Surviving hard Brexit will require sacrifices not seen since the Second World War

In reality the only sensible way to make the UK a success is by another dose of full-on free market economics. In the short term that means unemployment; depressed wages because of more, not less migration; scrapping the living wage; no increase in public sector pay and tax breaks for corporations

Sean O'Grady
Monday 17 July 2017 14:43
The Chancellor, Philip Hammond, has already hinted at this when he said that the UK would need to reset its economic model post-Brexit
The Chancellor, Philip Hammond, has already hinted at this when he said that the UK would need to reset its economic model post-Brexit

I think by now we know two things about Brexit. First, it is probably going to happen, because there is momentum behind it. We’ve activated Article 50 and soon the European Communities Act 1972, that constitutional landmark piece of legislation, will be repealed. That means that in British law the EU no longer has sway over this country, presumably from 30 March 2019.

Maybe, as Tony Blair has said, there is the chance of some last minute gesture from the EU, one final push to keep the UK in Europe through some accommodation on freedom of movement of labour. Maybe the Labour Party will join with the Liberal Democrats, SNP and Tory rebels to frustrate Brexit, either with or without the tacit support of some Cabinet members. Maybe the Chancellor will dramatically resign and lead the Conservative internal resistance to a deal he regards as ruinous. Maybe something else will happen in the next 18 months that means the Great Repeal Bill will itself be repealed and the 1972 Act restored and Article 50 cancelled. Maybe.

The likelihood though is that Brexit has gained so much life of its own that it is next to impossible to block. The point is that Parliament ceded sovereignty to the British people last 23 June, and a second referendum does, by rights, need to be held on the terms of the Brexit deal. Even so, no one can predict how that one might go.

It’s worth observing that the House of Commons gave up more power through that effectively binding referendum vote than it has ever sent to Brussels. The only thing MPs now have to do is to give effect, as best they can, to the referendum result; even if they hate Brexit and campaigned against it, they are now no more than popular delegates getting on merely with the detail of what the people demanded, albeit by a slim majority. No longer are MPs the representatives of the people on the old Edmund Burke model, voting with their brains and consciences as they fancied themselves to be. That, by the way, is a constitutional revolution as big as anything we’ve had for centuries.

Tony Blair: It's necessary that Brexit doesn't happen

The second thing we know about Brexit is that, Blair’s hopeful noises notwithstanding, there is no such thing as a soft Brexit. Wanting to stay inside the single market – one definition of soft Brexit – like Norway means accepting freedom of movement of workers. The EU insists on that, while the UK insistently rejects it. Being part of the EU customs union – like Turkey, say – means accepting that you cannot make trade treaties of your own. Once again that is not something the UK seems to want, and makes Brexit a bit meaningless. Sectoral arrangements, such as those Switzerland enjoys, are also unsatisfactory for both sides, as they require constant approval and fine tuning; and Switzerland is heading for a bust-up with the EU about freedom of movement of labour.

Any bespoke deal that seeks to keep “access to” the Single Market, say, or “frictionless” trade, as Labour and Tory front benchers talk about, would mean the EU giving in to things that they have consistently said they will not give in to. A free trade deal is simply not on. As far as the UK is concerned, Soft Brexit means all of the disadvantages of the EU with fewer advantages, for example a say on decision-making. As Blair says, we’d wonder why we were leaving anyway. Soft Brexit is in any case not going to be offered to the UK, unless we get lucky.

So we are left with the likelihood of hard Brexit. That is just the start of the pain, though. In order to keep the British economy competitive in such difficult circumstances it will be necessary to adapt. We cannot simply pretend nothing has happened and borrow our way to higher living standards. The UK's economic model will need to be reset, because we will need to be globally competitive in a new context. That implies the greatest economic and industrial dislocations since the 1980s. Here is how it will have to happen if we crash out.

I know, by the way, that no one voted for this stuff, still less campaigned for it. OK, but in reality the only sensible way to make the UK a success is by another dose of full-on free market economics. The Chancellor did once hint at this when he said that the UK would need to reset its economic model post-Brexit, though he has backed off that lately. Think of it as Britain becoming the Hong Kong or Singapore of Europe; or, if you like, the arrival of Thatcher’s Fourth Term in ghostly office, finishing where she left off in 1990. It may be no coincidence that almost all of the Brexiteers are hard-line nostalgic Thatcherites (with the important exception of liberalising immigration). These are the steps:

  1. Unilateral free trade

This is like turning Britain into a gigantic Lidl store – looking for bargains on world markets and then filling our boots with whatever value items we can pick up. It is surely one way to protect living standards when we take the hit to trade from leaving Europe.

