May’s Deal 1) Andrew Feldman – Party members must back it and her. Let’s not give Corbyn the crisis he craves.

If he can’t get an early election, he would take a disorderly departure from the EU, leading to a recession – and to victory at a later date.

Andrew Feldman is a former Chairman of the Conservative Party.

In recent months, I have spent time talking to business leaders in the UK and around the world. They all have two questions for me. Is there going to be a Brexit deal? Is there a chance that Jeremy Corbyn will become Prime Minister? My reply is always the same. That those two questions are inextricably linked.

If there is a sensible deal, then it is likely that the UK will enjoy an economic boost, releasing pent-up investment from a period of deep uncertainty. Businesses based here would stop sitting on their hands and commit to the new factories, warehouses and capital projects that we need. Investors abroad would once again feel confident that the UK was ‘open for business’, and would seek out the immense opportunities that we offer.

If this happens, the prospects of Corbyn being elected recede dramatically. Improving economic growth and confidence would facilitate continuing high levels of employment, wage growth and investment in public services. The Conservatives would secure their hard-won reputation for responsible government, fiscal prudence and effective management of the economy.

On the other hand, if there is not a deal, and a chaotic exit from the EU, the picture will change dramatically. Businesses will not only sit on their hands, but may start to withdraw activity from the UK. Investment from abroad may be replaced by dramatic divestment. Now of course, over time things may settle down. But there will undoubtedly be a risk of serious economic dislocation – causing substantial job losses, slowing growth and curbing the ability to improve public services.

And of course, Corbyn and John McDonnell are desperate for that to happen – some kind of shock to the UK that can help to win them power. Ideally, they want to force an early general election, because the Conservatives can’t agree on a plan. Failing that, they would take a violent and disorderly departure from the EU, leading to a recession – and then to election victory at a later date.  Chaos and uncertainty are their route to power.

This is more than ruthless ambition; it is rooted in ideology. Karl Marx predicted the inevitable demise of capitalism as part of the great tide of history. Frustratingly for him, it never happened. Living in England until the end of his life, he marvelled at the ability of the British to adapt their system. To accommodate the needs and demands of their changing industrialised economy. His theory did not predict the peaceful emergence of the NHS or the welfare state. He died miserably ruminating over his unfinished sequel to Das Kapital.

The Marxists in Britain have been continually disappointed. They have lurked at the fringes of Labour politics for many years. Unfortunately, they have now entered the mainstream. They are waiting to seize their moment to impose their already discredited ideology on generations who have not experienced its horrors first hand.

It is the duty of the Conservative Party to stop this happening. A Corbyn-led Labour Government would be a disaster for this country. And although Brexit is undoubtedly a seismic event; there is no need to for it to lead to a Tsunami, destroying all before it. The Conservative Party has faced momentous moments before. The reaction has always been pragmatism. Evolution not revolution. Steadiness and deal-making.

In her speech in Birmingham, Theresa May reminded us of this legacy. She asked her Party to come together in the national interest to deliver a solution to the Brexit conundrum. To help her to thread the needle of respecting the democratic result of the referendum; of preserving our proud Union; of keeping the economy on track and business on side, and of finding a fair basis for trading with our close neighbours and allies.

We are leaving the EU: the referendum result must be respected. As with all marriages, it may end with sour words and slamming doors. But once the anger has subsided, we need to come together to work out the future, to protect the interests of the next generation. We need to be grown up enough to accept that although we are going through a divorce, we cannot just walk away from our responsibilities and move on. This can take time and involve ongoing obligations.

And as the Prime Minister reminded us, it is not just Conservatives who need to stand firm. Our friends in the DUP know what a Corbyn Government could mean. They know that his well-documented Republican sympathies would risk the break-up of the Union. He longs for a United Ireland with the same passion that he dislikes the United Kingdom.

So we need to make sure that we rally behind the Prime Minister and help her to deliver a sensible, measured deal. We need to do this to frustrate Corbyn and McDonnell. We need to do this in the national interest. And we need to do this to keep Marx spinning in his grave up in Highgate.

George Freeman: There was much to cheer in the Budget. But now we need an inspiring programme for growth.

At the moment, we are treading water and appear to be relying on popular support for Brexit, and the threat of Corbyn, to keep us in office.

George Freeman MP is Chair of the Conservative Policy Forum and The Big Tent Ideas Festival, and is MP for Mid-Norfolk.

