newtjoh

Not Norway-Plus for Now: perhaps later

31st January 2019 by newtjoh

Often when the police appeal for information to solve a notorious crime they make the point that circumstances, allegiances, and loyalties change.

It has turned out to be true also for parliamentary support of the ‘Norway’ option: shorthand for continuing and permanent post-Brexit UK membership of the European Economic Association (EEA).

Hardcore Remainers, seeking the softest of Brexits, initially promoted it: for example, Labour Campaign for Single Market.

That changed last autumn when Conservative MP, Nick Boles, founder of the influential Policy Exchange think-tank and a close confidante of Brexiteer but latterly loyal Cabinet apologist for May’s deal, Michael Goves, in an attempt to provide an escape from parliamentary deadlock moved it mainstream.

The twist made was that the UK should rejoin the EEA on Brexit day – but only for three years – and enter a ‘temporary’ customs union with the EU that day also, without a transition period. Its new moniker, Norway for Now, reflected its expected transitory nature.

This website in Jersey rather than Norway-Now dismissed it as a red herring. This was for three main reasons.

First, it proposed a temporary holding pen or a marriage of convenience to provide breathing space for a former EU (but now an EEA) member that wanted to put into place a comprehensive replacement bilateral free trade agreement with the same trading bloc that it had just left. This was not the purpose of the EEA.

Second, the EU’s Northern Ireland (NI) backstop red-line meant that it could not be time-limited.

And, third, the mechanism identified for the UK to join the EEA applying to become a member of the European Free Trade Association (EFTA), on the face of it, appeared also incompatible, or, at least, inconsistent, with the UK remaining in a Customs Union (CU) with the EU.

Nor could it be expected that special arrangements for the UK for a temporary and time-limited period of membership, in contrast to one offering a continuing and progressive template for a long-term replacement trading relationship, could be agreed with the EU.

The ground shifted during November, however. Boles addressed the above flaws, at least in general, if not specific, terms.

The proposed arrangement was made indefinite or even permanent, not temporary and time-limited. It contained an continuing and equivalent CU with the EU that could obviate the need for rules of origin checks on goods passing between the UK and EU. Special status and related derogations capable of reconciling continuing UK participation in a CU with the EU with that of the status of EFTA as a dedicated free-trading bloc outside it was recognised as necessary.

Norway-for-Now morphed into indefinite Norway-Plus (as termed hereafter in this post). Its main selling point was that it could offer the economically least damaging Brexit.

This was a product of its retention of the four freedoms of the single market (SM): free movement of capital, people, goods, and services between the member states.

The other side of that same coin required the UK to become an indefinite rule-taker of the EU with only limited say in framing future SM rules, including those impacting upon its financial sector, unless, in the unlikely event, that special additional provisions could be negotiated during the reinstated transition period.

Nor could the UK progress and implement an independent trade or migration policy. Substantial budget contributions to Brussels would also continue.

Early in 2019, ait was repackaged – or, at least re-labelled – it as Common Market 2.0 in a pamphlet jointly authored by the Conservative MP for the Essex town of Harlow, Robert Halfon – often portrayed as the parliamentary champion of ‘white van’ Conservatism – and, Lucy Powell, centrist and staunch Remainer Labour MP for Manchester Central, a northern 2016 Remain-voting redoubt.

No doubt this confluence of political backgrounds was chosen to court support from both Leave and Remain supporting MP’s from both main parties, especially those representing Leave-voting constituencies.

Its title was also emblematic, heralding a return to the commercially led principles of the original common market – in effect, CU – of the European Community (EC) that the UK had joined back in 1973, a decision endorsed by a wide margin in the 1975 referendum. It also conveyed an accompanying antipathy to the progressive political integration of member nation states within an enlarging EU since progressed by Brussels.

The authors made efforts to explain how UK membership of the EEA could possibly provide mechanisms to control free movement from the EU in certain defined circumstances, additional to the actual implementation of powers that are (were) available to the UK as an EU and SM member, such as requiring migrants to obtain work within a stipulated period, but unused by the May and previous governments.

They also highlighted that the UK could reduce its budget contributions to c50% of the current level. The prospect that ‘sometime in the future’ it could negotiate its own independent trade deals was also held out.

The revamped version still struggled, however, to grab the parliamentary and media limelight. The 29 January mandation by the Commons of the Prime Minister to renegotiate the NI backstop element within the Withdrawal Agreement (WA) suggested the prospects of Norway-plus attracting a majority in this Parliament, never high, would recede further.

The reasons for this are explored further below.

Opposition of Hard-Brexiteer (HB) Tories
The parliamentary HB bloc is broadly coterminous with the European Reform Group (ERG) faction within the Conservative party. The 117 MP’s who voted no confidence in Mrs May during that momentous week last December are a broad proxy for that HB tendency. It will not vote for the softest of Brexits.

And it is difficult to see how Mrs May, given how completely and tightly that she has chained herself to the mast of ending free movement, her reddest of red lines, could stay on as Prime Minister (PM) to preside over Norway-plus.

Besides, it has become quite clear that her over-riding priority is to prevent an epochal shattering of the Tory party, not minimising the economic damage of Brexit: the main advantage of Norway-plus.

Supporting it would serve as a red rag to the HB parliamentary faction on the Conservative benches, and alienate the majority of Conservative party members who support a No deal exit. It is their political pulse that she has have always prided herself on understanding.

It is that rump and increasingly elderly membership that will choose the next Conservative leader. Possible future leadership contenders will need to take account of their HB worldview: pace Savid Javid’s and Jeremy Hunt’s expressed recent ambivalence towards a No deal outcome. This reflects their need, as potential candidates, to triangulate against their grassroots party-pleaser and Brexit opportunist rival, Boris Johnson.

In such a context, they are likely to calculate that it is not in their personal political career interest to tilt towards Norway-plus.

Fragmentation of Soft Brexit support into opposing factions
The weakness and incoherence of the government’s Phase 2 negotiating strategy and then its subsequent and related inability to garner anything even approaching a parliamentary majority for the deal it negotiated with Brussels (the May Deal), induced confidence among a growing number of Remainer-inclined Conservative and Labour MPs that a second referendum could provide a means to cancel Brexit together.

Soft-Brexit variants, Norway-plus in particular, designed to mitigate its economic damage, were rendered less appealing, even redundant, as a consequence.

Individual examples include, on the Conservative side, Anna Soubry. She, as noted in Sourby’s Norway-plus Approachback in February 2018, had been an early and pioneering proponent of Norway-plus, but during the course of the year changed instead into an ardent ‘People’s vote’ proponent. So did some prominent Conservative Remainer rebels, such as Dominic Grieve, former Attorney General, and Sarah Wollaston, chair of the powerful Common’s Liaison Committee.

On the Labour side, prominent soft-Brexiteers, previously sympathetic to permanent EEA membership, such as Chuka Umunna – a founder member of the Labour Campaign for the Single Market grouping, became more and more lukewarm in support, perceiving that continuing SM membership lacked a parliamentary majority.

They, too, became leading lights of the People’s Vote campaign, encouraging colleagues, such as Mike Gapes, to dismiss ‘Norway-plus ‘as a ship that has already sailed’.

