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June 15th 2016 print

Nick Turner

Brexit, Part III: The Road Ahead

Accept for argument's sake that the vote on June 23 favours the Leave case, what next? No longer in the thrall of Brussels technocrats and having rejected the political project that is the EU, Britain would have a free hand to innovate. A move to a flat-tax, for example

brexit two flags‘Uncertainty’ is a term in common usage. Both the Leave and Remain campaigns would have to admit to using negative tactics while economic fears are hawked in almost biblical language. Many Britons feel afraid of leaving. They have had to endure President Hollande’s “consequences”[1] and his heir apparent M. Macron warning that he will “roll out the red carpet” for the bankers who will leave London for Paris[2]. They have had warnings from the International Monetary Fund (with more yet to come), the Organisation for Economic Co-operation and Development and the Leader of the Free World himself[3]. President Obama’s remark that Britain would be “at the back of the queue” as regards to any trade deals was slightly at odds with his speech in Germany two days later where he said he wanted the US-EU TTIP trade deal concluded by the end of the year. How long is this queue again?

The IMF report mentions Britain only four times[4]: In the foreword; predictably in the “Outlook for Individual Countries and Regions”; that the potential of Brexit is one of the “Heightened downside risks” facing the world economy[5]; finally in a special section of a hundred odd words[6]. The actual risk from Brexit is quantified as that dreaded word “uncertainty” again as well as potential damage to trading relationships[7]. It is undermined by the report itself pointing out that Britain’s strong economic performance will offset any “heightened uncertainty ahead of the June referendum”[8]. All these are potential risks and are hedged with many ‘coulds’ and ‘likelys’. None of the report’s authors, no matter how experienced, have ever witnessed such an event and all forecasts should be treated as the worst scenario they wish to imagine.

The OECD report, while more detailed, can be dismissed out of hand. A hatchet job deliberately painting the most damaging picture. In presenting the report one almost expected that OECD head, Señor Gurría[9], would unveil the younger Bill Murray of Ghostbusters drily warning of “human sacrifice, dogs and cats living together… mass hysteria!” but relations between the US and Mexico seemed to have soured of late. The underlying assumptions of the report, in all of its scenarios, are so flawed as to be laughable. They surmise that Britain would become inward looking, with little trade, immigration or investment. Even its most neutral assessments rest on premises such as “most of this stems from the decline in trade openness” and “a failure to undertake regulatory reforms”[10] which completely misses the point of why Britain would wish to leave.

Both the OECD and the IMF base their hypotheses on the idea that Brexit is a “turn toward more nationalistic policies, including protectionist ones”[11]. The OECD do concede Britain may wish to “improve the business climate” post Brexit but even its best case assumes it would only do so at a speed it calculates partly from Mr Brown’s Ministry, hardly known as a great de-regulating one, and in its worst case that it would do nothing[12]. Its fundamentally flawed view of the UK is highlighted by its pointing out that despite business opposition to labour market regulation and the Working Time Directive, the “political constellation after Brexit” would probably not heed that[13].  Perhaps the best example of its partisan nature is in its summation of the financial sector. Highlighting the risks it then, apropos of nothing, mentions that Switzerland exports an even greater proportion of its banking services to the EU but that they got a good deal[14].

The truth, as the IMF point out, is that the world economy is in danger of slowing down further. All the problems that face the developed world are the results of exactly the kind of over-regulated Big Government policies the EU and the US have inflicted upon themselves[15]. The UK by comparison, is the healthiest advanced economy excepting Germany, and they are mired in the Eurozone. The fundamentals of the British economy are strong with the highest labour force participation rate in the G7, low unemployment and some of the lowest taxes[16]. As well as being the tenth most competitive nation (according to the World Economic Forum), Britain’s GDP per capita is rising year-on-year and government spending to GDP has fallen from a (criminal) high of just under 50% in 2010 to just over 43%[17].

