be successful. So they would have to borrow and spend, currency goes down further, inflation goes up more, but if taxes have to rise it removes the incentive for international companies to base themselves here anyway further reducing the tax take.

The UK leaving the EU might not trigger a recession by itself, it could even see the wonderful outcomes promised by team Leave… but it won’t mean there won’t ever be another recession, and to pretend otherwise makes you Gordon Brown. To go ahead with a hard Brexit and the fiscal measures and mitigation which have been hinted at in order to retain competitiveness is, on present course, leaving very little room for manoeuvre for when the next downturn comes.

To get a decent deal with the EU, whilst being able to trade freely with the rest of the world will require a level of skill in negotiation and diplomacy which seems utterly beyond the current government on current performance.

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