On Monday, the Chancellor announced that “austerity is coming to an end”. Politically, there was a lot to cheer in this Budget – some good news and headlines for struggling high streets, our crucial Universal Credit reform, NHS workers and the vast majority of constituents who rely on public services. Furthermore, there were many helpful retail pledges for colleagues in marginal seats. Given the Brexit divisions and infighting, we badly needed some good news.

But if we are going to end the biggest squeeze on disposable incomes since the war, the central question for our future is this: how can we get back to the 2.5-3 per cent growth that we enjoyed pre-Brexit? Before the EU Referendum, we were one of the fastest-growing economies in Europe and the G7. Now we’re one of the slowest-growing.

The Budget invites the public to judge us on different metrics – no longer on our commitment to balance the books (abandoned) or reduce the debt (still growing), but on our ability to “end austerity”. People will now need to feel tangible improvements and see how Brexit can be a catalyst for much higher growth and prosperity.

Because this Budget won’t be decided on the comment pages of broadsheets. It will be decided on the ground.  By parents chatting at the school gates. Families looking after their ageing relatives in care homes. Commuters stuck in traffic jams because the housing has come, but the infrastructure hasn’t. Or the millions standing on trains every morning who’ve shelled out £2,000 for a season ticket and feel ripped off.

I no longer advise the Prime Minister, but here’s what I’d say if I still did. We need to remind people that every public sector pound has to be earned before it is spent, and that we need a more inspiring programme of business-led growth to drive prosperity and opportunity.  This means some big changes.

First, accelerating our transition from a service economy to an innovation nation.  Innovation is key to our driving up productivity, prosperity, inward investment and exports. We won’t escape debt with growth at 1.5 per cent and low productivity.  We need a renaissance of enterprise and innovation.  Such buccaneers as James Dyson and Richard Branson have done more to transform this country’s prospects than any government department ever will.  We need to stop the business-bashing and promote entrepreneurship and innovation. While the UK is still a crucible of start-up entrepreneurship, the engine is not yet humming: we have too many start-ups that are never scaled up, too little of our innovation funded by the City and too little that is taken global by British companies. We need a new national mission. We must be the innovation nation.

Second, tangible access to new markets for our innovation.We can’t just do research.  We need to innovate, manufacture and trade.  If Brexit means anything, it surely means an opportunity to go global. But that can’t mean importing cheap food and cheap clothes from sweatshops. We need to be exporting our innovation. The UK should be using every tool possible to unlock access to the fastest emerging markets in Africa and Asia.

For 40 years our whole economy has been geared to our being a European services economy. Why don’t we make Brexit the moment to embrace a new global strategy for higher growth through exporting technology and innovation into emerging markets? If the opportunity is properly seized, we could use our Industrial Strategy and public sector innovation to make Britain a crucible of new technology scale up and financing through the City.

We could then use our aid budget and global soft power in emerging markets to grow our exports and trade links with the fastest growing economies. Why don’t we offer some of the fastest emerging countries where we have a strong historic links a deeper Aid, Trade and Security Development Partnership?

Third, harnessing the public sector as a test bed of innovation. We’ll never export our innovation if we’re not using it ourselves. Innovation can’t be just about making a lucky few in the City rich beyond their wildest dreams. In order for us to be a test bed for new technology, we need to put enterprise and innovation at the heart of the public sector.  If we want to lead the world in digital health, we won’t do it unless the NHS is already a pioneer. You can have as many digital health clusters in Shoreditch as you like. But if the NHS isn’t testing and buying it, we will never become the innovation nation we need to be. Building, financing and growing these little start-ups into serious businesses of scale. The problem of the austerity era was thinking that our problems could be solved by cutting things. Actually, the only way our problems can be solved is by growing things.

Fourth, empowering local leaders to innovate more. Innovation can’t be ordered from on high. It comes from people having the power to make decisions themselves. That’s why we need to embrace bolder economic localism. Let’s remember that our national economic performance is made up of hundreds of local economies, all of which need to be growing faster. Another five years of ever-tighter spending controls from the Treasury risks undermining local growth and innovation.  Instead of delaying essential local infrastructure holding our growth hubs back, why not let them raise infrastructure bonds in the international capital markets and embrace bold ideas like integrated track and train mutuals which invests users money into better services?

