Sunday, 10 July 2016

The Post-Brexit plan

Today I'm going back to talking about Brexit for a bit. The plan for the week ahead, time permitting, is to look at some aspects of the Chilcot report, then a post about Ukraine. 

For now though I want to focus on the plan for the UK now that it has voted to leave the EU. Or rather, the lack of a plan. As the various political parties sling it out with one another internally, it has basically been left to the Chancellor George Osborne and the Governor of the Bank of England Mark Carney to pick up the slack, steady the ship, and take the UK forward in the interim. And yet both appear to be doing everything in their power to kick the whole apple cart over, almost as if they're worried their credibility might be damaged should the financial apocalypse that they both predicted not materialise. So what should we be doing?
For a start I find it astounding that Home Secretary and Prime Ministerial candidate Theresa May refuses to back the right of current EU migrants to remain in the UK, seeing them instead as a bargaining chip. Theresa May has a reputation as a hard nosed negotiator, yet there is little real evidence that she actually possesses this skill. Being deaf to others concerns and bulling on ahead with a potentially flawed plan is not a negotiating skill. It's just being stubborn. There's a significant difference between the two. Her inability to see that she is using the lives of many millions of people as what she thinks are bargaining chips is to me deeply worrying. I worry for the people caught up in this and for the country as a whole if Theresa May seriously thinks it will give her any leverage in a deal with the EU.

Her supposed bargaining position is the threat that she will potentially send millions of young (relatively speaking), economically active, motivated individuals back to their home countries. In exchange for what? Millions of non-economically active UK pensioners who have retired abroad? What a deal Theresa!! While some parts of the EU might be hit hard by this, broadly speaking such a deal would only benefit the EU immensely and have a negative effect on the UK economy. She can stand fast to her position all she wants and big herself up for how much of a tough negotiator she thinks she is, but the reality is she has no leverage against the EU on this issue. She is walking into a minefield and hasn't even got the sense to realise it.

At the same time she is damaging the UK's reputation as a free and open society and causing a tremendous amount of fear and resentment among migrants. There are people who have lived here for many years, built lives for themselves, started families, started businesses even, and in her bid to build herself up as the 21st Century 'Iron Lady' Theresa May is undermining these people and their confidence in our nation. It is a cowardly and self-serving act for which I hope she is rightly lambasted and pulled apart in the coming weeks.

To me this is really the first priority of government right now, to assuage the anxiousness of those who have already arrived, been here a reasonable time and are productively contributing to our society, as well as those who may have been here for a shorter period but work in key areas such as the NHS. Not only is this the right thing to do by those people, but it also sends an important message that counters the Remain camps narrative (which they seem intent on spreading worldwide as a protest at losing the vote) that Britain is closing in on itself. This is a wonderful opportunity to show the world that actually, leaving the EU is about opening Britain up to the wider world.

For this reason I personally would like to see the UK adopt an immigration system in the future that is closer to the one used in Canada, as opposed to the one from Australia (but still tailored to our individual needs). Both are points based systems, but the Canadian system is a little more liberal. While the Aussie system is good, it does place a degree of reliance on people having secured a job offer already in the country. The Canadian system is more open in that as long as someone has sufficient points based on things like their language skills, education and age, they are near enough in the door already. 

I am absolutely behind a system that encourages relatively high levels of immigration among those with high levels of education and/or skill, as long that education fits into a broad range of useful subjects and skills, which again the Canadian system accounts for. The argument is fairly simple and fairly sound; someone with a masters degree in engineering may not have a job on arrival, but they likely will have one soon. I'd also be interested to see how the views of Guardian readers change on immigration when it's their middle-class salaries that start coming under attack and not those at the bottom. 

As for Osborne and Carney though, blimey, where do we start?

The markets were recovering after the shock of being caught out betting heavily on a 'Remain' vote. The pound had fallen against the Dollar and the Euro, but not nearly as far as was actually expected. And yet for the first week or two this comedy pairing have done nothing but talk of doom and gloom, with token statements about the robustness of the UK economy. Considering that neither of them has been especially successful at either a) predicting the future of the UK economy, or b) handling the problems with the UK economy, I'm amazed that in turn a) people still treat their predictions with credibility, and b) that they still believe their own hype.

Rather than talking like the sky is about to fall in on the whole world, perhaps it might be prudent for two such powerful individuals to actually do something useful? Like, perhaps, pointing out the many advantages that the UK will now accrue from Brexit and making the positive case for the country? Like, perhaps, pointing out the number of countries that are already lining up to be the first to seal a trade deal with the UK, of which there is an ever increasing list, including the quite amusing prospect that the UK may conclude deals with people like India before the EU does, as some of us predicted they might. Or perhaps, I don't know, getting themselves on the news and talking with great relish about the fact that just the other day Mars Food UK announced a £23 million investment in its Uncle Ben's rice production facility in King's Lynn, a sign that confidence to invest in the UK is clearly still high.