Ben Bradshaw, another Labour Campaign for Single market founder member, and vocal critic of Jeremy Corbyn, perhaps encapsulated that tendency when, during the first 14 January Commons debate on the May deal, he declared that he preferred to ‘bet’ on a second referendum to reverse the June 2016 Brexit decision, to secure, in effect, a full glass Remainer victory, not a glass half-full or-empty Norway-plus soft Brexit compromise. Such a ‘worst of both worlds’ compromise was as ‘pointless’ by ex-PM, Tony Blair, a view echoed by many other ‘People’s vote’ champions.

Labour opposition to continuing freedom of movement (FOM).
Some MPs representing Leave-voting constituencies where immigration was touted to have been a major factor, many of which are Labour-held marginals in the North and Midlands, will oppose an option retaining, to all intents and purposes, FOM.

For related reasons, the Labour front bench can be expected to resist whipping its own MP’s to support Norway-plus as the ‘something’ that Parliament will need to prevent No deal, extension or no extension to Article 50.

Whipping, not only could alienate much of the party’s hardcore Remainer membership base, wedded as they have become to the perceived lifeboat escape from Brexit that a ‘People’s vote’ potentially offers, but could enable the PM to partially unite her party behind her by painting Labour as the party that supports a Brexit-in-Name-Only (Brino) and continuing FOM in particular.

Gravitation of the Agnostics towards May-deal.

The amendment that Yvette Cooper, former Labour Cabinet and shadow Home Secretary, supported by Nick Boles, moved on 29 January, requiring the PM to seek an Article 50 extension, was defeated by 23 (321 to 298) votes. Instructively, despite winning Labour whipped support, it fell because of Labour votes against and abstentions that included no less than eight Corbyn shadow cabinet members.

17 Conservatives supported the amendment and three abstained, including the erstwhile and hitherto indefatigable, Norway-plus supporter, Nicky Morgan. She pivoted to support the Brady amendment, while promoting the so-called ‘Malthouse Compromise’.

It suggests that although the ‘agnostic’ group of MPs, as the No Deal cliff-edge becomes ever-closer, could well grow, such members will tend to gravitate towards a May-deal variant in preference to Norway-plus.

Perhaps later: When?
Here and now, Parliament will need to agree to ‘something’ by early March, if an economically and socially disastrous No Deal exit is to be avoided.

That ‘something’ could be nothing more than to ask the EU to extend Article 50 into the summer. That would only delay the day of reckoning, however. It is, for that reason, unlikely to be granted by Brussels without conditions that might well include a timetable for Parliament to resolve on an agreed option.

In that event both Front benches might well conclude that the best way to avoid No deal, whether disorderly or partially managed, without splitting their parties, leaving a dangerous electoral hostage of fortune for them, would be to provide leeway to MP’s to vote according to preference, lifting party whip.

That might open-up a refreshed window of opportunity for Norway-plus.

To muster a parliamentary majority would presuppose, not only added support from Remainers – many of whom are wedded to a second referendum – but also from the MPs across both parties, who – above all and anything else – desire to see Brexit delivered without further unnecessary and prolonged ado and damage. As noted above, the numbers of this ‘agnostic middle’ can be expected to rise as the No deal cliff edge approaches ever-closer, but will not necessarily gravitate in favour of Norway-plus.

But, besides, Norway-plus cannot realistically be taken back to Brussels for re-negotiation, if it is simply the product of an unwhipped vote that will not or cannot be sustainably supported and progressed by the executive. It will continue to be led by Mrs May or a Conservative successor, unless a general election or a change in government subsequent to a successful no confidence vote occurs.

Back around the same circle, then?

Perhaps. The most feasible scenario in which Norway-plus could become the successor arrangement appears to be one where Labour formed a parliamentary majority, following a snap general election precipitated by continuing parliamentary deadlock, and as the government it promised to go back to Brussels to negotiate a deal aligned to its six tests. Some variant of Norway-Plus was what it then could best come back, to be ratified by a second referendum.

In such circumstances, the referenda choice conceivably could be between Norway-plus and Remain, but such a restricted choice would provide a dangerous and uncertain political path to navigate.

A Week in December

18th December 2018 by newtjoh

On Monday 10th December, cabinet ministers confirmed on breakfast-time radio that the scheduled Commons ‘meaningful vote’ on the Draft Withdrawal Agreement (WA) would proceed the next day.

By lunchtime that vote had been pulled. This was to prevent its defeat on the floor of the Commons by a large enough margin to topple the Prime Minister (PM).

By Wednesday evening, May had faced and won a confidence vote in her leadership, albeit with 117 of 317 of her own MPs voting against her.

By Friday, her attempt to persuade EU leaders to provide sufficient comfort to the Ulster Democratic Unionist (DUP) members and the 80-100 Conservative hard-Brexiteers and European Research Group (ERG) MP’s within her own party to time-limit the Northern Ireland (NI) backstop provisions within the WA, or, at least set out a route map with legal standing as to how it could be escaped, had demonstrably failed, notwithstanding some vague assurances that its activation was not desired and that ‘further clarifications’ could follow.

On Monday 17 December, the PM confirmed that the meaningful vote will take place in the week of January 14. Debates on her deal would restart in the week of January 7, when MP’s return from their Christmas break.

Her 2018 December Summit line was reiterated: political and legal assurances on the WA Northern Ireland (NI)backstop line would be sought from Brussels.

The reasons why the WA backstop is futile and misconceived and contrary to the overarching NI backstop that she agreed to in December 2017 are set out and discussed below.

Her game plan still appears to go to the wire to put pressure on MP’s of both parties that simply want done with Brexit, avoiding both a second referendum and a No deal departure.

After the inevitable defeat in parliament, the government will have 21 days to report back as to how it intends to proceed, providing opportunities for MP’s to debate, put forward, and perhaps even secure majority support for one of the alternative options, discussed earlier. That period will end in mid-February.

That process is likely to be interrupted by an opposition no confidence vote in the government. Jeremy Corbyn will table a vote of no confidence in the PM today (Tuesday 18th December), but whether it will take place is uncertain.

Understanding the NI Backstop
This was defined in Section 49 the UK-EU December 2017 Joint Agreed Report on the Phase 1 Negotiation process, as follows.

The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship.

Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland.

In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all island economy and the protection of the 1998 Agreement’

It is that commitment in the last paragraph of that provides an overarching NI backstop.

Coupled with the government’s (and widely supported) blood-red line ruling out an Irish Sea regulatory border and/or specially agreed other arrangements for NI, that NI backstop meant and continues to mean, in effect, that the UK would need to: (i) stay in an equivalent CU with the EU; and, (ii), cede continuing regulatory alignment with the EU for goods, at the very minimum, for the foreseeable future.

As explained in The May Agreement, the WA backstop, if activated, would not allow frictionless trade between the EU and UK to continue. The WA relies instead on the operation of a separate regulatory treatment regime for NI.

For that reason alone, it is difficult to discern how it could never be accepted by parliament without jettisoning the overarching principle of the December 2017 NI backstop.

Any reliance that a future trade deal will render that WA backstop unnecessary is a mirage.

Close to unanimous agreement exists among informed commentators that the time-frame for putting in place an alternative trade deal would extend far beyond 2020. Recent EU trade negotiations have taken far longer to negotiate and ratify. The Canadian Free Trade Agreement (CETA) took over six years.

