British budget (it should be noted) assumes success for Brexit negotiations

London correspondent:  Britain’s budget, announced on Monday by the Chancellor of the Exchequer, Philip Hammond, mainly comprised the small fixes voters have got used to:  here tweaking tax thresholds, there nudging up stealth taxes, a little more cash for schools now and a (perhaps not-so-small) digital tax in the future.  But what was more interesting was the acknowledgement that the budget assumed a satisfactory outcome for the current Brexit negotiations and that a totally different budget would be required in the event of failure.

In fact, Britain’s economy has performed much better since Britain voted to leave the European Union than predicted by those who opposed exit.  Neither consumers nor businesses responded to the uncertainty by hunkering down and slashing expenditure.  But if Britain leaves in March next year without a transition deal covering areas like trade, commerce, transport and communications, there is likely to be at least temporary, perhaps significant, disruption to transaction flows.

In this event, it is generally accepted that the Government should provide a fiscal cushion for consumer spending and boost business competitiveness, say with lower taxes or business rates. There is a growing argument that the Government should go much further, taking advantage of the shock to increase competition in UK markets, boosting productivity and growth.

The Brexit negotiations themselves are stuck, with pressure building up behind the blockage.  The European side is comfortably settled on the position that the UK must detach Northern Ireland from the UK and pledge to keep it in permanent alignment with the EU.  Then the rest of Britain gets a smooth transition to a free trade agreement.  Unfortunately, the one thing the Government can agree on is that it won’t agree to this.

Britain’s Prime Minister Theresa May would dodge the problem by keeping all of Britain in close alignment to the EU – which, while negating Brexit somewhat, would certainly minimise any economic shock – but she can’t find a way that the EU will agree to.  Her Conservative party opponents would keep the UK intact by, if necessary, leaving the EU without a formal exit agreement – thus generating maximum short-term impact for both sides.

The Conservative party caucus is spooked by the electoral impact of a high-shock exit,  but wants Northern Ireland to remain firmly in the United Kingdom.  Time will tell who or what gives first.

Which brings us back to that ‘alternative’ budget.  The question to be asked is why the longer-term measures appropriate in the event of hard Brexit are not being considered now.

The Brexit negotiations are but one step on Britain’s pathway to a post-EU economy and, some would say, is far from the most important.  All sides to the debate agree – amply supported by economic theory and experience – that Brexit will be harmful to the extent it closes the UK economy to trade and innovation.

Conversely, economic success depends on British governments taking advantage of Brexit’s freedoms to open the economy and make use of what Schumpeter termed the forces of creative destruction.  Long-term policy is of much greater economic significance than the short-term costs of disruption.  In electoral terms, however, the reverse may be true.

 

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