Author Archives: Rupinder Singh

Johnson’s Proposed Brexit Deal: Chances and likely Impact on UK economy and public finances

Whist there is history of EU negotiations going to the wire and wee-hours of coffee-fuelled (now smokeless) last minute give-and-take, these events tend to be about intra EU matters such as the EU budget or the “musical chairs” argy-bargy of who agreeing who and which country gets which plum jobs within the European institutions. 

Can a modified deal therefore be agreed between the Johnson government and the Commission in time to put forward to the European Council on October 17-18? 

On a range of probabilities, yes, but it is a low-probability one. But it would essentially require the PM to essentially converge – if not fully cave in – to the EU demands.  The chances that the required sequence of steps: agreement, Council blessing, agreement by UK parliament (inc DUP and ERG), and before askance from the other EU27 plus the European Parliament can all be addressed remains unlikely. 

The baseline remains that there will be no FULL agreement in place although the PM could then go to the electorate with a partial agreement that allows him to argue that he has “delivered” pre October 31st  even if the Benn Act kicks in for an extension (which as I have argued could go on to June 2020).

Johnson v May Deal Basics

  • The Johnson deal is to effectively agree that Northern Ireland will continue to, in effect, remain in the status quo governed by EU rules for all goods AND with no border checks with the Republic of Ireland
  • The UK will want to exit from compliance with EU rules on labour and environmental standards where previously there was to be no divergence from EU law
  • The J-deal seeks full flexibility for free-trade deals with 3rd countries where previously it was for services only AND
  • A Good-only EU-UK trade deal akin or “Canada minus”

Implications

  1. Not completely addressed so far but Northern Ireland would in effect become something between the Isle of Man and a full Home Nation and may well set in train the move towards full Irish unification. Leaving aside parliamentary arithmetic and the DUP, put to a referendum, voters in Northern Ireland would likely agree to this.
  2. Both the Johnson and May deals represent a worse outcome economically for the UK vis-à-vis the REMAIN position. 
  3. Modelling undertaken by Professors Menon and Portes (and excluding spillover effects such as a more brutal potential Scottish Independence) have shown that living standards – as measured by per capita incomes –  would decline more under the Johnson deal than under May’s…and both are worse than the current status quo of REMAIN.
  4. That there would be an ouflow of EU workers by up to 600,000 over the coming years partly compensated by an inflow of non-EU workers – with the result of labour shortages in key sectors inc NHS, falling productivity 
  5. No fiscal savings from exiting (aka the £350m per week fallacy) because the UK would have to set up its own agencies where currently the work is delegated to EU bodies, raise its own aid financing currently carried out by the EU and lose access to funds returned through Structural funds and grants for R&D and education
  6. And A WORSENING short-term fiscal scenario relative to REMAIN: around 2% of GDP worse off or equivalent to between £40-60bn.
  7. Beyond the macro-fiscal, there should be alarm bells ringing at the implied roll-back of structural reforms (Competition Policy, State Aid, Consumer Rights, Labour rights et al). The current Johnson deal is arguably even worse from a macroeconomic context and potentially imply a roll-back of a basic framework of labour and consumer rights not seen for generations

Summary

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The EU logic for an extension through to the summer of 2020 and implications for the UK

In a nutshell, the 7-year EU Financial Framework runs 2014-2020. More straightforward for the management of the EU budget for the European Commission and a neat end-point. Or is it?

The noise out of number 10 to be un-cooperative to our continental partners may prove to be temporary bellicose “humbug” to use the PM’s own recent rhetoric – not least if the UK’s common interest in avoiding further regional turbulence in the Levant: military, economic – should US President Trump’s threats to destroy the Turkish economy bear fruit, further potential conflagration into an already fragile middle east that could lead to further issues of migrants that Turkey itself has been in effect paid by the EU to keep in situ through the ‘EU-Turkey refugee agreement’ through a €6bn pledge of which half has already been disbursed.

