Why shocks can do good

ANO Deal Brexit would be an economic shock on the scale of quitting the gold standard for a second time in 1931, the 1967 devaluation of the pound and being ousted from the exchange rate mechanism in September 1992.

But shocks, if they trigger the right policy response, don’t have to be negative.

That is why it is fascinating that the Cabinet Office is thinking about what ‘Project After’ Brexit actions should be.

Indeed, it should come as no surprise that both the Bank of England and the Treasury have similar thoughts.

At the Bank, governor Mark Carney played a central role in the immediate aftermath of the referendum.

Interest rates were cut by a quarter of a percentage point, a £60bn round of quantitative easing was launched and an emergency £100bn line of credit for the banking system created.

The Bank should be able to do more in the case of No Deal Brexit.

It is known to think, however, that monetary easing becomes less effective with each successive episode.

Brexit poses more of a shock to the supply-side of the economy. That means fiscal and trade actions could be more effective.

The Chancellor Philip Hammond, and the Government, is in the fortunate position of having the fiscal space to act. The budget deficit has been dramatically reduced, but debt at 81.5pc of output, and falling, remains high. Compared to Italy, Japan and the US, however, it is far less threatening.

Post the financial crisis, markets are much more tolerant of debt, and low interest rates mean that it is more easily serviced.

So what should the Treasury do? The case for speeding up infrastructure spending, particularly in the North, with HS3 across the Pennines a priority, is indisputable, as is the need for better commuter routes into Manchester, Birmingham, Leeds and other northerly centres.

The most direct and easy way of shoring up confidence would be to cut taxes. Corporation tax has already been reduced sharply to 19pc and is due to fall to 17pc in 2020. The reduction to 17pc could be made with immediate effect and it may be the opportunity to go even further, if not down to Ireland’s 12.5pc.

Best way of putting cash directly into the pockets of all consumers would be to lower VAT from the current 20pc back to 17.5pc, or even 15pc, on at least a temporary basis.

Most of the doomster predictions about Britain’s prospects post Brexit have related to international trade and shortages of vital imports such as pharmaceuticals.

DREDGING Ramsgate harbour might help. But in international commerce, money speaks loudest. If Britain were to cut all tariff barriers and import duties to the bone, global enterprises would quickly deploy their best logistics skills to make sure the shelves in NHS hospitals, pharmacies and supermarkets are fully stocked.

Such policies might seem extreme. The biggest concern might be that with parts of the economy already operating at near-to-full capacity, too much fiscal and monetary easing might unleash an inflationary bubble which would be difficult to burst.

Renewing and creating new infrastructure is the number one priority with new runways at not just Heathrow, but Gatwick, part of that. But when, as Remain supporters like to say, the country is on a cliff-edge and social cohesion is threatened, it is important to think outside the box.

Escape route

HAVE you ever tried going into the local branch of your bank (if you can still find one) and tried to make a payment overseas? It is horrendously complicated, expensive and appallingly slow.

British fintech start-up Earthport seeks to change that by using software that bypasses traditional banking and links directly into local banks and clearing in 87 countries. The AIM quoted company has never made a profit and the shares have been a roller-coaster ride.

But it must be doing something right because it finds itself at the centre of a bidding war between the world’s two best known branded payments outfits, Visa and Mastercard. The shares are up fivefold since Visa weighed in with its first offer. Earthport technology and software, like that of Worldpay (bigger but in similar space), looks as if it will end up in foreign hands.

Good that capital is flowing into Britain, bad that brain power, software and patents are heading for the exit.