To expect the UK to conclude an agreement with the EU, more comprehensive and deep than the Canadian one, in less than two years is widely unrealistic.

And that is after taking on board heroic assumptions that all the negotiation stars are all aligned to produce a treaty within, to all intents and purposes, 18 months.

It then has to be approved by the EU national and, as required, by some regional parliaments, such as Wallonia in Belgium, without, as the UK Trade Observatory recently put out, any quibble and delay.That proved not to be the case with both the recent EU Canada and Ukraine agreements.

Cutting to the chase, a future UK agreement is not going to finalized and approved soon enough to render the WA backstop, or an extended transition, unnecessary. Full stop. To assume otherwise is either dishonest or self-delusional.

Besides it remains unclear how a replacement Canada-style agreement could ever avoid the re-imposition of a hard border within Ireland. Technological fixes that could allow the UK to levy differential tariffs on imports depending on their ultimate destination will not come to the rescue in the foreseeable future, if ever.

In that light, Parliament’s unanimous December 2018 Brexit Select Committee report re-affirmed that a Canada-style agreement with the EU would not, on its own, ensure the type of friction-free trade with the EU that many UK companies with just-in-time manufacturing supply chains need, concluding that it is not a viable option, insofar that:

‘the commitment to avoiding a hard border enshrined in the Withdrawal Agreement will continue to shape the future relationship between the UK and the EU because it will not be possible for the UK to decide on customs and regulatory arrangements which negate that commitment’.

A time-limited NI backstop is a contradiction in terms, therefore, and can never be accepted by the EU in a legally tangible form within the current or any amended WA..

What should happen next?

The Hard-Brexiteers who voted no confidence in the PM on Tuesday, in any case, will not be persuaded to support the WA. They seek instead a disorderly no deal exit occurring by default, regardless of its impact.

The WA can now only pass Parliament with some measure of Labour support. The PM to secure it will need to tilt at the very least the Revised Political Declaration (PD) towards a more permanent Customs Union (CU) and greater on-going regulatory alignment with Single Market (SM) rules.

But she continues to be boxed-in by the malign influence on the government that the hard-Brexiteers can exercise. This is through their power to determine the parliamentary selection of the two candidates to be submitted to the hard-Brexit-leaning rump party membership for the next Conservative Party leadership contest.

If either No deal or a second referendum is to be avoided, she must break out of that box and find a way to secure cross-party support for an option acceptable to the majority in parliament, with or without Labour whipped support, that will preserve an open border within Ireland.

Her difficulty is that could risk the break-up of the Conservative party in parliament, rather like the Liberals did over Irish Home Rule in the nineteenth century.

But, if she doesn’t, Tory Remainers are quite likely to jump ship at the prospect of a rigid, and, ultimately, an unelectable government beholden to the hard-Brexiteers and their accompanying neo-liberal economic and social policy agenda.

It did not help that some EU leaders were indicating post-December summit that they would still like to give Mrs May some comfort concerning the application of the WA backstop to help her to secure a parliamentary majority. That is a forlorn hope that will encourage May to extend the impasse or the agony, rather than to cut her losses and strive to strike a deal with MP’s.

The Labour front bench needs now to act in the national interest and hold Mrs May to account properly by highlighting her capture by – in the words of her own chancellor – extremist hard-Brexiteers, who are wedded to a no deal exit that would cause at very least considerable short-and longer-term damage to the economy, household incomes, and the public finances, undermine and even destroy the foundations of the Good Friday Agreement, before ushering-in a neo-liberal race to the bottom inducing greater inequality in market incomes amid further welfare state retrenchment.

May messed up by going back to Brussels in a self-defeating exercise to secure concessions bending to that destructive faction, living the lie that an alternative deep and comprehensive trade deal consistent with her December 2017 NI backstop commitment is negotiable with the EU within a time-limited period.

The only way, indeed, that a border within the island of Ireland and separate treatment of NI to the rest of the UK can be avoided and the industry supply chains integral to the protection of UK manufacturing industry and employment can be protected and fostered is by the maintenance of frictionless trade between the entire UK and EU.

That, in turn, as this website has consistently argued, requires an equivalent CU with no rules of origin checks along with continuing UK regulatory alignment with SM rules for goods – at least until institutional and technological means can be identified and implemented that will allow the UK to levy differential tariffs on imports, depending on origin and destination.

The real impact of Brexit and the actual choices that are available continue to be obscured in the mainstream media Brexit debate, reflecting not only the government’s, but also Labour’s failure to demonstrate through forensic precision and focus that:

The current WA backstop, whether time-limited or not, is incompatible with the December 2017 overarching NI backstop;
A comprehensive and deep economic partnership with the EU cannot be achieved in the short-to-medium term through the agreement of a Canada-style FTA;
The future benefits of any future UK trade deals with the ROW will be miniscule compared to the economic damage inflicted by loss of frictionless trade with the EU;
Frictionless trade, in turn, depends upon the maintenance of an equivalent CU with no rules of origin checks and continuing UK regulatory alignment with SM rules for goods into the foreseeable future.

The time for tactical posturing is over if either no deal or a divisive and, for the reasons discussed in The Dangers of a Second Referendum quite possibly destructive second referendum, are to both avoided.

The Labour front bench needs to be up-front and hammer home each of the points above – evidenced by the government’s own published documents and supported by the mass of independent expert opinion – not only in the national interest, but for its own wider electoral and strategic political purposes.

Each potentially commands a majority in parliament, and could be subscribed to by at least a significant minority in the cabinet.

Informed political and media focus on them will help to drive a wedge between the sensible majority in parliament and the hardline ERG faction, who continue to peddle their no deal exit vision by falsehood and misrepresentation – for example, it would be feasible for the UK to unilaterally declare tariff-and quota-free access to EU imports.

Such a wedge would assist the government to tilt towards the Labour position and at least increase the likelihood of an agreement acceptable to the parliamentary majority being agreed that could then be taken back to Brussels.

It would also help to define the dividing lines for any second referendum process in the event that transpired as the only alternative to no deal, and would begin to set them also for the next general election, whenever that happens.

The Dangers of a Second Referendum

18th December 2018 by newtjoh

The ‘People’s Vote’ campaign has steadily built some momentum – at least within the rank of Remainers – for a second referendum to include an option to Remain. Their clarion call is that details and impact of Brexit were unknown in June 2016 and the electorate has the right to decide anew, now that the implications and impact of Brexit has become clearer, at least in broad terms.

A second referendum has been consistently rejected by the government, however, pointing out the people in the first referendum voted by a clear, if modest, majority to Leave, and that its job is to effectively execute that decision.

It would certainly be problematic in design and indeterminate in outcome. Referendums involving a politically contentious nation-changing decision really need to offer a binary choice between two options.

They are employed ideally to legitimize a once-and-for-all complete change or revolution in governance or social practice arrangements, such as the transformative move to democratic majority rule in South Africa, or the introduction of divorce in countries, where previously it was prevented.

The 2016 referendum, however, was convened mainly to manage internal Conservative party dissension, and was to all intents and purposes, unnecessary.

The actual vote in that referendum was found to be correlated with age and education. It undoubtedly was also influenced, not only by such social-economic factors, such as inequality and perceived social and political exclusion, but also cultural factors linked to community and class, not necessarily related to EU membership, including immigration and refugee dispersal.

