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Open Britain briefing on Spring Budget 2017: Brexit is beneath the surface

While the pre-briefing for the Budget focused on preparing Britain for a post-Brexit world, Brexit was the noticeable omission from the Chancellor’s speech. This could on the surface appear to be because the Government want to set a new narrative focused on its domestic agenda, but it could also be because beneath the surface there is no good Brexit news to report.

The OBR’s economic assessment is notable for how it undermines three of the Government’s central Brexit objectives: that trade with the EU will remain as beneficial as it is today; that new Free Trade Agreements (FTAs) would compensate for any losses; and that net migration will be reduced to the ‘tens of thousands’. 

The Government will not be able to maintain for much longer the pretence that there will not be fundamental changes to our trade relationship with the EU, which carry significant risks because of the decisions they have taken.

The Government’s official trade objectives undermined

Strikingly, the OBR have based their forecasts on assumptions that the Government will not meet its central Brexit objectives on trade. 

The Government has consistently maintained that it will deliver a new trade arrangement with the EU that will deliver the ‘exact same benefits’ as we have today, despite plans to leave both the Single Market and Customs Union. The OBR, however, say that over the next ten years import and export growth will slow and that this will be based on a “trading regime [that] will be less open than before”.  This is confirmation that the ‘hard’ Brexit path chosen by the Government will restrict trade with the EU, our largest trading partner, which will hit growth. 

The OBR is also clear that the prospect of new Free Trade Agreements (FTAs) with third party countries will not compensate for any lost trade: “at least over the forecast period, the process of leaving the EU and negotiating new trading arrangements is assumed to be associated with a lower trade intensity of UK economic activity” (p.71). It is remarkable that the OBR would be so frank about the flaws of one of the Government’s central economic rationales for leaving the Customs Union, which is autonomy to pursue bilateral FTAs.

The central tenets of the Government’s rational for its position on UK-EU trade, and its claims over post-Brexit global trade opportunities, have been undermined by these statements and are in line with the concerns Open Britain has consistently raised.

The Government’s migration targets will be missed

The Government has consistently maintained that it will retain its target to reduce net migration to the ‘tens of thousands’. Open Britain has long raised questions about this, saying that it would starve our economy of the skills, talent and labour we need, and that it is based on the false premise that migrants are a detriment to our country, when they in fact they add vital value. 

The OBR has made clear that, while there will be a reduction, it will not be “sufficiently tight to reduce net inward migration to the desired ‘tens of thousands’.” The Government must now show how the target will be met and explain the economic rationale behind keeping this as its intention, or admit that the OBR are correct. 

Below is the key passage (p.34) relating to both trade and migration.

Picture2.png

HMRC cut

The Red Book shows that HM Revenue and Customs’ budget will be reduced by £700m over the period 2016/17-2019/20. This is hugely worrying when we consider the implications of leaving the Customs Union. This will result in an increase in customs declarations that will need to be dealt with both by individual businesses and directly at borders, which will require greater physical infrastructure.

All imports and exports to the EU will now require customs declarations and security checks. Officials have reportedly sought to scale up the customs system’s capacity to 350m declarations a year, against approximately 50m filings now handled.[1] It is hard to see how such a task will be achieved against the backdrop of today’s announced funding constraints. The Government’s new customs co-operation agreement with the EU will be one of the most complex and technical aspects of our new relationship, and one which may require significant upfront investment, which raises serious questions about the Government’s preparedness for the task.

NB: it would be hard to argue that DXEU or DIT will foot these costs given their small annual resource budgets.

Longer-term growth has been revised down

In 2018, 2019, 2020, GDP growth will be lower than was forecast at the 2016 Autumn Statement and from the 2016 Budget before the referendum. 

Gross domestic product (GDP) percentage change on a year earlier

 

2018

2019

2020

2021

March 2016

2.1

2.1

2.1

n/a

November 2016

1.7

2.1

2.1

2.0

March 2017

1.6

1.7

1.9

2.0

Following today’s forecasts, the economy will grow slower in every year than was expected before the EU referendum. The graph below compares previous forecasts.

Picture1.png

Source: Sky News

Lower investment

The OBR says that “most outcomes” of Brexit negotiations “are likely to depress investment, at least temporarily” (p.38). This confirms many fears held before the referendum that the resultant uncertainty from a Brexit vote and a subsequent restrictive trade environment would dampen incentives to invest in the UK. This is reiterated on p.67: “business investment is likely to be lower than otherwise as a result of uncertainty regarding the UK’s new relationship with the EU and our future trading relationships with other nations”. The OBR says this could be less pronounced initially but more drawn out.

Furthermore, the OBR shows that uncertainty and weaker investment is curbing potential export growth resulting from Sterling devaluation, often cited as a Brexit bonus. This, it says, will be “relatively modest in historic terms because the warranted expansion in export supply…is likely to require some businesses to undertake associated investment which we continue to expect to be depressed by the heightened uncertainty following the referendum result” (p.71). It adds here that depreciation “raises production costs”, which of often glossed over by Brexit campaigners. 

The Government cannot explain how it will meet its Brexit objectives

As the OBR itself explains, it is “required by legislation to produce its forecasts on the basis of current Government policy” (p.33).  In order to understand the implications of this policy, the OBR has asked the Government “for any additional information that it wished to provide on its current policies that would be relevant to our forecasts”. This was not forthcoming and Ministers merely directed the OBR to the Prime Minister’s Lancaster House speech in January and the White Paper in February.

Given how significant the commitments to leave the Single Market and Customs Union are, their vast implications for our economy and infrastructure, and how bold the statement that there would be no change to our trade benefits with the EU, it is concerning that the Government is unable to supply more detail about the implications of these decisions and the shape of the replacement arrangements. 

Summary of key Budget announcements

 

Economic outlook

Taxation

  • The main rate of Class 4 National Insurance contributions for the self-employed to increase from 9% to 10% in April 2018 and 11% in April 2019
  • The new rate, applying to earnings below £43,000, will raise £145m a year by 2021-22 at an average cost of 60p a week to those affected
  • Class 2 National Insurance contributions, also paid by the self-employed, to be scrapped
  • No changes to National Insurance paid by the employed and employers or to income tax or VAT

Health and education

  • £100m to place more GPs in accident and emergency departments for next winter
  • An extra £2bn for social care over next three years, with £1bn available in the next year
  • £300m to support 1,000 new PhD places and fellowships in STEM (science, technology, engineering and maths) subjects
  • Free school transport extended to all children on free school meals who attend a selective school.

 




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