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New Model Economy For A Post-Brexit Britain

First published in Great Britain in September 2017 by Leave Means Leave, Labour Leave and Economists for Free Trade

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© Labour Leave

© Economists For Free Trade

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Contents

Introduction

The EU is Holding Britain Back

Brexit Provides the Opportunity for Economic Success

Adoption of Free Trade

Deregulation

ManagedBenefitsandCostsofMigration

AbolitionoftheCommonAgriculturalPolicy(CAP)

Repatriation of Fisheries

RepatriationofBritain’sNetContributiontotheEU

ACompetitiveCurrency

Balanced Approach to Markets The Positive Economic Outlook after Brexit

No EU FTA Necessary

‘Soft Brexit’ Ideas Do Not Work

Conclusion

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Introduction

Brexit provides a unique opportunity to set the UK on the path to higher growth and competitiveness with gains for people at all income levels.

Leaving behind the restrictions imposed by our membership of the European Single Market and CustomsUnionwillenabletheUKGovernmenttointroducepolicymeasuresthatwillboostgrowthand productivity, measures that can be introduced unilaterally by the UK, but only if we leave the EU.

Thesemeasures add up to aGDP boost that is very significant. It is estimated that additionalgains approaching some 7 per cent of GDP can be achieved, about £135 billion per annum. Even a conservative additional 5 per cent of GDP would be the equivalent of boosting growth by up to a quarter, every year, for the best part of a decade.

The EU is Holding Britain Back

The EU is protectionist (with high trade barriers on food and manufacturing), its Single Market regulation is excessively interventionist across the whole economy (not just trade), its insistence on freeimmigrationunleashestaxpayer-subsidisedcheaplabouranditsplansforaunifiedEurozonestate, partly in reaction to the euro-crisis, threatens to create even worse problems in the future.

The EU’s budget is a direct cost to the economy, as the UK is a key net contributor. The EU is unaccountabletoUKcitizensunderqualifiedmajorityvotingrules,soreformisprevented.

Many vested interests, including producers and favoured groups such as less productive regions oftheEU,environmental lobbiesanduniversitiesbenefitfromtheEU,butthecitizensoftheUKincluding many entrepreneurs and businesses lose out. In Britain consumer prices and taxes are raised, poor people are most damaged and productivity is reduced. Brexit gives the UK the chance to end all of this.

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Brexit Provides the Opportunity for Economic Success

Brexit provides a unique opportunity for the UK to be richer than it would otherwise have been by remaining in the EU or by “Brexiting” in name only.

But in order for this to be achieved the Government must adopt certain economic policies. These shouldbesignalledtothebusinesscommunitywellbeforeBrexitday.Crucially,onceoutoftheEU,we will have power to adopt such policies unilaterally.

Amongst the measures that should be adopted are the following:

Adoption of Free Trade

Protection should be ended and free trade ushered in, either by agreeing free trade agreements with theEUandotherkeytradingpartnerssuchastheUSA,Japan,Australia,NewZealand,Canada,South Korea, and Singapore. Or, if such agreements are partially or totally blocked by unwillingness of other parties to cooperate, by adopting judicious, unilateral action by the UK that eliminates any significantremainingtradebarriers.Unilateralremovalofbarrierscanbeachievedinmanyproductareas without in any way affecting our leverage in negotiated trade arrangements because, for example, such products are not produced within the UK or tariffs are irrelevant to a trade relationship. Unilateral moves to free trade would have no negative impacts on UK competitiveness, not least when accompanied by an appropriate exchange rate.

Removing such basic barriers need not prevent subsequent talks about removing barriers more widelyinareassuchasservices,investmentorpublicprocurement.CuttingEUimposedexternaltariffs, either unilaterally or through trade deals around the world would be worth up to 4 per cent of GDP1, which could increase current UK growth by a third, each year, for up to six years after Brexit.

Deregulation

The UK should embark on a new effort to bring our regulatory systems to a point where there is a propertradeoffbetweenbusinessefficiency(andconsequentlywealthandprosperity)ascomparedwithsafetyandsecurity.Inkeyareaslikeenergy,financeandindustrialstandards,EUregulationsrequire reform; they create costly intervention, limit competition and reduce innovation. On the other hand, labour market regulation may well, for now, have approximately the right balance.

