The War is over, the Treasury should now get back to its day job

The War is over, the Treasury should now get back to its day job

by Brian Monteith
article from Monday 17, October, 2016

WHAT ON EARTH is going on at the Treasury? The EU referendum was held and lost nearly four months ago and yet still some of its number carry on like WWII Japanese soldiers appearing out of the jungle years later believing they still have to keep fighting.

Last week’s leaked Treasury paper that was intended to inform a Cabinet discussion on the scenarios of different Brexit outcomes is simply not credible.  Using worst case scenario figures that were discredited during the referendum debate for their faulty and highly partisan modeling only causes embarrassment for Chancellor Philip Hammond and raises the question, does he have a grip on his department?

Stuck in oldthink, the Treasury has got its arguments the wrong way round. Rather than cost the exchequer much needed revenues by creating a tariff war with the EU, leaving the single market and its pernicious customs union is now the only route to higher revenues to bring down the deficit that Hammond appears to have abandoned all hope of reducing.

Be it the UK or Scotland, our world trade is growing and our EU trade is shrinking. The figures are undeniable. A decade ago 61% of UK trade was with the EU. It is 43% today and projected to fall to just 35% by 2025.

Last year the UK exported £135bn of goods and £89bn of services to the EU, equivalent to 12% of UK GDP. For the Treasury to assume that GDP could fall by 9.5% with a £66bn hit to tax revenues is frankly beyond eccentric.

The total UK tax take is projected to be £716bn in the current tax year so to suggest over 9% of the entire tax base is at risk, as the Treasury does, is an extraordinary claim. It makes a good headline but it is as improbable as many of the ‘official’ pre-referendum forecasts. Rather than the economy contracting, as the Treasury predicted, employment is up, wages are up, growth is up and the stock market is at an all-time high.

Yes Sterling has fallen, but that has as much to do with the UK’s frightening public finances and shocking trade deficit as any uncertainty over Brexit.

The trade figures for Scotland and the EU are sobering. Scotland's exports to the rest of the UK are worth more than four times its trade to the EU. That the main EU destination is the Netherlands suggests that the reality is even worse for the EU, as the Rotterdam effect means that many goods recorded as destined for that port are in fact going on to a further destination outside the EU.

Scottish exports by value 2014:

To rUK           £48.5bn – 64.4%

To rWorld     £15.2bn – 20.2%

To EU             £11.6bn – 15.4%

Scottish Exports to the rest of the World almost doubled between 2002-14. Starting from a lower base, they are now 31 per cent higher than Scottish exports to the EU, which have stagnated. To quote Professor David Bell, “It is striking that even though Scotland is part of the EU single market, the US is Scotland’s top international export destination.”

To therefore suggest that trade will collapse operating under WTO rules if no free trade agreement between the EU and UK is reached, is simply not credible. Indeed the opposite looks likely - we should anticipate an export-led boom as Sterling’s devaluation means the UK has gained some 16% competitiveness against the US and 14% against the Eurozone at the new currency rates. This more than compensates for EU tariffs which average 1.1% of the total value of non-EU imports, with a zero percent tariff on approximately 75% of all goods and services traded.  

Moreover, the Treasury talks as if the EU is some sort of economic success. Sadly it is not; otherwise the British people just might have voted to stay. It has been the slowest growing economic region for a generation and some economies including Italy, Portugal and Greece, are actually smaller today than a decade ago.

The problems with the EU banking system remain unresolved, as witnessed by the problems with Deutsche Bank and the Italian Banking sector, while across the EU unemployment remains well over twice the UK average. It makes no sense to tie ourselves to a failing economic bloc with no say in its governance which is exactly the bind Norway is in.

Considering the competitive benefit of devaluation coupled with the monetary and fiscal response, minus modest short term uncertainty has been estimated by Leave Means Leave to add 1% to UK GDP in 2017, equivalent to £18bn, delivering a tax benefit of £6.6bn pa. Longer term, leaving the Single Market could add 0.5-0.75% GDP each year or a further £12bn compound due to the saving on EU membership fees, more sensible regulation and global free trade deals, minus a marginal reduction in EU investment.

Now even if this is a best case scenario (and it looks more balanced than the Treasury forecast as it takes account of both ends of the argument) then we end up with a score draw. 

The reality is that the only way Brexit can be made to work economically is to be outside the oversight of the EU Commission and the jurisdiction of the European Court of Justice – so we can be free to strike trade deals with the rest of the world’s growing economies. The only way to achieve those three outcomes is to leave the single market and its customs union.

Likewise, the only way Brexit can be made to work politically is for the UK to show the British people that it has control of its borders where the people of all nations are treated equally unless they present a security risk. Again to achieve this means leaving the single market. Theresa May obviously gets it, but does Philip Hammond?

It is being said that the British public did not know what they were voting for but we only need to look at the tapes of David Cameron, George Osborne and Anna Soubry repeating ad nauseam that “leaving the EU means leaving the single market” to see that it was made absolutely plain to even the dog in the street.

What we are witnessing is an orchestrated effort by a few corporatist organisations to fight a rear-guard action to undermine the vote of the British people to leave the EU. It is time for the Treasury to accept the War is over, stop undermining confidence in the UK economy and get back to its day job, if it still knows how.

 

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