But no, of course not. I mean after all it's not like the Chancellor of the Exchequer and the Governor of the Bank of England have any kind of responsibility to promote the best interests and welfare of the UK economy now is it? No, that would be silly. Think of all the time they would waste doing that when they could instead be trying to prop up their own positions. Why promote confidence in the UK economy when they could be busy promoting confidence in themselves, seeking people to pat them on the back and tell them how clever they were at predicting the consequences of Brexit, even though they've actually not materialised?

Take another recent news story that warned about low confidence in the consumer market and how retailers were slashing prices to move goods. At no point does anyone seem to have taken it upon themselves to point out to journalists that this is the beginning of the summer sales, where retailers look to off load their last holdings of spring/summer stock in order to make room for the autumn/winter stock ready for Christmas. No, no, no, we can't let anything as silly as the standard annual business cycle get in the way of a good doom and gloom story can we?

So what are Osborne and Carney planning in response to the imminent falling in of the sky? After all, between them they have so far failed quite spectacularly to achieve their main economic aims, but maybe there is hope for them yet? What have they got for us?

Well, Osborne's grand plan is to cut the rate of corporation tax. No, stop laughing. I'm serious. That's his plan. Which raises an interesting question for Mr. Osborne I feel; given that you think that the UK is about to enter a period of economic malaise, in which you expect many companies to struggle to make ends meet and in which you expect to see a period of rising unemployment, prey do tell us what impact you think such a cut will make? If you're expectation is that many companies will struggle to balance the books at all and that some companies are about to go under - a problem which you feel will be exacerbated by a rise in unemployment - then what real difference does a tax cut on profits make? Would that not, I would venture, simply aid those companies that don't need the aid in the first place while doing nothing to help the others? 

If I were a cynic, which of course I'm not (I said stop laughing), I'd imply that this is something he's been keeping under his hat for a while just waiting for the chance to deploy it and that he doesn't really believe his own hyperbole over the future deterioration of the UK economy. The alternative explanation is that he's just an idiot, which in itself is entirely plausible. Me personally - if I genuinely felt there was an impending risk to the UK economy - would go with a reduction in employers National Insurance contributions. The NHS, pensions and benefits are topped up out of general taxation anyway, so let's stop pretending there's any real link between NI contributions and what comes out the other end. Instead, give employers a temporary relief that would not only help to keep them in business but would also help to keep their staff in employment. That is of course assuming you actually believe such action is needed.

As for Carney? His grand plan appears to be cutting interest rates yet again, down to 0%. Interestingly the Bank of England is considering doing this when the next set of economic data comes out soon, which is odd considering it will be data that pre-dates Brexit. It should really go without saying that making an interest rate change without first assessing the impact of Brexit could do a lot of damage, but considering the committee entrusted with making such a change seems to be planning just this, it does have to be said.

With the Pound having fallen in value against the Dollar and Euro we would expect to see prices rise in the near future (inflation), providing the Pound stays in its weaker position, which it's looking likely that it will. This is not a bad thing, despite everyone crying into their breakfast cereal about the good old days when they remember the Pound being 'strong'. Particularly guilty of this seems to be students, which should give you the first clue that you need about whether a 'strong' Pound should always be considered a good thing. As I have said before, the relative strength of the Pound affects different people differently. Like most things in economics, every time it moves someone always gains and someone always loses.

Losers right now for example are UK travel companies and airlines. Why was Richard Branson so adamantly pro-Remain? Because he knew a fall in the Pound would hurt his Virgin Atlantic Airways company, as the weaker Pound made holidays abroad more expensive. It's the same reason that RyanAir campaigned so passionately for Remain. And already we're starting to see a drop off in the travel market, at least for Brits leaving the UK. Conversely, Chinese travel agents have seen a 200% increase in enquiries about holidays in the UK. This is a theme that has played out in many countries across the world. At the same time online shoppers abroad have been going crazy for UK products. Brands like Burberry - once the style of choice for UK 'chavs' - have seen a remarkable growth in the sale of luxury products into foreign markets as bargain hunters look to take advantage of the effective discounts that have been handed to them by the weakening Pound.

Remarkably enough many of us 'Leave' campaigners predicted this beforehand. That's because despite the warnings of economic experts (who have been busy discrediting themselves for the last decade without any help from anyone else) and the prevailing notion that economics is some kind of arcane art known only to a few, it was in fact much like predicting that if you throw a basketball out of an aeroplane it will eventually hit the ground at great speed (the basketball that is, though the plane might follow soon depending on how you removed said basketball from it). Prices go down, sales go up. This is not hard. As I said, winners and losers.