Free from the shackles of the EU, consumers will be free to buy knobbly pears, to ditch dim energy-savinglightbulbsandembracemorepowerfulvacuumcleaners.Moreimportantly,theUKwillfinallybeable toseize theopportunity toadvancemedical researchandnewagricultural technologiespreviously restricted by EU rules.

1 “From Project Fear to Project Prosperity- an Introduction”, August 2017, available www.economistsforfreetrade.com

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The Treasury’s report of 20052onthecostofEUlaw,theBritishChambersofCommerce“EURedTape Tracker” of 20103 and the Open Europe Report of 20154 all reported approximately the same quantum of regulatory cost. They pointed to a ten per cent reduction in over regulation being worth between 0.7 and 1.2 per cent of GDP. The Economists for Free Trade Report of 20175identifieda2percentofGDPbenefitfromareductionofathirdincurrentEUover-regulation.

Repealing the thick web of burdensome EU regulations gives the UK a once in a lifetime opportunity to tailor rules and regulations to the needs of the UK economy.

Managed Benefits and Costs of Migration

TheGovernmentshouldapplyexistingimmigrationcontrolsonnon-EUcitizensfairlyandequallyto EU citizens. UK controls should satisfy business needs for skilled labour but end taxpayer-subsidisation of unskilled labour.

Recent high immigration rates for unskilled workers have been detrimental to UK economic prospects. Economists for Free Trade have concluded that migrants, occupying low skill jobs, cost the UK Taxpayer £3500 per migrant, per annum - adding up to an annual £3.5 billion cost to the Exchequer6.Therefore,theabilitytoonceagaincontrolourborderswillbenefittheeconomy.

Of course, the UK will continue to need skilled workers from overseas where there are skill shortages or the best talent is outside the UK. A post-Brexit work visa system similar to the one in use for non-EUimmigrationshouldreflectthis.However,thisshouldnotbeasubstituteforeducatingandtraining home grown talent.

Foreign students are the equivalent of a “service sector export” as educational establishments generate revenue from the provision of educational services. Students also provide a talent pool from which the brightest and the best can be chosen by UK businesses and provide a global network when they choose to return home. As a consequence students should not be counted towards immigration until they graduate, and should be allowed to stay only if they have a work visa or have created a business with a set level of wealth or investment.

Brexit provides business with a huge opportunity to focus more on up-skilling domestic workers through implementing training and apprenticeship programs. This opportunity is something big business has long neglected because of its ability to bring in cheap labour with ease. Reducing lowskilledjobsmigrationwillbenefittheeconomyinthelongrunbecausecurrentpoliciesproducea low skilled, low productive, low wage economy, exactly the opposite of what we want in order to create high GDP per capita.

2 “Global Europe: full-employment Europe,” HM Treasury, October 20053 “EURedTapeTracker,”BritishChamberofCommerce,20104 “Top 100 EU rules cost Britain £33.3billion,” Open Europe, March 20155 “From Project Fear to Project Prosperity- an Introduction”, August 2017, available www.economistsforfreetrade.com6 “The economics of unskilled immigration,” Economists for Free Trade, September 2016

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Abolition of the Common Agricultural Policy (CAP)

TheUKneeds toabolishTheCommonAgriculturalPolicy (CAP) inorder to fullycrystallise therealbenefitsofBrexit.TheCAPregimehasatitshearthighagriculturaltariffsaswellasquotasand variable levies that collectively raise the price of food by around 20 per cent and well above this for some foods7.Directpayments to farmersunder theCAParecostly; theUKgovernmentcan implement its own reformed system of direct support to farmers based on their contribution to stewardshipoftheland.TheCAPsystemleadstohighfoodpricesforUKconsumers,increasesinflationand reducesdisposable income,whichotherwisewouldboost consumerspendingandthustheeconomy.Moreover,itartificiallyinflatesagriculturallandvalues,whichfurtherincreasesthe cost of food and has wide knock-on effects to prices across the entire economy.