Fifth, a new model of Treasury incentives. Too often, Whitehall’s funding orthodoxy rewards failure.  If you deliver more for less in the public sector we give you…less!   And give more to those failing.  If you ran a business like that it would be bust.  And depressing to work in. It’s no wonder that public sector leaders are so dispirited.  Many are leaving.  We need them to stay.  So why don’t we send a signal to encourage them, be bold and embrace a new model of incentives-based funding which rewards successful local service leaders for delivering efficiency and productivity? We need a new approach based on a radical idea: if an area reduces the deficit quicker than Whitehall’s average we should let them keep 50 per cent of the savings to re-invest.  Why not the same on growth? If councils grow their tax base, why not let them keep 50 per cent for local services?

Our choice as a nation is clear. Do we timidly manage our decline? Or do we set out a bold plan a brighter future? At the moment we are treading water and appear to be relying on popular support for Brexit, and the threat of Jeremy Corbyn, to keep us in office.

For a majority of voters, keeping Corbyn out and delivering Brexit are not good enough answers.  We need to show voters that this is the path to something more inspiring.  We need to start setting out a bold vision for Conservatism in the twenty-first century.

Why the UK economy should grow faster in the short term if there is no Brexit deal

Much of the current narrative regarding the Brexit negotiations goes something like this: “Brexit is likely to damage the economy in the short term. Even its advocates accept that. They said that even if there is a good free trade deal with the EU we should expect the economy to take a few years to […]

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Much of the current narrative regarding the Brexit negotiations goes something like this:

“Brexit is likely to damage the economy in the short term. Even its advocates accept that. They said that even if there is a good free trade deal with the EU we should expect the economy to take a few years to adjust, sacrificing perhaps two or three percent of GDP growth in the process. Now, they hope to get that back over the medium to longer term — Gerard Lyons talked during the Referendum campaign of a ‘Nike tick’ effect. But only a small set of economists, even amongst those that favoured Brexit, denied there would be short-term losses even if we do a good free trade deal with the EU.

“Well, then, if even a deal leads to short-term losses, how much worse must it be going to be in the short-term if there is no deal? That surely must be very bad indeed! Perhaps it could be so bad that it would undermine the Conservatives’ reputation for macroeconomic management, ushering in a Corbyn government in 2022?”

I think it is fair to say that some version of this narrative is near-universal. Even those keenest on no-deal are largely arguing that although no-deal is worse than the best sort of free trade agreement, at least in the short-term, that is worth doing through some combination of political gains and not sending the EU £40-odd billion we don’t owe them.

I think everyone’s wrong here, and I want to explain to you why. A good free trade agreement (something like a Canada+ deal) would be the best outcome for the UK economy over the longer-term — indeed, I cannot believe anything other than a Canada+ type Free Trade Agreement is sustainable for more than a few years. And if we do do a Canada+ deal, then I agree with those that say they expect the short-term impacts on GDP to be negative — we’ll sacrifice 2 percent or so of GDP growth by around 2022.

So, a deal is better than no-deal over the longer-term, and a deal will mean a short-term loss of GDP growth. But where the discussion goes wrong is in assuming that no-deal means bigger losses of GDP in the short-term. What would actually happen is (after we got through the first few weeks, say one quarter, of disruption, which might well include a non-trivial dip in GDP), GDP would grow faster in the short-term (say, the following 12-18 months) than if there had been a deal. Just because no-deal is undesirable for the economy in the longer term, it does not follow that that means we make bigger short-term losses.

Let me explain why. Let’s step through some of what will happen in the economy, once we leave the EU, and compare how that plays out in the event of a deal versus no-deal. First, let’s list some of the effects there will be, as per the following table.

We can see various ways UK imports will be affected, but it should be pretty uncontroversial that increased barriers to imports from the EU post-Brexit will mean fewer imports into the UK, at least in the short-term, as more of UK demand will be met by UK firms and less by EU-based firms exporting into the UK. Over the longer term, perhaps we will do more trade deals with non-EU countries or unilaterally strip away barriers to non-EU trade, and imports will end up unchanged or even higher. But in the short-term, it’s pretty clear we should expect imports to drop. It should also be pretty clear that in the event of no-deal, we’d expect imports to drop by more than if there is a deal.

Again, it should be pretty uncontroversial that Brexit will mean fewer exports to the EU, and probably fewer exports overall in the short-term, and that the impact will be larger if there is no deal than if there is a deal.

So, fewer imports and fewer exports, in the short term. Which effect will be bigger? Well, the UK is a larger net importer from the EU. We import about €4 worth of goods and services for every €3 we export. So if barriers to exporting and importing are fairly similar (as UK policy-makers would surely ensure they would be in most areas), the expected net impact will surely be a larger drop in imports than exports. So from this source, we’d expect a short-term boost to GDP, as net imports fell and the UK’s trade deficit improved.

