Our exit from the EU will create a substantial fiscal dividend, which the Chancellor Philip Hammond can spend on a mixture of debt reduction, higher government expenditure and tax cuts
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.
Philip Hammond says UK has bright future after Brexit
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.
"What makes the current difficult period especially problematic is the profound weakness of the British government"
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.
Given the current disarray among our leaders, you could be forgiven for thinking that the UK is in a parlous state
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.
"I have always said that Brexit is not a magic wand. But, to mix my metaphors, nor is it a poisoned chalice"
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.
Mark Carney, the Governor of the Bank of England, acknowledges our robust performance through gritted teeth
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.