Bill Jamieson: Brexit should be the mother of invention

With every week we are nudging closer to what, by almost all accounts would be a 'Brexit no-deal disaster'. From higher tariffs on food to a slump in business investment, a plunge in exports, possible shortages in medical supplies, long queues at ferry terminals and disruption of air traffic, we are heading towards chaos. In this, households and businesses alike would be losers.
A deal eluded Theresa May at the Brussels summit last week. Picture: Sean Gallup/GettyA deal eluded Theresa May at the Brussels summit last week. Picture: Sean Gallup/Getty
A deal eluded Theresa May at the Brussels summit last week. Picture: Sean Gallup/Getty

These gloomy prognostications are accompanied by warnings over the calamitous effects of uncertainty. Not knowing what the future holds might seem to undermine those firm predictions of impending catastrophe: if there is no certainty, how can we be so sure about the “inevitable” calamity that awaits?

And are we helpless victims in all of this? Is there no response that can be made? Is government no more than a lifeless corpse? There are practical, positive steps that can be taken at UK and Holyrood level to counter the “no-deal Brexit crash-out” chaos that has dominated commentary for months. Some useful suggestions are set out here.

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There is no doubting business expansion is already being put on hold and investment decisions delayed. Business confidence overall is being damaged. The latest Quarterly Economic Survey out last week from the Scottish Chambers of Commerce reveals slowing investment across a range of sectors. The manufacturing sector has posted its first negative result for optimism/business confidence since 2016. Expectations in the sector for future revenue and investment both sit substantially lower than for the previous quarter.

The survey also recorded slowing investment trends generally throughout the third quarter, with all sectors bar retail experiencing a decline in investment relative to the second quarter.

Fears over a worst-case scenario will have been heightened by the dispiriting lack of progress on a deal evident at the meeting of European leaders last week – a summit that was supposed to put the finishing touches to an agreement. And without the UK parliament coming up with an alternative plan that would secure a majority in the Commons, a no-deal Brexit looks ever more likely.

Warnings have flooded in about the consequences. Leaked Whitehall analysis forecasts a 7.7 per cent hit to UK GDP under WTO rules and a 4.8 per cent contraction under a “Canada Plus” arrangement.

Predictions here at Holyrood are even more worrying. According to a Scottish government forecast earlier this year, Scotland’s economy faces losing up to £16 billion a year as a result of leaving the EU. It warned that a hard Brexit, in which the UK falls back on WTO rules, would cost Scotland up to £12.7bn and cause real household incomes to fall by 9.6 per cent, or £2,263 per head.

In contrast, staying in the EU could result in the UK economy growing by 2.4 per cent if integration of Europe’s single market in digital industries, energy and services intensified, adding about £3.6bn to Scotland’s economy.

Now, there are searching questions raised by these projections. The words “up to” in the Scottish Government statement are weaselly, covering a meaningless range of outcomes. Equally, no economist can forecast with any certainty what our economic growth rate two years ahead will be without a no-deal Brexit. Least of all would they be able to isolate a “Brexit effect’ from a general downturn in global trade and activity many are now predicting.

The Whitehall modelling has come without any disclosure of methodology or explanations as to how the forecasts have been arrived at. According to the pro-Brexit European Research Group, the public are now “battered and bewildered by conflicting predictions of the future path of the economy following Brexit, fuelling a growing suspicion that Whitehall is engaging in what is apparently known internally as ‘policy-based evidence-making’.” The analysis, it says, appears to believe “that the EU will behave illegally and in defiance of WTO rules that are backed by the international legal order”.

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But the greater omission of both of these forecasts is the absence of any possible response the UK and Holyrood administrations would adopt in the event of a “no deal”. Is it credible that economic and fiscal policy would remain unchanged in the face of widely feared disruption?

No government would risk simply staring into space and doing nothing. Pressure for policy response would be colossal. One likely outcome would be a package of stimulus measures to help bolster business and household confidence.

That, in current conditions, is not so easy as it sounds. There are debt and deficit constraints, and previous commitments, such as £20bn more for the NHS, to be honoured. And one can appreciate the dilemma that now traps Chancellor Philip Hammond, with a budget scheduled for 29 October. Who could blame him for opting to delay any significant measures until early next year when the outcome of the miserable Brexit imbroglio may be clearer?

But the budget deficit continues to fall – down to £19.9bn in the first half of the current fiscal year, the lowest since 2001-02 and down 35 per cent from April-September 2017. He could put markers down – for example, signalling a cut in Corporation Tax to 12 or 10 per cent. He could announce a temporary cut in the 20 per cent VAT rate which would be of particular help to the retail, construction and manufacturing sectors. In 2008 the Labour government announced that it would cut the standard rate of VAT from 17.5 per cent to 15 per cent for 12 months to stimulate consumer demand and to reduce the depth and duration of the recession.

The Chancellor could also announce that in the event of no deal, the UK would embark on unilateral free trade, abolishing all import tariffs on everything except food.

As for the flow of trade and goods across borders, the UK could opt for spot checks, allowing the bulk of goods traffic to pass through until paperwork has been streamlined. Technological innovation does not stop at Apple iPhones but is sweeping across all sectors of the economy. We are not helpless in the face of “no deal” – and it serves no-one’s interest to think so.

CBI warning: Page 58