Any second vote would also be influenced and probably decided by such proxy factors, sometimes only loosely related, if at all, to the pros and cons of each ballot paper choice.

Non-binary choice referenda become complicated, producing results that can reflect tactical voting, the order or permutation of the questions, or the intention of the framers of the questions, rather than indisputably the actual preference of the majority.

Leaving aside for a moment that hard-Brexiteers oppose the idea of a second referendum on the ground that the issue has already been decided, but, if it was conceded by parliament, they, for example, can be expected to agitate for a choice between No Deal and the May Deal, because that is the permutation most likely (but uncertain) to deliver victory to them.

By the same token, Remainers relish a binary choice between Remain and either no deal or the May deal, as current polls suggest a Remain majority over both.

If an alternative vote (AV) system was used, where voters are asked to make a first-and second- preference, with their second preference votes counting if no option obtains more than 50% of first preferences and their first preference option is eliminated, the May Deal could win, even when both Remain and Leave options were able to secure more first choices but more than 50% of the total vote. Polls can change, of course.

Most MP’s reject No deal. They could decide to exclude that option as simply too damaging and thus not in the national interest option to offer the people in a referendum, and decree that choice should be between the May deal and Remain.

Logically, however, that is little different to parliament taking the entire decision on behalf of an electorate, not trusted to make the ‘right decision’ because it could decide in favour of No deal, notwithstanding its expected dire economic impacts. That decision could be the result of the electorate placing a higher weighting on sovereignty (perceived or actual) or be the product of the proxy factors discussed above, or a mixture of both.

A second referendum undoubtedly would be divisive. Committed Remainers and some Brexiteers, as noted above, now increasingly see it as a ‘going for broke’ option, where their best outcome, cancellation of Brexit for the former, and ‘No deal’ in the case of the latter, can be achieved.

As Daniel Moylan, a former adviser to Boris Johnson, noted at an Institute of Government seminar last week, its proponents tend to promote it to solely to secure a desired outcome rather than because of their commitment to the process itself.

It is not surprising therefore that there has been little evidence of either camps engaging with the arguments of other. A simple re-run of June 2016 would be a bit like a referendum in Belgium being convened to decide if the national language should be Flemish or French, after a narrow victory of one or the other could not be translated into actual arrangements that were politically acceptable and sustainable.

Nor would a simple binary choice between Remain and Leave, if Leave was subsequently confirmed, settle the terms for the UK’s departure: back to square one minus x, then.
On the other hand, a flip-over in favour of Remain would induce claims of betrayal by up to 49% of the electorate who voted to Leave across both referendums, risking the further estrangement of a huge number of people from the political process and associated political and social instability.

Many Cabinet ministers and MP’s across the party divide share that concern and for that reason have hitherto been most reluctant to go down the route.

Moreover, no guarantee exists that any alternative option to the May Deal that required re-negotiation of the Withdrawal Agreement (WA) would be accepted by the EU in the form envisaged, giving rise to the prospect of a third vote becoming necessary when the detail of any final negotiated revised deal became available.

The details and impact of other possible Leave options, such as a stand-alone trade deal would also not be known.

Framing and finalizing the actual details of the referendum questions would be as, if not more, contentious, and as likely to be deadlocked, as the current parliamentary impasse has proved to be.
Logistically, its organization and delivery could take up to six months. Parliamentary business would continue to be gridlocked by Brexit, and the economy further undermined by uncertainty.

The majority of MP’s could conclude that the fundamental interests of the four nations of the UK required the cancellation of Brexit, and then act on the courage of their own convictions as elected representatives of the people and resolve to revoke Article 50 and the withdrawal legislation already on the statute books.

In that case, they would, however, be accused of ignoring the expressed will of the people as expressed in the first referendum. Undoubtedly some who voted Leave would feel betrayed and robbed of their Brexit by the distant Westminster establishment, leading to an even greater risk of political and social instability.

That danger could, however, possibly be mitigated by a concentrated communications exercise explaining their decision was taken, accompanied by a strategy to tackle the causes of Brexit, such as the upskilling of indigenous workers: things that need to happen anyway.

It is not really conceivable a simple revocation of Article 50 to cancel Brexit would be taken up by either the Conservative or replacement Labour government, without prior recourse to a referendum, although they could ask the electorate to ratify the revocation after the event: an uncertain outcome.

Facing continuing deadlock, May could ask the electorate to approve or the WA agreement. Hilary Benn at the same IOG seminar indicated that it might be convenient for both front benches for May to take her agreement direct to the country.

If the point was reached where her deal was rejected by the Commons and the lack of majority parliamentary support for any alternative option threatened No deal by default, and a no confidence motion had been defeated, most bets are on the Labour front-bench swinging in favour of a second referendum.

That would not necessarily translate into a parliamentary majority for a second referendum, but given the looming reality of a no deal exit and with other options exhausted it might become difficult to identify an alternative outcome, save for MP’s to vote in a temporary Government of National Unity to go back to Brussels to re-negotiate a revised May Deal more in line with majority preferences of both parties, but the prospects of that appear dim.

An understanding of the dangers of the drawbacks, uncertainties, and risks involved in a second referendum might help to concentrate parliamentary minds in mapping out a process to an agreement that that could be sustained in Westminster and Brussels, however.

May’s Contradictory Deal

30th November 2018 by newtjoh

The Draft Withdrawal Agreement (WA) The Draft Withdrawal Agreement was published on the 14th November accompanied by a Revised Political Declaration on the 22nd November (the May deal or agreement).

The Northern Ireland and Ireland Protocol of the legally binding Withdrawal Agreement (once approved and ratified) provides for a NI backstop that diverges in both principle and spirit from that defined in December 2017.

It is thus termed, here, the WA backstop, to differentiate it from the overarching NI backstop.

A common customs territory is created, where no quotas or tariffs would be applied on goods circulating between the UK and EU. It is not comprehensive, however, failing, for instance, to make express provision for road haulage or agri-food movement (services), the absence of which would result in bottlenecks and delays at the UK-EU border.

Even more crucially, the WA backstop does not provide for continuing regulatory alignment at the UK-level for goods, which is also necessary if continuing full frictionless trade between the UK and EU is to be maintained.

In order to maintain an open intra-Ireland border additional provisions are made within the WA that will apply to NI only and not to the rest of the UK.

These include NI’s full adherence to the EU Customs Code and its continuing regulatory alignment with SM rules with respect to the technical standards of goods, to sanitary and phytosanitary measures relating to animal, plant and food safety, to environmental protection, to agricultural production and marketing, and to rules relating to VAT and excise in respect of goods, and to state aid.

The European Court of Justice (EJC) will continue to exercise direct jurisdiction over the application and interpretation of these rules.

NI, in effect, would be treated differently to the rest of the UK under the WA backstop, making it impossible for the DUP to support the agreement.

It will become operative at the end of the transition period on 31 December 2020, until when the UK will continue to apply full CU and SM rules, unless alternative other arrangements that are consistent with an open intra-Ireland border are put in place.

Otherwise the transition period is extendable by mutual agreement for up to a further two years until December 2022, subject to the government requesting an extension by 1st July 2020 and then its subsequent approval by the Joint Committee that will be set up to oversee the WA.