TheCAPalsodiscriminatesagainstdevelopingeconomies;itsabolitionintheUKwouldstimulateadded value production in some of the poorest countries allowing them to develop the dignity of sustainable, added value and wealth creating production, rather than relying on aid.

Repatriation of Fisheries

When Britain voted to leave the EU on June 23rd 2016, it voted to take back control. Britain should, once again, be in full control of its own waters, which can be achieved only by withdrawing from the CommonFisheriesPolicy(CFP).

TheCFPhasfailedUKfishermenandthemarineenvironmentsurroundingtheUK.TheRtHonOwen Paterson MP, former Secretary of State for Environment, Food and Rural Affairs estimates thatonemillion tonnesoffishwasunnecessarilypouredback into theseabecauseofwastefulEU regulations8.Onceoutof theCFPtheUKwillbeable tomanagefishstocksandtheoceanenvironment better.

ThelargestbenefitwouldbethehugeboostitwouldbringtoBritishjobsandtheeconomy,breathingbackvitallifeintothefishingindustry.EscapingfromtheCFPwillrejuvenatemanysmallcoastalvillages and poorer parts of the UK, the survival of which has been left threadbare by the regulative policysetuponusbyBrussels.Therearecurrently justover12,000fishermenactiveintheUK;thenumberoffishingvesselshas fallenby28percentsince1996,with8,000 fewerfishermenemployed since the mid-1990s9. Once the UK controls its waters and escapes wasteful regulations, thefishingindustrywillbefreetoflourishinafairer,competitivemarket.

The actions already underway from the Government represent steps in the right direction, steps that will enhance a fairer, cleaner, and more productive, thriving marine economy. The process of taking back control of our waters will be, by necessity, staged with quotas available to foreign trawlersreducingovertimeastheUKfleetdevelops.DevelopmentoftheUK’sfishingfleetshouldbeencouraged,recognisingalltheeconomicandemploymentbenefitsitwillbring.

7 Rt Hon Owen Paterson MP, Launch of Economists for Free Trade, February 2017, https://goo.gl/XtbbjS8 ReportedbytheDailyExpress,April2017,http://www.express.co.uk/news/uk/787557/eu-common-fisheries-poli-cy-125000-dumping-sea-bass-fixed-quota-allocation-fishing9 “UKSeaFisheriesStatistics,”HouseofCommonsLibrary,November2016

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Repatriation of Britain’s Net Contribution to the EU

The availability of an annual saving of our almost £11 billion per annum net EU budget contribution, coupledwith thebetterallocationof themoney that is recycled to theUKvia theCAP, regionalaid, etc, will provide the Government with a “war chest” for Post Brexit economic stimulus10. For example, the opportunity to allocate these funds to create tax incentives for business investment and R&D, to enhance digital connectivity, general infrastructure and housing development and the possibly for tax cuts creates a potential boost to economic growth. This in turn will boost tax receipts and the availability of funds for public services.

Some monies may continue to be contributed to the EU in respect of continued participation in projectsor institutions fromwhichwebenefiteconomically.However, thesecontributionswillbesmall by contrast with the overall pot.

A Competitive Currency

The post-Brexit business environment will enforce new competition on farming and manufacturing but the new lower post-Brexit exchange rate, ushered in by markets to deal with the Brexit regime change, provides a positive counter-balance that could last for a decade and possibly longer - the time needed for Brexit policies to be seen to succeed. This is a good thing and provides time in which these sectors can raise productivity - aided by less regulation and lower input prices. It should not be forgotten that these sectors already maintain a substantial export trade that competes successfully in world markets – eg, Jaguar Land Rover and Aston Martin.

AllofthiswillhelprectifytheUK’spersistentandunsustainablecurrentaccountdeficit.

Balanced Approach to Markets

We are in favour of open and unrestricted capital markets. However, once out of the EU, Government will have the powers of a sovereign state to intervene where its national interest or competitive equilibrium is threatened - powers it currently does not have under the EU.