Yet oddly an increase in prices here in the UK might also cause sales to go up. As mentioned in my piece prior to the referendum, if consumers expect prices to rise in the long term this can actually cause an increase in sales because people realise that putting off important purchases will only lead to them becoming more expensive in the future. This is essentially what is happening with the foreign tourists and bargain hunters right now. They might not be foreign exchange traders, but they're smart enough to realise that the Pound will recover at least some of its value in the near future, so they're all piling in to snatch up the deals now while they last. An expectation of future inflation is causing a rise in sales.

So where does the Bank of England fit into all this?

Well if we're expecting inflation on the horizon anyway (which we should be) then the last thing we need is for the BofE to lower interest rates and fuel that inflation even more. The government's target inflation rate, the one which the BofE is supposed to try and maintain across the economy as a whole, is 2%. It's currently 0.3%. Inflation caused by the weaker Pound should push that number back up towards 2%, as even though the Pound has dropped more heavily against the Dollar and Euro, not all of that increase will be passed on to consumers for a variety of reasons.

The inflation wont really kick in for a while, as most big companies buy their imported products in advance and will also have foreign currency reserves in hand. The smart ones will have even hedged against a 'Leave' vote by buying up even more reserves beforehand (while the ones that tried to be a bit too clever for their own good will have sold them off the day before the vote...). Still, inflation is coming, and it should sit somewhere within the 1% boundary either side of 2% that is considered acceptable. You can argue the toss about what the exact number will be or what it should be, but suffice to say it will give the economy a shot in the arm the likes of which it hasn't had in years, spurring spending and growth.

If then the BofE decides to cut interest rates soon, before it's had the chance to properly assess the state of the economy and the impact of 'Brexit', then it risks flooding the economy with cheap money that isn't needed. The result of which could be an inflation rate that spirals out of control well over the 5% mark and will then need drastic action to correct it later. It's a bit like responding to a slight slip on an oil patch in your car by turning with the slip instead of against it; you make the slip worse, then have to make a massive correction to avoid hitting something decidedly solid like a tree or a central reservation.

What I would really like to see Mark Carney do, the same with George Osborne as well, is to just sit and wait for a bit. I know this idea is something of an anathema to politicians and powerful individuals, as it implies that the best thing they can do in their position is to not exercise their powers and just get out of the way, which then raises interesting question marks about whether we need them or not (which we do, just not now) and whether they themselves are part of the problem. I also understand that it goes against the grain of most people to just sit patiently and allow a situation to correct itself without the need for endless f**king tinkering. But that's what I'd like to see.

The soon to be released economic data is fraught with variables. The recent poor weather will have hit some areas of the economy. The uncertainty over Brexit will have done the same. But the boost provided to many service industries by the ongoing Euro 2016 championship will skew some of the data back the other way. The short lived fall in the Pound in the run up to Brexit will have helped some as well (and hurt others). The data will be a chaotic mish-mash of impacts we don't really fully understand just yet and without understanding that, or the full impact - positive and negative - of a Brexit, it is hopeless to start chucking around fiscal and monetary policy decisions. What is needed is patience.

We will have a new Prime Minister soon, along with potentially a new leader of the opposition, and Brexit negotiations will begin. As mentioned earlier there are a variety of countries all queueing up to be the first to strike a deal with the UK and it's worth bearing in mind that the progress of these deals will apply pressure to the EU when its turn comes around. This is why the next PM should embrace offers of negotiating help from New Zealand and others, and seek to prioritise their deals first. Not only will these countries have earned such rights by being positive in their attitude to the UK rather than being threatening, but they will also help set the benchmark against which the EU will have to compete to get a good deal with the UK. The possibilities of what can be achieved are truly mouth watering I feel and are part of exactly why I voted 'Leave' (independent "Department of Trade and Commerce", with cabinet representation, here we come. Fingers crossed at least).

Importantly this progress and stability will help to cool fears that some still have in the UK market going forward. And it will be from that more settled and reliable position that the government, hopefully with a new Chancellor and (slim prospect I know) a new Governor of the BofE, can then assess the state and prospects of the UK economy with much greater clarity. Rational decision making has not been a feature of George Osborne's time in office. Just look at the disastrous help to buy scheme. And now is not the time to be plunging into another hasty course of action, both feet first. Now is the time for reflection, planning, and strategising for the months and years ahead. It is about patience and a view of the long term. It is about building the UK's position up gradually, ready to let it roar into life when the deal to leave the EU is finally concluded.

I for one am incredibly optimistic. I just wish Osborne and Carney would stop doing everything in their power to ruin what could be the start of an incredible future for this country and the generations that will follow us.

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