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

In summary PM Johnson has bowed to EU concerns about maintaining sanctity of the Single Market and its Customs Union. 

My own view is that modelling is a useful tool for a projection but it is always based on past statistical trends so can often be way off actual outcomes. This can work both ways and it is true that the actual outcomes after the 2016 referendum were better than doomsday scenarios. 

Ironically, the UK economy was given a short-term boost by the fall of the pound post 2016 Referendum but the country remained – and remains – in the EU. Once the UK leaves the EU then the risks of economic damage and malaise escalate – modelling or not – and the macro-fiscal hit could easily be far worse than modelled, especially if we then run into Scottish Independence II.

Notwithstanding all the above, OK, if this is the Tory deal …assuming it passes…let’s put it to a Referendum: Boris Deal v Remain

* With experience across academia, think tanks, central banking, EU Accession and reforms across 40 developing and transition countries, Dr Rupinder Singh works with multilateral organisations and governments as an independent adviser. He is an Executive member of Liberal International (British Group).

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8 Comments

  • And on top of all that, despite the worsening fiscal scenario, come all the unfunded huge spending promises made by Sajid Javid. UK will be begging for an IMF bailout in no time.

  • John Marriott 15th Oct '19 - 11:23am

    From an economic point of view it’s accepted by most people that anything but Remain will signal a worsening of our position. However, that really doesn’t seem to bother those people who still support leave, with or without a deal. We should be asking ourselves why this appears to be the case. Are there really forces out there, unleashed by the build up to the 2016 Referendum, that defy all logic, or at least the logic as defined by Remainers?

  • Graham Evans 15th Oct '19 - 12:27pm

    Many of the losses will be opportunity losses so won’t have a perceptible impact on most people. Moreover even if people suffer adversely they will find reasons why it wasn’t the fault of Brexit, or more likely because the UK was punished by the EU for wanting to leave.

  • They may indeed hang tough for awhile, but as a country we are unused to pain, especially the boomer generation. When bad things happen expect Depeffles popularity to drop as people unused to pain suffer it. They may however just rush to the next populalist ( probably the one shouting ” Tis all the fault of Depeffle, the remainers and the EU”.

  • John Marriott: Your remark about economic decline not bothering leavers is certainly true of many of them, but not all. Our hope lies in those who really do care about this and about our position of influence in the world; let’s assume there are enough of them to make a difference to our politics.
    Rupinder’s article shows how Johnson’s ideas for a deal has detrimental effects on us all and I get the impression that the EU is so fed up with us that as long as the Irish problem is set in the right direction, they have lost caring about the fact that the UK will suffer more from Brexit than they will.

  • Denis Loretto 16th Oct '19 - 12:06pm

    Am I right to say that if there is an agreement within the next few days and approved by parliament it will in legal terms be a withdrawal agreement only? In other words the political declaration, including the intentions of the current UK government on the nature and scope of the future relationship with the EU and such matters as labour and consumer rights are just that – intentions. If so there is much still to be campaigned for by Liberal Democrats and others even if and when we have to stomach terminating our membership of the EU.

  • Peter Martin 17th Oct '19 - 9:58am

    @ John Marriott,

    “From an economic point of view it’s accepted by most people…….”

    There’s lots of “economic POV” that are “accepted by most people” that are quite wrong” !

    Any Brexit analysis in the mainstream news usually starts with an account of why Britain will suffer. The ‘Britain is doomed’ crowd always make the assumption that Europe itself will be fine. But will it be?

    Pro Remainers are saying the Pan European organisation is healthy, and will thrive whether we’re in it or not. That it’s ‘the place to be’, essentially. But suppose it isn’t. In a few years time, if we do leave, we’ll be thanking our lucky stars we got out while we could. It could well be the same story as the euro.

    At the time, “it was accepted by most people”, at least most in the pro EU camp, that not joining the Euro would lead to severe financial disadvantage for us and increased prosperity for the EU euro using countries.

    That was pre the 2008 GFC. Britain was then able to control its fiscal policy and therefore its economy much better than our fellow deficit countries like Italy and Greece, who were trapped in the single currency. They are still paying the consequences of that more than a decade later.

    We need to be very cautious about our connections with Europe. They’ve built an over rigid monetary structure. Rigidity isn’t the same as strength. If the structure collapses we’ll need to be well away from it. Just not using the euro isn’t enough if we are too closely tied to the EU.

  • Rupinder Singh 17th Oct '19 - 10:00am

    Thank you for your comments.

    @Denis Lorett: as of this morning 17th, it really is “shrouded in mist” as the PM said but my baseline remains as outlined in the article that, at best, a political agreement without the necessary implementation details inc customs, VAT et al is best the PM can hope for.

    @John Marriott: positions from parliament down to the average citizen have crystalized into tribalism of the worst sort. So long as we can keep winning the argument in the centre ground then a majority ensues. The counter-argument is that consensus for Remain is itself an amalgam of different groups with differing views about the end-game beyond the short-term common aim of rejecting a bad deal.

    @Graham Evans: possibly but 2 potential outcomes: (i) UK is an EU Member State (MS) with a voice at the table for modifying EU law, pays into the budget and accrued benefits ….UK leaves but either ends up with essentially the same outcome but without the voice and/or marginal change in budget (WORSE OUTCOME) or (ii) a Boris deal sacrifices Northern Ireland which if it is accepted leads to de jure de-unionisation (both NI and Scotland) and a serious macroeconomic supply shock to the rump Britain familiar to the Tudors b4 Scotland and Ireland joined the Union (MASSIVE NEGATIVE OUTCOME ECONOMICALLY if not politically for UK global voice and soft power).

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