For example, authorities would be able to act in circumstances where• Acquisition by an overseas investor reduces UK competition.• Foreign acquisitions threaten UK strategic or security interests.•

Thus, authorities will be free to use the powers of a sovereign state restored to them by Brexit, powers that are routinely used by other sovereign nations, including the USA.

10 “Economicandfiscaloutlooksupplementaryfiscaltables,”table2.27,OBR,2017

Unfair (e.g. state subsidised) competition or dumping from overseas is observed. This should not be limited only to dumping, but also to explicit and hidden state aid. For example, the operation of the state backed KFW bank in Germany and similar institutions in other member states may represent clandestine state aid.

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The Positive Economic Outlook after Brexit

Project Fear with its predictions of imminent Brexit recession was demonstrably false and so are the predictions of delayed recession being bandied about by “Brexit Deniers”. Nevertheless, since thefinancialcrisis,alldevelopedcountrieshaveexperiencedslowergrowthforavarietyofreasonsthat are unrelated to Brexit.

Growth in the UK has for some time been running in the range of 1.5- 3 per cent per annum11 and this remains the underlying situation. Thus, the boost that Brexit can bring is essential, as it will turn a basically sluggish environment into one of renewed growth in the longer term.

The gains that can be achieved from the above policy initiatives have been estimated by Economists forFreeTradetoapproachanextra7percentonGDPandconsumerwelfare.About4percentflowsfromfreetrade(includingUKabolitionoftheCAPsystem)and2percentfrombetterregulation.Another 0.2 per cent is gained from the elimination of the taxpayer subsidy to unskilled EU immigrants, 0.6 per cent will come from the ending of the EU net budget contribution12, with some further gains from better allocation of the balance of the gross contribution.

This gain to GDP would be a major boost to economic growth post Brexit. Even a conservative estimate of 5 per cent of GDP would increase the growth rate by around a quarter for a decade. In addition, there are likely to be gains to growth that are less easily measurable from the encouragement of SME business creation and entrepreneurial innovation. There also will be gains to developing countries from the UK’s free trade policies.

The reduction in prices and immigration control are particularly important for lower income households. These households spend more on food and housing, the prices of both of which are raised substantially by EU protectionism. Unskilled immigrants settle in poor communities which, therefore, carry a disproportionate cost in public services as well as suffering from a fall in wages. Our estimates show that the lowest decile household would gain £36 a week from Brexit; the second lowestdecile(60percentofthemedian)wouldgain£44aweek.Thesefiguresrepresentaround15per cent of their weekly spend.

We expect faster productivity growth in manufacturing and farming, with a rebalancing towards products where the UK has strong comparative advantage; nevertheless, we expect the Treasury to help farmers directly for environmental/ land stewardship reasons.

The fall in the exchange rate will provide a strong offsetting boost to all sectors in the short to medium term. It will boost net exports and investment by diverting funds from consumer incomes to industrial revenues; we are already seeing this in reduced consumption but improving business prospects.

The above measures and their consequences will lead to a rebalancing of the economy, stimulating exports, helping manufacturing and providing renewed prosperity to the regions, while continuing to boostservicesandtheCity.

11 “GrossDomesticProduct:YearonYeargrowth:CVMSA%,”ONS,May2017:https://www.ons.gov.uk/economy/grossdo-mesticproductgdp/timeseries/ihyp/pn212 “Economicandfiscaloutlooksupplementaryfiscaltables,”table2.27,OBR,2017

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TheCitywillthrive:theEUcannotdiscriminateagainstLondonversusNewYorkandothercentreswhichittreatsas‘equivalent’,butinanycaseBrexitwillbenefittheCitythrough

• Lowerinputprices,particularlyforland,whichwillbereflectedinlowerpropertypricesas agricultural protection is removed.• Reduction in home-based regulation leading to an opportunity to tailor a regulatory environmentappropriateforaworldfinancialcentre.• Its enhanced ability to capitalise on its unparalleled world market position to sell across the world - more than offsetting any conceivable contraction in its EU markets.

No EU FTA Necessary

The “New Model Economy” can be achieved whether or not we agree a free trade arrangement (FTA) with the EU.