The Brexit Countdown: Part I
Brexit, Part II: Faith in Oneself

The problems facing the UK economy are very different from the rest of the developed world. They lack jobs, Britons need better paying ones. They are highly taxed, the UK has proven that lower taxes lead to a healthier economy. Are there risks from Brexit? Of course, but the dangers and ‘uncertainty’ are mainly due to worries over future policy direction. All the veiled threats and warnings are based on a misunderstanding of the motives behind Brexit and the fact that none of these experts have any real idea of what would happen in the event[18]. Not one voice on the Leave side has called for a ‘bury your head in the sand’ isolationist strategy, and even the most strident voices on immigration only call for restrictions to the potentially unlimited numbers EU membership implies. There is also the unquantifiable consideration that a ‘Brexit bounce’ could occur. The Scottish referendum showed a dynamic unleashing of animal spirits, despite the result. There is no reason to suppose it will be different south of the border.

The Deal

Leaving aside whether rich bankers would wish to pay French tax rates, or the general opinion of the British people on whether such an exodus is desirable or not, the best way to capitalise on Brexit is, as the wartime slogan put it, keep calm and carry on. The ‘uncertainty’ is reminiscent of the worries over a hung parliament in 2010. A clear statement by the Prime Minster would allay such fears. The government should not invoke Article 50[19] until it has agreed upon the correct strategy. A Cabinet reshuffle and probably a new Budget will be needed. The Prime Minster would then appoint a team of negotiators headed by three politicians who are not in government and backed by the best business, legal and civil service brains that can be provided. The government should agree on the deal Britain would offer the EU before entering the negotiations and task the team accordingly.

Many of the fears of Brexit stem from a flawed view of Britain’s position vis-a-vis the EU. The UK rivals the US as the EU’s biggest trading partner. Giving them unfettered access to ‘Treasure Island’ is a huge bargaining chip. In addition all of those hyperbolic warnings apply to the EU as well. It is not in the interest of either side to drag out negotiations over a decade or descend into some kind of trade war. A bold positive offer to the EU could easily lead to a mutually beneficial agreement.

The British position would be thus: The result of the referendum is a rejection of the political project that is the EU. It is not a rejection of Europe. Britons wish to trade, co-operate and help improve the lives of Europeans, they just do not wish to be ruled by them. Britain is a special case. It is one of the largest European economies. It has its own seat on the UN Security Council and is one of Europe’s two real military powers. If one of Germany, France or Italy were not in the EU they would have a special deal due to the size of their economy alone.

The government should be prepared to offer the free movement of goods and services, but not peoples. A fast-track visa service should be agreed between Britain and the EU based on job offers. Right to remain and dual passports should be offered to all EU nationals currently residing in Britain and a reciprocal arrangement for all British nationals in the EU. In exchange for the unquestioning agreement by Britain that all Member States have indeed followed the EU’s byzantine regulations[20], the EU will accept a British Standards Certificate (BSC) as equally meeting those regulations. The UK will allow free access to its market for EU goods and services in return for a reciprocal arrangement accepting free access to the EU’s market for British goods and services holding a BSC. Furthermore, the UK will contribute to certain EU programmes on a voluntary basis dependent on mutually beneficent interests that make such involvement inevitable. Other arrangements such as the European Arrest Warrant, Britain’s involvement in Europol and the sharing of intelligence data can be decided separately. Lastly, the government should offer to help maintain the EU’s coastal boarders separately from NATO commitments.

A new Board of Trade should be set up to oversee the British Standards Certificate. As many of the regulations the EU passes down are global, Britain would have to accept them anyway, “the EU is therefore increasingly becoming a pointless middleman”[21]. The UK would however have a seat on those bodies[22] that agree on these rules while currently it is the EU that represent its and twenty seven others interests. The new Board of Trade would offer help to all firms wishing to export. If they wish to trade with the EU they would need a certificate and the Board would help them meet the necessary regulations. In reality, as the starting point is that Britain already has these regulations, the Board would only need to help in the future as paths diverge. If British firms only wish to trade within the UK then they would only need to meet current and future regulations and will have no need of the certificate. Thus any future de-regulation Britain conducts need not affect EU-bound goods and services. The Board would offer similar facilities to firms wishing to export to other markets. Where trade barriers do not prevent British firms operating they would be free to offer their products on their own merit. The certificate would imply a certain quality and the Board should offer help to exporters in return for meeting those standards. The government should be actively promoting the BSC in any future trade deals[23].

There need be nothing acrimonious in Britain leaving the EU. If it is considered a marriage, there are no children to complicate matters, the UK’s children have long flown the nest and set up home elsewhere. The EU wishes to integrate into a deeper union that Britain does not wish to be part of, indeed outside of the Euro and Schengen it is already on a separate course. If the EU is confident in its model it should have no problem in Britain wishing to demure: if it is successful, they benefit; if their opinion is that the UK won’t and must be prevented from harming itself then Britons may as well decide they are seen as a slave state.

