Garvan Walshe: How the majority needed to deliver Brexit will thwart the reform needed to make a success of it

Garvan Walshe is a former national and international security policy adviser to the Conservative Party. He runs TRD Policy.

If the polls are right, and the electorate indeed returns a Conservative majority in a week’s time, we can expect the Withdrawal Agreement to be passed, and the UK to leave the EU in short order.

The Prime Minister has promised not to take up the option of extending the transition period provided. Let’s allow ourselves a moment of optimism, and suppose that the majority is large enough to enable him to carry what agreement he can make by the end of 2020 – thus avoiding a repetition of the paralysis caused by Parliament refusing to accept leaving without a deal while simultaneously refusing to accept any kind of deal that could be agreed by both the UK government and the EU.

Britain will then have left the EU, along the lines expressed in the Political Declaration that accompanies the Withdrawal Agreement, with a free trade deal that sets goods tariffs at zero. To conclude such a deal, the EU will require the UK to accept what it calls “level-playing field” provisions on state aid, environmental policy and labour market regulation.

Though the Spartans might balk at this, it does not, in fact, amount to a significant price. Agreement on state aid is actually a bonus: it will stop future Labour governments subsidising failing industries. The Government, after all, intends to continue Britain’s leading role in efforts to combat climate change. Nor is it signalling any intention of deregulating the labour market. Its record in office, from the introduction of real-time information, to automatic pension enrolment and increasing the minimum wage, has been to increase the burden borne by employers, not to reduce it. A Conservative majority that depends on keeping seats in Bolsover and Ashfield is not going to have room for Thatcher-style economic reform.

Nonetheless, the type of Brexit entailed by the Withdrawal Agreement will produce significant economic disruption (and if it did not, what would be the point?), and with it the opportunity for economic reform that would allow Britain to make the best fist of its post-Brexit circumstances.

The kind of trade agreement envisioned by the Withdrawal Agreement has a number of implications for trade policy. Trade agreements themselves don’t generally move trade volumes that much. More important is leaving the Customs Union, which will take Britain out of pan-European manufacturing supply chains, because the need to complete customs formalities as a good goes back and forth from Britain to the EU (and Northern Ireland) will make a lot of that trade unviable.

Such manufacturing that survives will have to make do with a local supply chain, and assemble products from their components in the UK rather than optimise for cost and quality: in other words, British goods will become more expensive, and will be able to make use of a smaller range of components. So it will makes sense to specialise in high value products, from Aerospace to Scotch Whisky, in which British-made goods will still be competitive.

If there is an upside to the gloomy economic models that predict sharp drops in manufacturing output from a hard Brexit of the type planned, it is that the City of London escapes relatively unscathed. Though some activity will move to the EU, most can still be profitably carried out in London. This will have implications for regional distribution: to deal with manufacturing troubles, London will have to subsidise the rest of the country, particularly those manufacturing heartlands with newly-minted Tory MPs.

An island that spurns advantageous trading arrangements with its nearest trading partners, and so reduces the attractiveness of trading with Europe vis a vis the rest of the world, should specialise in goods and services where distance is a less important factor, and transport costs a smaller proportion of the price. Much of this will need to take place by air, and accordingly it follows that the UK should increase its airport capacity. It didn’t build a runway in London during the 40 years it was inside the EU, even though air travel has increased dramatically. It won’t be able to afford to waste the next 40 as well.

Semi-skilled physical and white collar work has been becoming a thing of the past over those last 40 years, too. As technology advances, this will continue. Routine clerical and manual work will be further automated, and the opportunities for people without an education to earn a living will be concentrated on those where human interaction, which forseeable AI technology is not capable of reproducing accurately, is at a premium. Demand for semi-skilled labour in areas like tourism and social care will however stay strong.

Long-term education and skills policy needs to adapt accordingly: as well as developing mathematical skills, softer aptitudes and verbal skills – the premium the best British private schools provide — will need to be developed in more of the population. Just the thing perhaps for a Clacissist Prime Minister with a way with words.

Until that transition to a high skill economy can be made (and it’s something Britain has had difficulty doing, which is why it has had to import so much high skill labour from the rest of the EU), something will need to be done to occupy the people who aren’t ready for it. A silver lining might be in dealing with climate change. Though decarbonising the power sector is a matter of high tech engineering, improving energy efficiency is essentially a construction industry task. That, plus housebuilding, where a major labour shortage is expected as a previous generation of construction workers reaches retirement age, could provide some of the necessary labour demand. The question, as always, is: how it is to be paid for?

Brexit will require a transition to a high tech, high skill, green and low manufacturing economy. In many ways, Britain is already some of the way there, but its current mood of nostalgia for an obsolete manufacturing life will have to be replaced by determination to transform the economy. It remains to be seen whether this be done with a majority based on Northern, post-industrial Britain.

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Author: Garvan Walshe


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