From the EU’s perspective therefore, there is no other major big EU-wide decisions in the offing for another year that Britain could threaten to either derail or upon which to simply do a spoiler akin to Farage’s MEPs turning their backs in the European Parliament. For EU capitals and the new incoming Commission and European Parliament a year offers enough time for the UK to go through the political catharsis: post October 31st “do or die” deadline gone, an election, perhaps a referendum, who knows maybe yet another election still, a possible Scottish referendum..

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LIB DEMS: by default, the only party for Business and sound economic management

The “new normal” was coined as a new lexicon by Mohamed El-Erian, the then head of the global financial firm PIMCO to describe the post-script of global finance following the financial crisis of 2007-08. 

With the torrent of news and scandal, it feels as though we are all becoming immune of not sensitised to an almost daily feed of political shocks and ever-more worsening language in the current political maelstrom. The new normal.

One aspect of the current pre-election phase – but also a reflection of a structural shift – is the position on public finances for the two parties. As Lib Dems should be able to capitalise on as the ONLY sensible party for economic stewardshipmost sensible centrists and business will recognise that the Tories have lost this mantle.

I wrote earlier about PM Johnson’s rapidly escalating fiscal promises that are clearly a pre-election gambit – a well-worn political strategy of governing parties over generations. I also highlighted the risks that the fiscal costs of a de facto government “bail out” by the Treasury in the event of a No Deal could easily get into figures and a scale that would test the UK’s reputation for economic management at the least, and the worst, risk a full-blown economic-financial crisis.  

A further extension into 2020 (June most likely) is now the baseline scenario. I’ll outline why separately.

A quick review therefore of the fiscal issues is apt but without going into policies specifically, or even the legality for some of Labour’s positions eg on sequestration of private school assets. 

These are my 3 main conclusions for the current new normal for economic management in the UK:

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Policy responses to the Amazon fires – a longer read for the weekend

President Macron, the UN Secretary General, London mayor Sadiq Khan and even Cristiano Renaldo have all chipped in over the last 24 hours with concern about the situation where 1/5th of the Earth’s oxygen source is located and Sao Paulo is covered in a blanket of smoke and across half of Brazil. How big is the problem, what are the implications and how do we incentivise and assist Brazil?

The figure above, from the BBC website, shows the increasing trend which feeds into the wider global concern about global warming and the resultant thawing of the Arctic, melting of glaciers such as that in the Hindu Khush that feeds 1 in 3 of the global population and the extreme weather events from heavy rains that cause flooding (from England to the current woes affecting the Indian sub-continent) and intense summer heat and often more intense winters. And witness the spate of Artic fires this year from Alaska to the Russian far north.

The immediate impact of climate change is evident across much of the world – even if not accepted by naysayers – and most pressingly by the developing world, countries without either the budgetary resources or the institutional structures in place to put together cohesive long-term stabilisation strategies in place to deal with the immediate emergency and humanitarian crises following fires and floods.

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What the Yellowhammer assessment reveals

The Sunday Times on August 18th led with this “leaked” Cabinet document, purportedly by a former Cabinet official and then downplayed by Mr Gove and others as a “worst case” scenario or a re-hash of “project fear”.

Even if the “revelations” are slightly dated (although it is said to have been an updated version) the base-case cannot have changed materially since March 2019 and if anything could arguably have worsened given the macro-fiscal setting the UK faces.

The National Audit Office produced a dry overview of Operation Yellowhammer in March 2019 which was setup under the aegis of the Civil Contingencies Secretariat (CCS) at the Cabinet Office. The CCS works alongside the Department of Exiting the EU (DExEU) to prepare for the UK’s exit from the EU across 12 areas.

The institutional mapping and framework to prepare for the operation is impressive and speaks volumes for the hard graft undertaken by our Civil Service and which would potentially involve over 30 central government bodies including all government departments or ministries, 42 local forums in England and Wales and equivalent bodies in Scotland and Northern Ireland, governments in Scotland, Wales and Northern Ireland as well as key sectors and industries.

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Tory “Wafflenomics” and the Expected Macroeconomic-fiscal Costs of NO DEAL

In my last piece, I outlined the expected consequences of a depreciating pound and that a looser fiscal response was the only feasible short-term policy response that would be available to deal with the massive macroeconomic shocks that are likely to ensue (an uncoordinated) NO DEAL Brexit.