 

The Future for an Independent UK

“Name a city or state that failed because it taxed too little?”
Greg Abbott, Governor of Texas, May, 2016

As the OECD highlights, the long-term fear that Britain outside of the EU would lead to a decline in investment is again subject to policy decisions. Foreign Direct Investment (FDI) in the UK is one of the drivers of the economy. A free trade deal such as that outlined above would obviously allay those fears but Britain should go further. The government should take the opportunity the short-term ‘uncertainty’ will afford to drastically revise fiscal policy, too long ignored in favour of monetary in this age of the technocrats’. FDI is dependent on the rate of return foreign firms can expect from UK investment. The government has made the right move in bringing down Corporation Tax[24] and should continue to cut this and Capital Gains Tax further. In addition it should cut the rate on income from dividends to encourage investment in British firms[25]. Currently it almost mirrors Income Tax rates but is calculated as part of one’s personal income. The government should scrap the marginal rate altogether. Ideally it should take income from dividends out of the personal rate and set up a 10% flat tax. This will lead to huge investment in the British economy[26]. The added benefit will be to democratise the stock market as greater numbers will be attracted in, concurrently widening the tax base. Next time there is a ‘shareholder spring’ it won’t just be the ‘jobs for the boys’ crowd.

The government should also cut taxes on the non-domiciled. Secretary Kerry is correct, the world is “borderless”, at least for its ‘super-rich’. Due to Britain’s liberalised laws, the world’s affluent classes already own so much property in the UK; they should be incentivised to spend their time and wealth in Britain, not be driven away. Lower rates will encourage them to invest. This will lead to a rise in productivity as economic output expands. Greater returns lead to reduced unemployment, higher wages and therefore higher tax receipts despite the lower rates. Private wealth creates wealth, not inefficient government spending.

Overall UK tax rates are too high. There is a deeply rooted fallacy in public discourse that raising the rate of tax will generate greater income. The evidence of the last century proves the opposite and for more recent examples try this decade. It may be a facile argument that the rises in VAT and the top rate of Income Tax[27] in 2010-11 caused the stagnant growth of the following years but the figures are undeniable[28]. High tax rates are the bedrock of big government and necessitate inept and sometimes damaging spending to justify them. It is essentially a con job pulled on the taxpayer by whosoever is the ruling elite. Big government can at best offer a healthy 2% growth rate which is, coincidentally, just enough to keep those employed by big government wealthy, and those dependent on it docile. This is the poorest ambition for any country and will lead to decline. By simplifying the laws, lowering the rate and broadening the base greater incomes are generated and it is actually the poorest who benefit while the richest end up paying more as income goes to the public purse rather than the highly paid accountants who understand the alchemy of taking the highest paid into the lowest bracket.

Once the greater revenues have come in from the dividend tax, the government should introduce a flat tax on all personal income rather than the progressive system currently in place. A taxpayer earning the average UK salary will pay the same proportion of his income as a taxpayer earning a million. That way everyone would truly ‘all be in it together’. Flat tax rates have worked all over the world. Some of the most successful and dynamic economies have them, but the ‘politics of envy’ in the UK prevents even discussion of such crazy ideas that are proven to increase revenues[29].



[3] IMF World Economic Outlook (WEO), Too Slow for Too Long, April 2016 (http://www.imf.org/external/pubs/ft/weo/2016/01/pdf/text.pdf), The Economic Consequences of Brexit: A Taxing Decision, (OECD) April 2016 (http://www.oecd.org/economy/The-Economic-consequences-of-Brexit-27-april-2016.pdf). President Obama’s visit to the UK, also in April 2016, to wish Her Majesty a happy birthday.

[4] There are other more general references eg. “At the same time, long-term government bond yields in Germany, Japan, the United Kingdom, and the United States” (WEO Page 7), “fiscal policy is projected to be… somewhat contractionary (sic) in Japan, Spain, and the United Kingdom” (WEO Page 14) etc.

[5] WEO Page 24.