Firstly, as a sovereign nation under WTO rules, we will be free to adopt free trade with non-EU countries, which represent nearly 60 per cent of our exports and to eliminate import tariffs and dismantle theCAPwith theEU.Thiswillprovide theeconomic tradebenefitsdiscussedearlier(even if the EU persists in raising tariffs on our exports to them).

Secondly, even without an EU FTA, we will certainly agree administrative arrangements at a technical level that are justiciable in normal international standard-setting organisations such as CustomsPaperwork(WTO),OpenSkies(IATA)andRulesaroundCityTrading(BIS)andCODEXfor food.Wewill also set out our procedures for issues such as dealingwithEU citizens, anyresidual ‘divorce’ payments to the EU we decide to make for the sake of goodwill, and the Irish border. Our aim is to make these parts of an FTA ‘deal’ with the EU that is comprehensive. But this is unnecessary; as a sovereign nation we can set out what we will do and what we expect to be doneinreturn(forexamplewithUKcitizensintheEU).Thenifthoseexpectationsarenotrealisedwe can suspend our own proposed actions in ways we can explain.

The key point is that Brexit allows us to set policies that suit our own economic interests bringing us large economic gains.

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‘Soft Brexit’ Ideas Do Not Work

The benefits of leaving the EU and crystallising economic policies that will be available to theGovernment for the first time in forty yearswill cause theUK to prosper and the country to bericher than it would otherwise have been by remaining in the EU as it is today. The same pertains to avoiding various “half way house” approaches proposed by some politicians. Membership of the EEA or EFTA, or the so called Norway option, or any other “half way house” is likely to prevent us fromadoptingall,orasignificantproportion,ofthe“NewModelEconomy”andcanonlyresultinusbecoming poorer.

These ‘Soft Brexit’ ideas include the proposal for a several-year ‘transition period’ in which nothing would change: all this does is postpone the gains we make by leaving. More importantly, this is most likely a deliberate attempt to frustrate the existing democratic will for Brexit by deferring it in the hope that a fresh referendum can be called or an election result produced that can negate it. It isjustifiedas‘avoidingacliff-edge’forbusiness.Butthereisnosuch‘cliff-edge’,onlyachangetoamore prosperous environment.

Aswehaveexplained,alreadybusinessesareenjoyingalargestimulustotheirprofitabilityfromthe Brexit devaluation and it is this that is helping them deal with changes to the status quo in cases where they may face more challenging competition. Far from being a ‘cliff edge’, March 2019 is a springboard to growth and prosperity. As Lawyers for Britain have explained13 the ideas being put forward for a ‘Soft Brexit’ are not implementable under EU rules, they run counter to explicit EU negotiating guidelines and expressed political objectives, and perversely are likely to create the very “cliff edge” they pretend to avoid as the EU manipulates such proposals to gain negotiating advantage. ‘Soft Brexit’ ideas also include proposals to modify our independent settings of trade, regulation and immigration policy in order not to ‘offend the EU’; some politicians have ‘assured’ the French we will continue to play by EU rules even when we have left. Why so? To do that would be to throw away the very gains from Brexit enumerated above. The EU will be free to adjust to our new policies, as it likes: it could follow free trade, more liberal regulation and more sensible immigration policies itself. This would be a healthy reaction and good for the world economy.

Conclusion

Simply put and in summary, Brexit properly executed in a manner in accordance with the Government’s expressed plans, offers an economic future of great hope. We believe that in the future Brexit will be seen as a key source of renewed supply-side reform of the British economy.

We believe the Government should adopt the “New Model Economy” and prepare now to implement it immediately after Brexit. The Government should also signal now that it is minded to do so, thereby creatingcertaintyandbusinessconfidence,leadingtoinvestment.Thesignalingofthe“NewModelEconomy” will, in addition, have the effect of improving the UK’s negotiating position with the EU and theaddedbenefitofreducingtheneedforanytransitionalarrangements.Thealternativemodelof‘Soft Brexit’ would merely leave us worse off and in danger of remaining in the EU in all but name.

13 “TransitionalStatusWhileLeavingtheEU;Consequences”,LawyersforBritain,August2017