Austerity is stillborn

Yesterday, Chancellor of the Exchequer Philip Hammond delivered his first major fiscal presentation to parliament. Overall it was a somewhat underwhelming event, opting as he did for a 'steady as she goes' approach, rather than seizing the opportunities afforded to him by the referendum result. Nevertheless there were a few key areas that stood out.

Firstly, as has been leapt upon by some Remainers, are the OBR projections that the economy will be £122bn worse off compared to George Osborne's projections in March. They claim that this is proof of the damage the Brexit vote has done to the economy, but fail to take into account several factors. To begin with, the OBR attribute less than half of that extra borrowing, £58.7bn, directly to Brexit. But in doing so, the OBR have had to make several assumptions, namely that Brexit will lead to increased barriers to trade, lower productivity, and lower investment.

It's difficult to blame the OBR for making such assumptions, given the Government are still coming to grips with Brexit and formulating a plan for our withdrawal, but nevertheless, these are incredibly pessimistic assumptions based on a rough hard Brexit scenario. As this blog has argued repeatedly, such a scenario would be madness and is thus very unlikely to happen. Despite the panic induced by May's speech at the Tory party conference, there have been no indicators to suggest the government intends to press ahead with a hard Brexit.

Those assumptions were based on May's stated desire to limit immigration, and jumping to the wholly false conclusion that this cannot be achieved if the UK remains a member of the EEA. What's more, we're increasingly hearing reports of an interim deal, which would see the UK remain in the single market in the short to medium term. Given this, the barriers to trade the OBR assumes in it's forecasts will fail to materialise and thus investment and productivity will be unlikely to fall too. In fact, given the safeguarding of our single market participation, coupled with the opportunities Brexit will afford us globally, there is the distinct possibility of these increasing, rather than falling.

Even taking the OBR forecasts as read, they are still predicting economic growth, from 1.4% next year rising every year to 2.1% in 2020. This is hardly catastrophic and still a far cry from the 'instant recession' proclaimed prior to the referendum result. Most leavers acknowledged there may be a short term economic impact of leaving the EU. These projections show that, and also demonstrate that growth will return to normal after a couple of years. By then we'll be wondering what all the fuss was about.

The biggest takeaway from the chancellor's autumn statement though is that austerity has been stillborn. George Osborne painted himself as the man taking the tough decisions to get the country's finances back on track, yet his cuts amounted to just 0.2%, the national debt now stands at £1.7 trillion and he missed every single deficit reduction target.

Far from correcting this, Hammond has abandoned his predecessor's tentative plans to balance the books, announcing more spending and more borrowing. The jump will see the UK borrow £68bn in 2016/17, then £59bn, £46.5bn, £21.9bn, £20.7bn, and £17.2bn, with government spending representing, a still far too high, 40% of GDP. Moreover, the national debt will break an eye-watering 90% of GDP next year.

The chancellor needed to be far bolder in his approach to a post-Brexit UK. His abandonment of fiscal prudency means that we will run a current account deficit for 22 consecutive years, and will still be living beyond our means 13 years after the financial crash. This saddles future generations with higher debt and higher taxes.

His top down approach to dealing with economic uncertainty is a risky business. It would have been far better to implement tax cuts, rather than spending rises, to boost productivity. The continued freeze in fuel duty was welcome, as was going ahead with the reduction in corporation tax. But there was still a missed opportunity. A further reduction in corporation tax would send the message that the UK is truly open for business, and would help ease the inevitable uncertainty around Article 50 negotiations.

Similarly, the chancellor has taken the wrong approach to the nation's housing problem. Abolishing stamp duty, liberalising planning laws, and reclassifying small sections of the greenbelt would do far more to help those struggling to get onto the property ladder than his announced spending plans. As Hinkley Point and HS2 demonstrate, the Government is woeful at picking projects with decent benefit to cost ratios. Far better to make it easier for the private sector to invest that money where it would be more effective.

All in all, the Brexit costs are at worst, in line with what some Leavers said before the referendum, and still nowhere near the catastrophe predicted by Remainers. But the big take away is that between a far left Labour party and a Conservative party apparently fully wedded to Gordon Brown style 'investment', those voters who want simplified, low taxes, a vast reduction in state spending, and a fiscally prudent government, currently have nowhere to turn.

Why Vote Leave - Part 2: The Economic Argument.

In the run up to the referendum I intend to post a blog each Sunday detailing the reasons why Britain will be better off outside the European Union. These posts will cover the following topics: the economy, influence, democracy, security, the environment, cost, and reform.