The government’s expressed intention is that the WA backstop would be rendered unnecessary by the UK entering into a subsequent agreement with the EU that would establish a future ‘deep and special future economic partnership’ between them.

To that end, the WA shoulders a joint ‘best endeavours’ duty on both parties to finalise such an agreement.

More specifically, Article Two of the Ireland and N.Ireland Protocol within includes provision for specific ‘best endeavours to reach a future agreement which supersedes the WA backstop by December 2020’ to be made.

When activated the WA backstop arrangements would then, according to Article One of the same Protocol, continue indefinitely “unless and until they are superseded, in whole or in part, by a subsequent agreement”.

The current draft of the WA does not include any time-limit on, or for any right for the UK to unilaterally exit the backstop after it comes into operation; nor does it define in which precise circumstances when it would no longer apply.

The UK commits to continue to adhere to EU State Aid and Competition Policy, and not to dilute existing EU social, labour, and environmental standards – the so-called non-regression clause, with provision is also made for both parties to jointly agree to raise them.

No provision is made in the WA for services at either the NI or the UK level. Nor is provision made for the UK to benefit from existing and new trade agreements with third-party countries.

Turning to the accompanying non-binding PD, no mention of frictionless trade is made, even though the original version published on the 14th November did, indicating the fluidity of the document and the PM’s tacking to her party’s hard-Brexiteer faction in response to their initial hostile reaction.

It, however, does air the possibility of using technological fixes and ‘trusted traders’. This suggests that government may hope to resurrect the Facilitated Customs Arrangement (FCA) included in the 2017 Brexit White paper to build and improve on the barebones customs union set out in the WA.

That FCA was considered and ruled-out as unworkable by the EU during the WA negotiations. For reasons explained in http://www.asocialdemocraticfuture.org/2018-brexit-white-paper/and little has changed since then, other than the political environment within the Conservative party.

The PD gives emphasis to the development of an independent trade policy with reference made to a future (trade?) agreement ‘that will obviate the need for checks on rules of origin’.
Such an outcome, however, assumes either the maintenance of the EU’s Common External Tariff (CET), or undue reliance on a future technological fix that would allow the UK to levy differential tariffs without border formalities.

The government conceded in Section 181 of its November Explainer on the Draft Withdrawal Agreement that, indeed, ‘The (WA) text reflects the UK’s commitment to align with the EU’s Common External Tariff, and with the Common Commercial Policy on trade in goods with third countries to the extent necessary give effect to these (WA backstop) provisions’. But to do that would probably prevent the UK negotiating, and certainly bringing into effect, its own trade deals with the Rest-of-the-World (ROW), save for services.

The government has been, therefore, caught facing in different incompatible directions, when explaining the WA. It will continue to do so, thus undermining its own position, until that it is made consistent and fit for purpose.

Such basic confusion, reflecting the conflicting internal party pressures within the Conservative Party, hardly augurs well for any expeditious trade negotiation process that can culminate in a 2020 trade deal. That, of course, in any case, assumes that the May deal is approved by the House of Commons next year, which it won’t, at least in its current form.

Jersey rather than Norway-now.

31st October 2018 by newtjoh

The phony war between the EU and UK ended in October. Brussels made it clear that the Northern Ireland (NI) backstop – continuing adherence to EU customs union and single market requirements for goods sufficient to prevent the return of customs controls on the inter-Ireland border – meant precisely that: one indefinite in duration, spatially specific to NI, involving a regulatory border down the Irish Sea; at least, if and until UK-wide arrangements are agreed during the subsequent ‘future relationship’ negotiations.

Mrs May on her part re-affirmed that Westminster could never accept such a splitting of UK customs territory. She offered instead to extend the transition period, during which the UK would, in effect, continue to be part of the EU-wide Customs Union (CU) and Single Market (SM), beyond December 2020, while insisting that it should still be time-limited to end before 2022 – when the next election is due in accordance with the Fixed Term Parliament Act and rejecting any specific NI ‘backstop within the backstop’.

These respective red-lines are, of course, incompatible. They must give if a calamitous no deal exit is to be avoided. The UK parliament will not approve a WA that involves an Irish Sea regulatory border, which, in any case could itself infringe the 1998 Good Friday agreement, at least in spirit.

On the other hand, a time-limited backstop constitutes a contradiction in terms: it will not be infringed (or, put another way, be required, or be necessary) while trading arrangements that obviate the need for NI border infrastructure are either maintained or are committed to into the future by formal treaty within interruption; the problem is that the date when any such future agreement could be made is unknown.

Three key points need to be borne in mind. First, the WA is legally binding and needs a super-majority vote approval by the EU27 members; it then will be subject to a ‘meaningful’ vote in the UK Parliament. But the accompanying political declaration plotting the future economic and political relationship between the UK and EU, is not. It can therefore be vague and aspirational in a way that the WA as a precise legal document cannot. Second, any replacement Canada-style comprehensive trade agreement is likely to take years to put in place. It almost certainly will not be ready by 2022. And, third, of course, politics trumps economics in Brexit.

The first two explain why the EU feels that the backstop requires legal backing in the WA. Without it, the UK could without legal impediment unilaterally decide when and how its future proposed trading relationship would prevent the need for border infrastructure within the island of Ireland. Its existence – given the UK blood-red-line against an Irish Sea regulatory border and/or specially agreed arrangements for the Province – mean that the entire UK, as a minimum, will need to: (i) stay in an equivalent CU with the EU; and, (ii) cede continuing regulatory alignment with EU regulations concerning goods.

That is, at least until an alternative trade agreement and/or technological fixes or arrangements that are consistent with no hard inter-Island border are mutually agreed with the EU and put in place. But, as noted above, the timescale for that end-point looms beyond 2022. Nor is it even clear how a replacement Canada-style agreement could ever avoid the re-imposition of a hard border within Ireland. Reality finally has caught up with the wishful thinking and/or hubris: the aspirations of the hard-Brexiteers as reflected in Mrs May’s Lancaster House speech conflict with minimising economic damage to the UK, and arrangements that can maintain frictionless trade without border controls within the island of Ireland rendering unnecessary the NI backstop.

The third means that May will need to depend on Labour votes to secure parliamentary approval for any Chequers Mark 2 agreement that she shortly could and needs to make with Brussels. The formal Labour position is to vote against any agreement that does not meet its six tests that in effect require UK continuing participation in arrangements equivalent to the SM and CU. On her own benches, the hard-Brexiteers of the European Reform Group (ERG) forswore after Chequers that they would not accept any variant to it. If they stick to their guns that would mean, unless Labour shifted its position, that parliament would vote down any Chequers Mark 2 agreement presented to it.

But, as no parliamentary majority for a no deal exit exists, such a concerted ERG rebellion that led to the deal being voted down would risk either a second referendum or a general election. For that reason, But no parliamentary majority for a no deal exit exists. A concerted ERG rebellion that led to a Chequers Mark 2 deal being voted down would risk either a second referendum or a general election. For that reason, it is quite possible that many of its posited 80-odd members will not actually vote against the government to a point where the numbers that do could be offset by enough Labour MP’s willing to vote – even against their party – for an orderly exit lifting economically damaging uncertainty.