[6] “Potential Exit of the United Kingdom from the European Union – A British exit from the European Union could pose major challenges for both the United Kingdom and the rest of Europe. Negotiations on post exit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility. A U.K. exit from Europe’s single market would also likely disrupt and reduce mutual trade and financial flows, curtailing key benefits from economic cooperation and integration, such as those resulting from economies of scale and efficient specialization.” WEO Page 26.

[7] “In the United Kingdom, the planned June referendum on European Union membership has already created uncertainty for investors; a “Brexit” could do severe regional and global damage by disrupting established trading relationships.” WEO Foreword xiii

[8] “In the United Kingdom, growth (forecast at 1.9 percent in 2016 and 2.2 percent in 2017) is expected to be driven by domestic private demand supported by lower energy prices and a buoyant property market, which help to offset headwinds from fiscal consolidation and heightened uncertainty ahead of the June referendum on European Union membership.” WEO Page 19.

[9] Angel Gurría, Secretary-General of the OECD, seemed rather animated at the presentation of his report. Former minister in the Mexican government and one of the architects of NAFTA, he is a classic big government man. Moving effortlessly from one world body to the next…

[10] OECD Page 32.

[11] WEO Foreword xiii.

[12] OECD Page 31.

[13] “Despite labour market regulation being among the least restrictive in the OECD, many UK firms find EU labour market regulation too tight, in particular the Temporary Agency Workers Directive and the Working Time Directive. However, there is no guarantee that the political constellation after Brexit would ensure more business friendly legislation in substitution of abolished EU laws.” OECD Page 29.

[14] “The EU absorbs around 45% of Swiss exports of financial services, despite the absence of passporting (sic) rights for its banks, but Switzerland negotiated a favourable agreement when it was planning to join the EU in the early 1990s”. OECD Page 14.

[15] See the section on ‘Secular Stagnation, Hysteresis, and Lower Potential Output’ WEO, page 26 etc etc.

[16] Labour Force Participation Rate – UK 78.3 %, USA 63 %, Japan 59.2 %, Canada 65.9 %, Germany 60.3 %, France 56.1 %, Italy 64.5 %. Eurozone average 56.8 %. Unemployment Rate – UK 5.1 %, USA 5 %, Japan 3.2 %, Canada 7.1 %, Germany 4.2 %, France 10.3 %, Italy 11.4 %. Eurozone average 10.2%.  Tax rates are calculated as an addition of the marginal rate of Personal Income Tax and Corporate Tax. Sales, Social Security and Sin taxes etc have been excluded. – UK 65 %, USA 78.6 %, Japan 83.9 %, Canada 55.5 %, Germany 77.15 %, France 83.6 %, Italy 80.3 %. Eurozone average 66.7%.  (Source http://www.tradingeconomics.com).

[18] The view that Brexit is an isolationist or protectionist move is a constant refrain from those opposed to it. The Centre for European Reform (CER) make a similar case to the IMF and OECD in their 2014 report The Economic Consequences of Leaving the EU with similar doubts over policy direction.

[19] …of the Lisbon Treaty, triggering the two year countdown to departure.

[20] Including the tacit assumption that the mean average of the 27 Member States interests is the best that can be achieved, or indeed hoped for.

[21] See Roland Smith, The Liberal Case For ‘Leave’, http://www.adamsmith.org/the-liberal-case-for-leave.

[22] Many are UN bodies, others include the WTO, ILO, IMO etc.

[23] The government’s aim should be to go beyond the EU and become the gold standard for quality around the world. The EU has to compromise for all its Members to have a level playing field by overregulating those who do not need them to ensure those that do can claim to meet the same standard. To compete, the UK outside of the EU would find smarter ways to meet global trading standards without overburdening business. In the future Britain may have to issue a second class BSC to cover the EU but that is for the long-term by which time, based on historical trends and current directions, the EU’s share of British exports will have fallen to such a low level that application for such a certificate would prove to be just the cost of doing business with the EU.

[25] The author does not own any shares nor receive any dividends. The author does not own any off shore wealth nor does he earn enough to pay the higher or additional rates. Nor (to the best of his knowledge) do any of his immediate family.

[26] Though the government may wish to take measures to prevent salaries being paid completely in dividends, a move in such a direction would not be such a bad thing.

[27] ‘Sales’ Tax from 15-20%, Income from 40-50%.

[29] For a detailed look at the efficacy of flat taxes around the world see The End of Prosperity 2008 by Laffer, Moore & Tanous.