"Its's the economy, stupid", to paraphrase Bill Clinton's campaign strategist. Just like a general election, of all the arguments in the referendum debate, of sovereignty, of influence, of immigration, the economy trumps all. Will they be better or worse off will ultimately be the deciding factor for many people when they enter the polling booth on June 23rd, so it's important to set out why leaving the EU is economically sound. This argument takes two forms. Firstly, how do we mitigate any possible negative economic shocks from leaving, and secondly will we ultimately be better off longer term as an independent nation, or as part of a federal EU acting as a global trading bloc.

Every argument you hear about jobs and investment from the remain camp makes the same false conflation of EU membership with access to the single market. There are 28 members of the EU yet 32 nations are members of the single market. This single trade area runs right the way across the continent, encompassing both EU and non-EU countries alike. It cannot be repeated enough, one does not need to be in political union in order to trade with Europe. By rejoining the EFTA we maintain access to the single market, thereby eliminating any potential short term damage leaving the EU may cause to the economy. This is detailed to a much greater extent in the excellent Flexcit document from the Leave Alliance, and pursuing this 'off the shelf' path as an interim measure is easily accomplished within the two year time frame allowed by Article 50 of the Lisbon treaty for negotiations with members leaving the EU. Commonly referred to as the 'Norway option' it allows us to continue trading with other members of the single market in the exact same way as we do now, but crucially frees us up to pursue our own trade deals elsewhere in the world, without being bound by the EU's common trade policy. It's worth stating that contrary to what the In camp would have you believe, this does not mean a loss of influence over the rules. Norway, by virtue of being an independent nation, has access to the actual top tables of global regulation, allowing it to exert it's influence where it really matters, before those regulations are adopted by the EU. Whilst repatriating the whole of current EU regulations ensures stability in the short term, before adjusting, repealing or indeed strengthening as necessary further down the line, it also means we're not bound by any excessive regulation that comes from Brussels from the moment of our joining the EFTA onwards. Norway for example adopts only 1 in 5 of all EU laws. I shall, however, address the issue of influence in more detail next week.

So having ensured we maintain access to the single market, what positives can be derived from our new status as a non-EU country? Well, by repatriating our trade policy we can pursue agreements with the rest of the world. Although on the face of it being part of a large trade bloc lends more weight to negotiations, it can offer just as many obstacles as benefits. The common position of the EU, acting as it does not as a free-trade area but an increasingly protectionist customs union, must accommodate all of the various wishes of it's member states. The much hyped Canadian trade deal is now under threat of being vetoed by Romania over arguments about visa restrictions. The TTIP deal with the US has gone from being massively flawed to practically dead in the water after major components of it have been removed to satiate histrionics this side of the Atlantic. It's unlikely Congress will ratify it, or indeed, if it will pass here. Italy is blocking a deal with Australia and after 9 years of negotiations, talks with India have been shelved. Having to secure the agreement of all 28 members, each with their own, often disparate agendas, renders the EU next to useless in trade negotiations. It's not beyond the realms of reason to suggest that giving our historical links with each of these countries, and the fact that as the 5th largest economy in the world we're an important market, we would have had trade deals in place with each of them years, if not decades ago were it not for our EU membership. The UK rejoining the EFTA would mean that trade bloc would become the 4th largest in the world, meaning we could still benefit from collective clout whilst enjoying the freedom to pursue our own arrangements as and when it suited. It really would be the best of both worlds.

And it is to the world we should be looking. At a time when technology has made geographical proximity meaningless, it's backwards to be locked in a common position with our neighbours on the continent. Especially when you consider the EU's declining position in the world. It's a stagnant market, growing at a much slower pace compared to giants such as the US and rapidly expanding markets like India and China. Our exports to the EU have dropped by roughly 10% over the last 10 years, now accounting for less than half our total, whilst exports to the rest of the world have climbed by the same margin. Furthermore we run a huge trade deficit with the EU, buying far more from them than they do from us, whereas we sell more to the rest of the world than we buy. It's these global markets where our future prosperity lies but only by shaking off the shackles of EU membership can we fully engage with them. Given our links across the world and the relative wealth of our country, we should have no trouble at all striking up deals of various scope with all players in the global market. If Iceland with it's population of 320,000 is capable of negotiating and securing a deal with China, then the 70m strong, newly independent UK should have no problem at all.

Upon fully extracting ourselves, whilst we shall still have to meet EU standards when selling to Europe - just as we would have to meet Japanese standards when selling to Japan - crucially we shall have no need to apply these standards to our domestic market. EU VAT laws for example, have crippled small digital businesses across the continent and freeing ourselves of that sort of convoluted regulation will contribute to our economic growth post-Brexit

It's important to remember that Brexit is not an event but a process. Little will change overnight, but our long term prosperity is far better served engaging with the rapidly expanding global marketplace, whilst maintaining single market access, than remaining trapped in a protectionist customs union.