One proposed possible way to avoid such a disorderly exit is for the UK to park itself into the European Economic Area (EEA), at least on an interim temporary basis until future long-term arrangements can be agreed. Nick Boles MP, close to Michael Gove – a possible leading Leaver contender for prime minister in the event of the ouster of May – has most recently put forward the case for Norway for Now.

The UK would scrap the planned transition period starting in March 2019. It instead would rejoin the EEA for three years, alongside a ‘temporary’ customs union with the EU: making it, in effect, Norway-Plus for Now. Boles claims that this model offers an escape from a no deal exit that is supported by a broad swathe of MP’s, including prominent Conservative Remainers, such as Nicky Morgan. Back in February, the Labour Campaign for the Single Market , supported by prominent Labour Remainer MP’s unreconciled to the Corbyn project, such as Chuka Umunna, Chris Bryant, and Ruth Cadbury, demanded that – as a minimum – the UK should remain part of the European Economic Area (EEA) allowing it to stay on a permanent basis in the single market for both goods and services. When push comes to shove some could be expected to support support interim EEA membership, plus UK continuing CU participation, as a second-best alternative.

But Norway-Plus for Now appears to offer a red herring for three main reasons. First and foremost, the EEA is not designed to be a temporary holding pen for an exiting EU (and EEA) member wanting to put into place a comprehensive replacement bilateral free trade agreement with the EU, it had just left. At the end of October, Norway’s prime minister, Erna Solberg, highlighted that -albeit rather delicately and diplomatically – as ‘a difficulty’, no doubt fearing the entanglement of her country into UK Brexit politics and the possible disruption that it could cause both domestically and across EEA-linked institutions, and the European Free Trade Association (EFTA) in particular. Indeed, the UK economy in size dwarfs that of the three extant EFTA/EEA members – Norway, Iceland and Liechtenstein – combined. But, even if they were prepared to welcome the UK into their club on such a basis with open arms, the EU has shown no indication that it would be prepared to fast-track the UK to re-join EEA through an application to the European Free Trade Association (EFTA) in such circumstances.

The EFTA/EEA route from the onset of the negotiations was offered by Brussels as a counterpoint alternative model to a Canadian-style trade agreement for the UK to pursue. The May government chose the latter. That the EU would now pull out all of the stops to allow the UK to join as a temporary expedient in the compressed timescale now available before a March 2019 exit, while at the same time ditching its red line that the NI backstop cannot be temporary or be time-limited, is, frankly, inconceivable.

Second, the mechanism for the UK to join the EEA by becoming a member of EFTA, on the face of it, appears incompatible, or at least inconsistent, with the UK remaining in a CU with the EU. An ex-Director-General of the EU Legal Service, pointed out in https://twitter.com/piris_jc/status/1056860779427913728 that such membership appears inconsistent with Article 56 (3): Any State acceding to this Convention shall apply to become a party to the free trade agreements between the (EFTA) Member States on the one hand and third states, unions of states or international organisations on the other: the accession to EFTA of a new Member State (UK) aiming at a custom union with the EU appears inconsistent with it entering into existing EFTA free trade treaties.

It is perhaps possible that on a needs-must basis, special arrangements for the UK could be sought and engineered. But not for a temporary and time-limited period of membership that both the EU and EFTA members are uncomfortable with. The UK could not make an application to join EFTA until it had left the EU in any case.

Third, all relevant Internal Market legislation is integrated into the EEA Agreement so that it applies throughout the whole of the EEA. All EU members are contracting parties to the EEA, along with Norway, Iceland and Liechtenstein. The four freedoms of the free movement of goods, capital, services and persons lies at its heart. In addition, the EEA Agreement covers horizontal areas, such as social policy, consumer protection, environment, company law and statistics; to ensure equal conditions of competition throughout the EEA, it mirrors the competition and state aid rules of the EU Treaties, while also providing for participation in EU programmes, in return for agreed budgetary contributions. This would mean that the UK would need to maintain freedom of movement (FOM), continue to pay budgetary contributions to the EU, but now – as a non-EU member – as a rule-taker.

Norway-Plus-for-Now could not be time-limited without infringing the EU NI backstop red-line. That so, given the complexities and uncertainties of negotiating a replacement free trade agreement, the arrangement would need to be indefinite one, contrary to its prime purpose of providing a temporary holding pen for the UK. The prospect of the UK being a ‘vassal’ state indefinitely is deeply troubling, not only to hard-Brexiteers, but to some Remainers, such as Dominic Grieve, who have indicated that a second referendum would be preferable. Many Labour MP’s, such as Caroline Flint, representing leave-voting constituencies on their part have expressed a willingness to vote against such an arrangement, while accepting a principle of a continuing CU, because UK EEA membership would involve full participation in the single market and thus continuing FOM, putting themselves at odds with their Campaign for Single Market colleagues.

The end-game to secure a deal that is politically acceptable in both Brussels and Westminster is imminent. Time is certainly running out to avoid mounting abortive and wasteful expenditures on preparations for a disorderly ‘no deal’ exit with its accompanying market turmoil. The Withdrawal Agreement (WA) should be agreed at least in principle by an EU Summit in November – certainly no later than early December – for it to be approved by the scheduled EU Council on the 12/13th December.

Rather than making a CU an adjunct to UK continuing full involvement in the SM through the EFTA/EEA route, as Norway-for-Now does, a more bespoke arrangement that focused on extending UK participation in an equivalent CU with the EU to encompass regulatory alignment for goods in sufficient depth to render the NI backstop unnecessary, would seem to offer a better prospect of securing both EU and UK parliamentary approval.

As Sam Lowe of the Centre for European Reform, noted back in July, in Inching Towards Jersey, from the EU standpoint, such an arrangement would need to provide comfort to the EU that the UK would follow all the rules of:
• The customs union, single market rules for goods and the EU’s VAT regime. All industrial goods and agriculture would have to be covered to prevent checks on origin and standards, among other things, becoming necessary;
• State aid, industrial emissions and social and employment laws, to avoid the charge of environmental and social ‘dumping’.

Lowe further noted that it would need a surveillance mechanism, to check that the UK is complying with EU rules, a court to settle disputes between the EU and the UK that would have to take account of the case law of the European Court of Justice. The EU would insist upon a financial contribution to the economic development of central and eastern Europe, among other things.

Such an arrangement could allow the UK to pursue and sign FTA’s in services with third-party countries. It could also possibly be provided some flexibility on developing an independent migration policy – probably the most pertinent point in terms of selling it to MP’s who my be prepared to vote with the government, as well as the wider UK public-at-large. It would no longer be bound to the Common Agricultural and Fisheries Policy, thus addressing the concern of David Mundell, the Secretary of State for Scotland, who, in October warned that he would resign from the Cabinet if the UK was still subject to the Common Fisheries Policy when the next Scottish Holyrood elections next took place in 2021: a resignation that Mrs May cannot really withstand.It would allow the transition to be time-limited: the Political Declaration would simply confirm that both parties would apply best endeavours to negotiate, resolve, and finalise the arrangement prior to the expiry of the transition period. Overall, it could offer a model close but crucially distinct to the EEA, particularly with respect to the addition of a CU so to ensure continuing frictionless trade in goods between the entire of the UK and EU, rendering the NI backstop unnecessary or irrelevant in practice: one bespoke to the particular economic and political prevailing circumstances of the UK impacting upon on Brexit. As is required, of course.