Next, let’s consider capital flows. There is a great deal of press discussion of UK finance firms or car manufacturers relocating some activity into the EU to avoid barriers to trade. Perhaps there will be some of that (though so far it seems to be mainly talk), but even so, that is part of that €3 of exports going out. What we do not hear about are all the EU-based firms that would relocate activities into the UK to avoid barriers. Since there are €4 of those for every €3 coming in, we should expect that more EU-based activity has an incentive to relocate into the UK than in the opposite direction.

This is not quite so unambiguous as the imports/exports effect. Some firms exporting to the UK will also export to other EU markets and may face economies of scale losses in relocating into the UK, and it is arguable that economies of scale impacts may more often tend to affect EU-based than UK-based producers’ relocation decisions. So there is some interplay between inward flows, reduced imports and domestic investment. But the difference between €4 of exports and €3 of imports is so large that we should probably expect the effect to be positive nonetheless. And we should expect net inflows to be bigger if there is no deal than otherwise.

Next, effects on consumption. These depend upon whether consumers expect the long-term impacts to be positive or negative for GDP, and the extent to which they react to that in the short term. This one is difficult to call. I would guess there would be little change in the event of a deal and a slight drop in the event of a no-deal.

Last, domestic investment. This includes firms whose investment plans have depended upon our relationship with the EU that will do less investment or even liquidate investment. It also includes firms whose plans depend upon expansions in UK or non-EU activity. I believe it is natural to imagine that, even if the net impact on domestic investment is fairly balanced over the medium term, that will consist of a drop in domestic investment initially, as EU-dependent projects are cut back or liquidated, and the capital then only later being re-allocated to new UK-based or non-EU projects.

That drop in EU-dependent domestic investment is the main reason I expect there to be slower GDP growth in the event of a deal being done. If there is a deal, I’d expect fairly modest impacts on imports and exports in the short-term, and relatively modest short-term changes to capital flows, so the drop-off in domestic investment will probably be the dominant short-term impact, meaning slower GDP growth.

But if there is no deal, these other short-term impacts will be larger. Net imports will fall much more and there will be much larger inward and outward capital flows. So if there is no deal, I would expect those effects to dominate, outweighing the drop in domestic investment in the short run.

Overall, what does that mean? It means that, even though we should expect slower GDP growth in the event of a deal, and even though a deal is better for the economy over the medium term than no deal, if there is no deal then in the short-term we should expect GDP to grow faster, not slower.

I emphasise again that this would be after the first few weeks of drop-off in GDP associated with no-deal disruption. But it would be more than simple catch-up from disruption. It is a reflection of the basic dilemma that net importing countries always face. Free trade is good for economies over the medium to long term, but if a country is a net importer then it tends to gain output, in the short-term, in protectionist scenarios with greater trade barriers. There is no good reason to believe that this long-established basic economic truth should not be expected to apply to the UK in the case of Brexit as well.

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Brexit was the elephant in the room as Philip Hammond presented his Budget

Fiscal activism underpinned by a resilient and sound economy was the main message of this Budget. In recent months it became clear the budget deficit had turned the corner and was on a credible improving trend. The Chancellor has taken advantage of this not to pay down debt and achieve a balanced budget sooner, but […]

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Fiscal activism underpinned by a resilient and sound economy was the main message of this Budget. In recent months it became clear the budget deficit had turned the corner and was on a credible improving trend. The Chancellor has taken advantage of this not to pay down debt and achieve a balanced budget sooner, but rather opt for what he called a balanced approach to the public finances. This means spending more, not raising net taxes and instead allowing the budget deficit to persist, albeit at low levels. This fiscal year the budget deficit is 1.2% of GDP and is projected to be 0.8% by 2023/24.

Despite this, the Budget was trying to be all things to all people, and heavily interventionist, with 86 new tax and spending measures.

The Budget confirmed a sizeable net £103.5 billion fiscal boost over the six fiscal years from 2018/19 to 2023/24. Of this, £98.5 billion was increased spending, the vast bulk being the previously announced boost to NHS spending. For four of the six fiscal years, net tax cuts were announced, and these will be particularly large next year at £4.2 billion, led by an increase in personal tax allowances.

The Chancellor stressed a “Double Deal Dividend” but was unable – probably because of the ongoing negotiations – to focus on saying whether there will be any Brexit Dividend. Brexit was the elephant in the room. Of course, it is not just Brexit, but what you do when you leave the EU that is key and that will help deliver this dividend.

