Roger Boo­tle

Brexit is not a magic wand but, to mix metaphors, nei­ther is it a poi­son chal­ice’

The Daily Telegraph - Business - - Front Page - ROGER BOO­TLE Roger Boo­tle is chair­man of Cap­i­tal Eco­nom­ics. His lat­est book, Mak­ing a Suc­cess of Brexit and Re­form­ing the EU, is pub­lished by Ni­cholas Brealey. roger.boo­tle@cap­i­tale­co­nomics.com

We are now en­ter­ing one of the worst pe­ri­ods in the run-up to Brexit. The clock is tick­ing and EU ne­go­tia­tors are try­ing to ratchet up the pres­sure. Mean­while, there ap­pears to have been lit­tle solid progress with re­gard to the trade agree­ment that Theresa May has been seek­ing. The EU con­tin­ues to press for more money up­front be­fore it will deign to ne­go­ti­ate on trade.

The Bri­tish gov­ern­ment should stand firm. There is noth­ing in the Lis­bon Treaty to say that a de­part­ing coun­try should make a large pay­ment to the EU be­fore start­ing trade talks. And there is noth­ing in eco­nom­ics jus­ti­fy­ing the pay­ment of a large sum to the EU in re­turn for “ac­cess” to the sin­gle mar­ket.

What do coun­tries as di­verse as the United States and Sin­ga­pore pay for their “ac­cess” to the sin­gle mar­ket? The an­swer is pre­cisely zero.

What makes the cur­rent dif­fi­cult pe­riod es­pe­cially prob­lem­atic is the pro­found weak­ness of the Bri­tish gov­ern­ment. At the best of times, politi­cians are not usu­ally blessed with a good grasp of eco­nom­ics and they are li­able to make bad de­ci­sions.

In par­tic­u­lar, they tend to over­es­ti­mate the im­por­tance of agree­ments, while un­der­es­ti­mat­ing the im­por­tance of the im­per­sonal forces of com­pe­ti­tion and in­cen­tive. And they are all too sus­cep­ti­ble to the spe­cial plead­ing of Sir Thingummy What­not of Wid­get PLC.

In keep­ing with this, they are cur­rently fix­ated on the im­por­tance of do­ing “a deal”. On the Con­ti­nent, politi­cians and of­fi­cials tend to be­lieve that pros­per­ity emerges from the pens that they wield to sign var­i­ous doc­u­ments. Ac­cord­ingly, they gen­uinely be­lieve (and some un­doubt­edly hope) that with­out “a deal” the UK is sunk.

They could not be fur­ther from the truth. As I have re­peat­edly writ­ten, the his­tory of the EU is one of blun­der­ing eco­nomic pol­icy. This er­ro­neous be­lief about the UK’s po­si­tion with­out a deal is yet an­other ex­am­ple. We can now add an­other “ism” – namely “deal­ism” – to the “sizeism” and “prox­im­ity fetishism” that have dom­i­nated EU eco­nomic think­ing.

Given the cur­rent dis­ar­ray among our lead­ers, you could be for­given for think­ing that the UK is in a par­lous state. In fact, the econ­omy is do­ing pretty well. Ad­mit­tedly, last week, the EU pub­lished fore­casts say­ing that, while the eu­ro­zone’s growth rate is set to pick up, the UK’s is go­ing to fall back. Sup­pos­edly, the UK is set to un­der­per­form the eu­ro­zone for an ex­tended pe­riod. Well, there’s a sur­prise!

By con­trast, al­though the UK will prob­a­bly grow by only about 1.5pc this year, I ex­pect growth to ac­cel­er­ate next year as the squeeze on con­sumers’ real in­come eases and the growth of ex­ports picks up.

This is, af­ter all, the logic be­hind the Bank of Eng­land’s de­ci­sion to raise in­ter­est rates. And it looks as though there are a few more rate rises to come. Al­though Mark Car­ney, the Gov­er­nor of the Bank of Eng­land, only ac­knowl­edges our ro­bust per­for­mance through grit­ted teeth, the fact is that when it cut in­ter­est rates in 2016 in the wake of the Brexit vote, the Bank was se­ri­ously wor­ried that the econ­omy would suf­fer a pro­found down­turn.

We learned last week that the Bank’s agents around the coun­try are ad­vis­ing that the rate of growth of av­er­age earn­ings is go­ing to rise next year. That is a good thing and it backs up the story of an econ­omy on the up.

Of course, over the im­pact of the Brexit vote the Trea­sury was equally amiss. Its Brexit blun­der had sev­eral com­po­nents. In com­mon with many other fore­cast­ers, it used a so-called “grav­ity model” which rests on the be­lief that in­ter­na­tional trade is very heav­ily in­flu­enced by prox­im­ity. In fact, though, what­ever model they used, the as­sump­tions made by the Trea­sury were bound to pro­duce a fore­cast in which the UK econ­omy func­tioned much worse out­side the EU. As we ap­proach the Bud­get and the Gov­ern­ment con­sid­ers what stance to take in re­la­tion to our Euro­pean part­ners, it is vi­tally im­por­tant that we don’t make the same mis­takes that the Bank and the Trea­sury made in their think­ing about the im­pact of a vote for Brexit.

Re­flect­ing fore­casts from the Of­fice for Bud­get Re­spon­si­bil­ity (OBR), in the com­ing Bud­get the Trea­sury will doubt­less again be spread­ing gloom and doom. Yet – and it is dif­fi­cult to put this po­litely – their fore­cast­ing record hardly in­spires con­fi­dence, let alone blind ac­cep­tance.

In­deed, to­mor­row a group called Econ­o­mists for Free Trade (EFT), of which I am a mem­ber, will pub­lish an al­ter­na­tive view of our fu­ture which in­cludes a sub­stan­tial fis­cal div­i­dend cre­ated by the eco­nomic ex­pan­sion made pos­si­ble by our exit from the EU, which the Chan­cel­lor Philip Ham­mond can spend on a mix­ture of debt re­duc­tion, higher gov­ern­ment ex­pen­di­ture and tax cuts.

I have al­ways said that Brexit is not a magic wand. But, to mix my metaphors, nor is it a poi­soned chal­ice. It presents a chal­lenge and an op­por­tu­nity. To meet the chal­lenge and seize the op­por­tu­nity the UK must em­brace com­pe­ti­tion and free trade. The no­tion that the Chan­cel­lor is boxed in by the gloomy post-Brexit eco­nomic prospects is a delu­sion. Ex­actly how things turn out de­pends a good deal on what the Chan­cel­lor does. So he ab­so­lutely should not use sup­posed Brexit con­straints as an ex­cuse for do­ing noth­ing.

Largely be­cause of cur­rent po­lit­i­cal tur­moil, I do not ex­pect the UK to have a com­fort­able ride over the com­ing months. In­deed, things may well get very bumpy. Yet, if only the Gov­ern­ment could get enough of a grip to se­cure a proper es­cape from this ill-fated Union, I am con­vinced that in years to come peo­ple will look back upon this trou­bled time and won­der why so many peo­ple ever doubted that it was right to leave.

‘You could be for­given for think­ing that the UK is in a par­lous state. In fact, the econ­omy is do­ing pretty well’

To say Chan­cel­lor Philip Ham­mond, above, is boxed in by gloomy post-Brexit prospects is delu­sional

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