In that light, if the national interest is the assessment criterion to be applied, this Chequers Mark 2 ‘Jersey’ option appears to represent the least damaging available Brexit option that can also politically sidestep the hiatus of No Deal by attracting a sufficient number of MP’s to approve it. There would, however, be an economic downside in terms of loss of EU market access for services. In that regard, while the importance of the financial sector to the UK economy and its public finances should not be under-stated, the sector is better-placed to withstand and adapt to such loss of access than most goods sectors are, with better distributional outcomes. An alternative Canada FTA would have similar or even worse impact. Better to remove the uncertainty now and support the export-oriented service sectors to get on protecting their existing EU business and to secure new and growing markets across the ROW.

The EU can be expected to insist that the NI backstop remains in the legally binding WA. Semantics is likely to come into play in cross-referencing it with the accompanying Political Declaration, in terms of reconciling the ‘temporary’ with the ‘indefinite’. Both parties committing to the end outcome of no return to border infrastructure within Ireland as an inherent feature of any post-transition replacement must be central to that. Crucially, as noted above, and unlike the negotiation of a Canada-style replacement FTA, a bespoke CU+ regulatory alignment for goods arrangement covering the entire UK could be finalized within a time-limited transition.

The EU previously has underscored that the four freedoms underpinning the single market are inviolable and indivisible. Well, needs-must. The NI backstop on a smaller spatial scale showed that. A bigger prize beckons. The advantages to the EU of avoiding No Deal – with its economic and diplomatic known and unknown adverse consequences – and in securing a higher market share in services are salient to its balancing of the net advantages and disadvantages to its members of such a bespoke deal . Navigating the separation of services from goods in practical implementation terms is not unproblematic, but possible.

Across the Channel, Prime Minister May could offer this Chequers-Mark 2 as the ‘pragmatic’ and ‘principled’ best available deal that follows the thread of her the July 2017 Brexit White Paper on establishing a sustainable free trade area in goods with the EU. One that within a realistic longer-term timescale could provide scope and opportunity for the UK to progressively identify and reap the most advantage of its altered and new relationship with Europe, in accordance with the result and spirit of the 2016 referendum vote.

Not only could the UK could forge new FTA’s concerning services with the ROW, it could also possibly allow the UK’s to progress FTAs concerning goods to the point where they could come into operation when the UK finally leaves the interim equivalent but still bespoke CU, where that is consistent with the NI backstop: that will be sometime in the indeterminate future, as always has the been the case. The actual prospect of independent deals – at least of the significance and scale needed to offset the loss of frictionless trade with our nearest and main partner, the EU, across the high value supply chains that are of particular economic importance to many communities in the north and midlands, was always to put it kindly, dim and distant, and unrealisable in the short-term, at least. The majority of MP’s appreciate that.

So such a Chequers Mark 2 deal could pass muster, at least on a two-thirds glass full basis, with enough Labour and Conservative MP’s to pass parliament. That, in turn, could create political space for co-ordinated labour market and industrial strategies to be put in place on a sustainable basis that can effectively upskill and provide more secure and better paid conditions for indigenous workers and young people., especially across the caring, construction, cleaning, hospitality, and other low wage and insecure, service sectors. If Brexit is to provide any lasting benefit to the UK economy and society that process needs to start now in earnest.

A Way Out of the Brexit Impasse

17th August 2018 by newtjoh

The prime minister clearly hoped that her Chequers package could at least be sold to the warring factions in her own party. The swift resignations of her Foreign and Brexit secretaries soon put paid to that. The European Research Group (ERC) of hard-Brexiteers, led by Jacob Rees Mogg (JCM), were emboldened to openly rebel. The government then went on to accept amendments from him that seemingly contradicted the principles on which its and her own package was based.

That, in turn, prompted 12 Conservative Remainer MP’s to table an amendment of their own requiring the government to consider staying in the customs union if no EU agreement had not been reached by the end of January 2019 – their initial promise to give ‘a fair wind’ to the new approach blown away by May’s apparent craven capitulation. It was defeated by a mere three votes, and then only after four Labour MP’s, including Frank Field, defied their own party’s three-line whip to vote with the government.

May’s decision, on the surface, puzzling. She had earlier – at least according to some reports – advised Conservative Remainers to hold fire on their amendment and to wait for the EU to knock-back her then-forthcoming Chequers offer. She could have then told Parliament that the only way that to avoid either NI/Ireland border infrastructure or an Irish Sea border, as well as the maximum economic disruption of a disorderly exit, would be to accept, in effect, the UK staying in a CU equivalent to the existing one beyond the already-agreed two-year transition or implementation period slated to end in December 2020, where no tariffs or quotas or intrusive border ‘rules of origin’ checks would be needed, or levied, or conducted on goods travelling between the EU and UK. The UK would continue to levy, collect, and remit the EU’s applicable Common External Tariff (CET) on all goods imported into the UK from the rest of the world (ROW).

Such a position with government support could have been expected to pass Parliament given Labour Party support for the UK to remain a customs union.

Although Mrs. May had previously provided the Trade Secretary, Liam Fox, with personal assurances about his ability to sign independent trade deals with the ROW, that does not explain why the prime minister felt that it was necessary to capitulate to JRM and his ERG band of fundamentalist Brexiteers. Their two ‘wrecking’ amendments, covering VAT and the EU collection of tariffs on behalf of the UK, would have almost certainly been rejected by the Commons, had her government not accepted them.

Most likely, her motivation was to persuade potential rebels to desist from depositing enough letters of no confidence in her to trigger a summer leadership contest. Yet, by accepting JRM’s amendments, she served to strengthen their position and stiffen their intransigence against the Chequers package. Such appeasement has and will continue to undermine her future political negotiating positions, both internally with her party and externally with the EU, making her ouster as Conservative party leader and prime minister more likely than less.

Putting that political misstep aside, the yawning core contradiction at the heart of the entire Brexit process was inescapably and openly laid bare by Chequers: the economic damage that it entails can only be mitigated by the UK retaining as much of the tangible benefits of EU customs union and single market membership that it can. But that in return requires the UK to accept some of the obligations of EU membership along with an accompanying loss of domestic UK control over their content and of their future development: making the UK a rule-taker without representation.

If the point of leaving was to wrest wholly in practice and effect any EU direct control of ‘our money, laws, and borders’ back to Westminister, such a Brexit-in-Name only (BINO), as it is called by its detractors, seems, in logic at least, pointless: the UK might as well not leave. But that would be contrary to the June 2016 referendum result. On the other hand, exiting with no deal to trade on World trade Organisation (WTO) rules, as extolled by the ERG, would result in the most economically most damaging, and politically (and quite possibly socially) calamitous consequences: a conclusion disputed, or brushed away, only by most fervent Brexiteers.

As Parliament went into its summer recess, individual members of the ERC group – that could number between 60 and 100 MP’s in total – swore that they will vote against any future withdrawal deal aligned to the July Brexit White Paper, which fleshed out the Chequers package. The Labour party, on its part, confirmed that it will continue to oppose such a deal because it would not meet the – albeit unrealizable (short of continuing de facto CU and SM membership) – six ‘Starmer’ tests. And, the Conservative Remainers, alienated by May accepting the ERC amendments, were once again cast outside the government tent.