Three and a half questions follow:

  • What is the Boris math for the litany of fiscal promises issuing since his “inauguration”?
  • Are these spending promises feasible & credible in terms of the macro-fiscal context the UK will face in a NO DEAL scenario?
  • What should our response as LibDems be to unpick if not defenestrate the Tory Wafflenomics in the run-up to October 31st? The half-question I leave for another occasion, what should be our policy response to deal with the after-effects from November 1 should a No Deal actually take place.

Math on Boris’ Fiscal Promises and projected values

(…mind you we’re just a few weeks in..)

  • 20,000 new police officers: £1bn (one-off)
  • Rise in 40% tax threshold from £50k to £80k: £10bn
  • National Insurance contributions at higher trigger: £11bn
  • Schools: reversing cuts in Education envelope: £5bn
  • Health: Unclear but: 20 New hospitals £1.8bn + wooing female voters £2bn + ??promised £350m per week: £3.8bn – £20bn
  • social care: £10bn
  • new railway Manchester – Leeds: £2.1 – £3.6bn depending on sources, assume £3bn
  • Help to farmers: £0.5bn (but is this just for the Welsh lamb?)
  • No-Deal Planning: £2.1bn (let’s assume £100m no-deal advertising part of this budget line)
  • Unbudgeted thus far: other sectors e.g. Fisheries, medicines, food shortages, …you get the picture…cost of increased policing…

Totting these figures gives £42bn excluding the £350m/week which alone would imply a further £18bn…and per year if the red bus promise is to be kept strictly. Large numbers in absolute terms (a billion has nine zeros) but not in relative terms as the UK economy is £2 trn in value (a trillion has 12 zeros), meaning that £42bn equates to around 2% of GDP or 5% of the current budget and therefore chunky but not a huge fiscal expansion…of itself..

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Sunny Uplands and Baloney Economics: whence the falling Pound?

The pound has hit a 2-year low and is the worst performing currency this year and there are still strong headwinds ahead for sterling, particularly if a No Deal Brexit ensues.

The circumstances facing the UK economy and the exchange rate remind me more about country risk scenarios that I faced for dodgy Emerging or Transition Economies, not a developed and mature economy such as the UK. 

All bar our more mature colleagues will have no memory of the dark days of the IMF led bailout of the UK in the 1960s. It’s worth therefore sketching out what the economic-cum-financial risks lie ahead if the “Sunny Uplands” scenario of Prime Minister Johnson starts to take shape, based on his statements and promises since his speech at the doors of 10 Downing Street.

The pound’s value in terms of other currencies is based several factors. Right now, the increasing risk of a “no deal” is scaring away demand for sterling and for sterling assets, thus pushing down the price or exchange rate in terms of other currencies – but the markets sense that there’ll still be a resolution or a further extension.

However, in the event of a “no deal” we will face a genuine currency crisis as investors pile out of sterling assets. These events tend to lead to an initial “overshooting” of the depreciation and we could easily see a further drop of 10, 15 or 20% – nobody really knows. With liberalised exchange rates there’s nothing to really hold back the initial loss of the pound’s value.

Ignoring the immediate hit for UK holiday makers facing a steep rise in the cost of holiday spending, what are the likely consequences for a no Deal as far as the pound is concerned?

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Is Ukraine lost?

 

Is Ukraine lost? Again? Is the social contract between state and citizens fundamentally flawed?

We are now well past the “honeymoon period” of the post-Maidan street protests that ultimately led to the rather fast departure of the then president Yanikovich, who fled to Russia in 2014.

A spate of ministerial resignations at the start of 2016, an economy in dire straits and with a huge external debt overhang, having lost up to a third of its economic base from the loss of territories and ongoing conflict with Russia and being supported by western-supported international financial institution packages including dollops of soft EU macro-financial assistance, a false dawn with the so-called Orange revolution in 2004 and the Maidan of 2014…so which way reform?

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