By reducing tariffs on all imports to the UK – that is of goods and services – we can swiftly take advantage of lower global prices of everything from lamb to cars. However - and there should be no doubt about this – access to such cheap produce and goods from, say, New Zealand and China – would mean ruin for the likes of Welsh hill farmers and workers in our currently thriving motor industry. There would be many other cases of radical structural change. The British people, as consumers, would do well out of it, and it would keep inflation down; but as workers they may find life extremely tough. As in the 1980s there would be high unemployment and a strain on the welfare system, and on society cohesion generally as the economy adjusted.

On the other side, we may face tariffs on things we try and sell into the EU; but at least on this end of the border we can minimise the disruption to industrial supply chains and normal imports from by unilaterally allowing their stuff to come in subject to next to no controls. HMRC believes that routine customs declarations can be made electronically and goods cleared at ports in seconds. There would be very little extra effort required by companies. There is no need to recruit an army of customs officers with peaked caps and clipboards to go around checking every lorry. We can minimise the barriers to trade even under hard Brexit, and open up non-EU trade.

  1. Lift the cap on migration

Coming out of the EU doesn’t necessarily mean lower migration; it does mean more rational and fairer migration. Put as it simplest, there is no logical or moral reason why a Bulgarian should be treated more favourably than a Bangladeshi if they want to come here to work or start a business. The truth is we need labour and we need entrepreneurs, and the Government must give every major company and public body a practically unlimited right to bring into Britain key people. They must have that guarantee so that they will be able to carry on their businesses as now – or even make it easier for them by reducing the burden of regulation on immigration.

Britain also needs a supply of students to keep our universities busy, and if they come from China rather than Germany, so what? Our universities could become some of the best funded in the West if only we took the opportunity to make them into massive export-earning revenue generators. Indeed it might well subsidise the cost of educating “domestic” undergraduates. Plus we actually do need unskilled labour too, to undertake the tasks the British don't wish to do.

Again, this more open door on migration would have a depressing effect on wages in some places; but it also means that UK businesses and public services would be more efficient and deliver more for less cost. In the long run it will deliver more jobs; it would be painful in the short to medium term. And of course it wasn’t exactly on the ballot paper last year.

  1. Liberalise labour laws

For the economy to compete in a tougher economic climate, the labour force has to become even more flexible. Thus, the fantasy that we can become richer and pay ourselves more than we earn simply by passing laws and setting the so-called “living wage” ever higher has to be abandoned. All this is a tax on business and tax on jobs. With a living wage at £10 plus per hour and no immigration we’d hardly have a hotel or restaurant in Britain left open after 2019. We need to get real about that. Union power in the public sector particularly needs to be rebalanced, and we cannot countenance co-management of enterprises via worker directors and the like. The UK needs to be a place where companies and public sector bodies can hire the right people for the right jobs at the right rates; and streamline redundant operations as needed.

  1. Cut taxes and shrink the state

In order to keep businesses here we need to make sure that their owners and management are rewarded for staying here. Capital is footloose and businesses prefer environments where there is light regulation, lower taxation, the rule of law and political stability. The UK can offer those things, and if it does not, then someone else will, maybe even Macron’s France. Outside the EU the pressures to attract inward investment will be much more intense, and the incentives we need to offer foreign investors will need to be that much more lavish. More investment means higher productivity and more jobs and higher wages in the longer run. In the short run lower taxes means lower public sending, and what there is being diverted into infrastructure investment. Borrowing to pay for pay rises for public sector workers makes no economic sense.

None of this unpalatable medicine is necessarily recommended except in the circumstances that the UK crashes out of the EU and has to sell its goods into Europe, and indeed other countries, with sometimes high tariffs and other barriers confronting us. Indeed services – three quarters of the UK economy – will be especially difficult to sell because so few are covered by World Trade Organisation rules, and the EU can legally simply stop the UK having rights to sell financial and other services into the EU. Deals and arrangements with the rest of her world will be needed to keep the economy running, but the first requirement is that the quality and price of those services, as well as manufactures and agricultural produce, has to be globally competitive. That means Britain has to change.

It could work: the UK could, by say 2050, be the largest and strongest economy in Europe, a nation of 80 million with the highest productivity in the continent, an economic powerhouse that the EU would be begging to co-operate with, if it is still around. Yet it would require sacrifices not endured since the Second World War. At any rate, it will be the coldest of cold showers.

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