I agree with the idea of a Deal Dividend in that once there is clarity about what lies ahead then this will trigger a rebound in investment. Uncertainty over the last two years is likely to have dented or delayed investment plans. The Double Deal, as the Chancellor called it, is that he is keeping back some fiscal fire power in case he needed to act and boost demand in the event of a No Deal. But it is the Brexit Dividend – including how to spend domestically the sizeable sums we send to the EU, as well as delivering a pro-growth economic agenda – that is key.

The economy has suffered from a lack of demand. But it also needs a supply side agenda too and the Chancellor was right to acknowledge this. Given this, the economic and fiscal numbers were credible.

The good news is that the budget numbers are on an improving trend. As long as the market believes the projections are credible, and borrowing rates stay low, then the current economic environment provides a powerful dynamic in which the budget deficit can fall further, as it did post-war when public debt plummeted from 240 per cent of GDP. Last year’s debt of 85.2 per cent of GDP was a peacetime high and is projected today to fall to 74.1% by 2022/23.

This Budget was partially aimed at showing austerity is over. The trouble is, there is no clear definition of this, but you tend to know it when you see it. For many, it will mean an end of the squeeze on departmental budgets – and we will have to wait until next year’s Comprehensive Spending Review to see what will happen, particularly to the previously non-ring-fenced areas.

While I am an advocate of fiscal activism, the reality is that the UK needs to save in good times to be able to spend in bad. It did not do this and the financial crisis blew the fiscal numbers off course. Not only did austerity restrain demand at a time when the economy needed it, but also the government then missed the opportunity to borrow at record low rates to fund necessary infrastructure. Now, one could argue tax cuts should be high on the agenda, hence it is welcome that personal tax allowances were raised from next year.

Ending austerity should not mean unlimited public spending. There clearly needs to be ongoing reform, including regional wage policies. Ending austerity should not mean keeping taxes high to fund spending. It also does not mean sacrificing capital spending to fund current expenditure. Thankfully the Budget showed both a desire to avoid further tax hikes, an aim for cuts and to protect capital spending plans.

It is important to appreciate that the margin of error on these one year ahead fiscal numbers is huge. Thus, we should resist the temptation to aggregate forecast changes over the next five years, as it makes little sense to do so. The key is: what happens to growth?

The trouble is the UK’S economic picture is one of low growth, low inflation and, presumably, low interest rates. The UK’s trend rate of growth has previously been revised down since the global financial crisis. At this Budget the growth forecast was tweaked lower by the independent Office for Budget Responsibility (OBR), to 1.3%, and higher from 1.3% to 1.6% for next, and averaging around 1.5% up to 2023.

This leaves the UK vulnerable to any global setback. Vital is what happens to productivity growth and this would be boosted by increased investment and innovation – and it is helpful there were incentives to try and boost these. I would not be surprised if UK growth in 2019 is higher than expected: as consumption could be boosted by rising wages, higher employment and the announcement of an increase in personal allowances from next spring, while a Brexit deal would likely boost investment.

The most striking aspect is that the OBR projects a further 800,000 jobs by 2023, bringing to 4.2 million the net new jobs since 2010. This puts to shame Project Fear’s misplaced projection of massive job losses in the wake of a vote to leave.

Previously I have described the EU as like the Titanic. Despite warnings of impending problems and the need to reform, it will not change direction and we are lucky to be jumping ship. The trouble is, after a Budget like this, and with a Chequers Deal pending, the UK is in danger of becoming like the Marie Celeste – in touch of the new world, it is being left to drift with no-one at the helm. One hopes that once a credible deal is agreed the sense of direction will be clearer.

What about a no deal? Clearly we want to avoid a no deal, but a valid question is that the implied threat on the eve of the Budget that if there was no deal then the Chancellor would have to take action to make Britain universally competitive – including cutting taxes and easing the regulatory burden on firms, as well as to use fiscal policy to provide support to the economy – was a bizarre one. It must surely have been aimed at our EU neighbours, to encourage them to reach a deal.

But one wonders why this is couched in a threat and should it not be the focus of policy now – deal or no deal? Of course, the Chancellor is constrained from pushing this, while the negotiations are ongoing, but it should highlight that the UK should be in a better position once it can determine its own post-Brexit destiny. Of course, this makes it vital we do not box ourselves in with a Chequers-style deal and instead edge towards a free trade agreement like Canada Plus.

Photocredit: UK Parliament/Jessica Taylor

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