If the Labour Party and the ERG stick to their existing guns, any deal based on the white paper package will be rejected by Parliament later this autumn, thus shortening the political odds on a UK ‘no deal’ exit, occurring by default. That outcome is far from certain, however: a season is a very, very, long time in politics.

Neither a responsible government nor opposition could engineer, or even countenance, a no deal exit; that is unless they simply washed their hands of its known anticipated consequences on the national interest. Even if they did, many of the potential political ramifications or fall-out from such an outcome, either by design or default, are too unappealing, or too uncertain, for both main parties to stake their future electoral prospects on.

The looming prospect of ‘no deal’ itself could cause the EU, however, to modify or fudge its own previously declared red lines to accommodate a compromise deal with the May government that could then possibly garner the grudging acquiescence of Parliament. It is to that prospect, we turn.

The european dimension

The facilitated customs arrangement (FCA) provides the cornerstone of the UK negotiating position. It is designed to avoid the need for the NI backstop included in the draft withdrawal treaty. The other main pillar on which May’s package rests is UK regulatory alignment with the EU, but only to the extent necessary for the UK to continue to benefit from frictionless trade in goods with the EU27 and with no border infrastructure to be placed between the two Irelands.

That pitch jars with the mood-music coming from, not only from Barnier and the European Commission, but also from key political leaders, that has hitherto maintained the steady tune that the four freedoms of the single market – goods, services, capital, and people – are both inviolable and indivisible.

But as summer simmered in early August, some suggestions of a possible softening of the EU’s absolute position began to emerge. Thee separate treatment of goods and services could perhaps be countenanced, subject to the adoption of interpretation and enforcement mechanisms that would give the final say to its own institutions, most particularly the ECJ.

The EU and UK red-lines could both be blurred or fudged, by, for example, providing the European Free Trade Association (EFTA) court a similar role in deciding disputes that it currently commands in the existing European Economic Association (EEA) governance structure. That arrangement already involves Norway, for example, opting out of membership of the customs union, and the acceptance of some associated frictions in the free movement of goods.

Freedom of movement is the main elephant in the room for the UK, and some tweaking of its application could be creatively presented by both parties as part of a movement to a negotiated and comprehensive replacement arrangements.

That the EU might be prepared to row back on its own stated negotiation red lines should not come as that much of a surprise. A no deal exit would cause one of its members, the Republic of Ireland, almost as much – or even – greater economic harm than it would wreck on the departing UK, whose domestic manufacturing and farming sectors would bear the brunt of the pain both immediately and longer-term. The EU’s other 26 members would also suffer some economic loss, most marked for the Benelux countries geographically closest to the UK.

A chaotic UK exit would put in jeopardy both the £40bn divorce payment and the residence rights of EU nationals working in the UK. At its most existential, the diplomatic credentials and reputation of the EU with the ROW would be soiled, perhaps permanently. The UK exit is a particular situation; at the end of the day: needs must.

Yet it is difficult to discern why the EU should allow the UK – a state that has chosen to leave its ‘club’ and become a non-member third-party – the benefit of the special customs arrangement represented by the FCA, while allowing the UK also to continue to benefit from FTA’s agreed between the EU and the ROW.

In particular, the proposed dual tariff structure of the FCA provides an inherent incentive to fraud and smuggling that along with its other added complexities and inefficiencies makes the prospect of its 27 remaining members suffering consequential trading and revenue, almost inevitable. That makes its adoption most unlikely as, http://www.asocialdemocraticfuture.org/2018-brexit-white-paper/, pointed out.

In that light, the EU should also do itself, as well as the UK, a favour by putting the FCA out of its misery as soon it can, without precipitating Mrs May out of office, although that might mean waiting until after the Conservative Party conference in October.

Brussels could then push the UK to maintain an equivalent CU with the EU until such time that a replacement FTA can be mutually agreed and put in place, as a ‘price’ for offering the UK some measure of flexibility on FOM. Of course, no real economic price would be paid by the UK by accepting de facto continuing membership of the CU. Its manufacturing businesses would benefit from the greater certainty of the maintenance of frictionless trade for a longer period; it is only the illusionary prospect of securing substantive new trade deals in goods outside the EU in the short-term that would be lost.

The real issue is whether the resulting political price for the government – and for Mrs May in particular – would be too high.

The domestic political dimension.

Any variant of the Chequers package is sure to be rejected by a sizeable segment of Conservative ERG members. But they set their face against the Brexit White Paper even in its July pristine published state. They, therefore, have already shot their bolt: no deal is their unshakeable article of almost religious faith, whatever happens.

Mrs May can be expected to stand firm behind her Chequers banner and now face down their messianic zeal for a disorderly exit, relying on the silent majority of her more Brexit-agnostic MP’s to carry her through.

But if she does, could the ERG unseat her in the autumn? Possible but unlikely. Not only are the majority of Conservative MP’s not wedded to a hard-Brexit outcome, which even if they were, would not pass Parliament, but a new hard-Brexiteer Conservative leader would face another general election. That precise same prospect is likely to deter Conservative MP’s from exposing both their party’s Brexit record and their divisions to a leadership contest and then to a volatile electorate.

That electorate could well vote in a ‘hard-left’ Labour government led by the populist Jeremy Corbyn, and trust it to negotiate a vague soft-Brexit aligned to Starmer’s six principles under a jobs and prosperity banner. A new Labour government can be expected to seek an extended Article 50 timetable – a need that Labour would make clear during the election had been generated by Tory incompetence and extremism.

Even if the Conservatives won, the ensuing chaos and economic damage caused by a disorderly exit would quite likely render it a short-lived victory that then made the party subsequently unelectable for a generation.

It is possible that the Conservatives, if a leadership contest was forced onto Mrs May, would elect a compromise candidate, such as Jeremy Hunt or Sajid Javid, promising a harder line with Brussels in the negotiation, but with no deal as the backstop rather than the desired destination. This assumes that the constituency members, who would decide such an election, would be amenable to any whiff of Brexit compromise. The deep Tory divisions would still be exposed by such a contest.

Some suggestion has been made that such a ‘compromise’ leader could oversee a UK exit according to a vague and skeleton withdrawal agreement and its accompanying political declaration minimally acceptable to the EU, before exiting in March, but then backtrack to a more hard-Brexit arrangement, presented as ‘what the people voted for in 2016’.

The EU, however, can be expected to include provisions within the withdrawal divorce treaty that would make that difficult. Nor could it be expected that Parliament would be fooled by such duplicity.

Turning to the Labour party, it might hope that a parliamentary vote rejecting any final package based on Chequers would also precipitate an election bringing it then to power. An election fought ‘on what happens next for Brexit’, however, is just as likely to expose Labour’s own Brexit fault-lines. Its outcome could well prove to be another stalemate that second time around could also induce a splintering of existing party alignments. Its current leadership could well decide, in that light, that betting on the altar of Brexit the once-in the-lifetime opportunity to implement the socialist transformative programme, which is its main preoccupation, was not justified by the odds.

Some on the left, most notably Paul Mason, How Labour could unite the country have argued that Labour should complement its opposition to the Chequers package by publishing the single market and migration approach that, after getting the Article 50 exit date extended beyond March 2019, as the new elected government it would progress with Brussels. Labour should also promise the electorate a second referendum on the final deal that it was then able to secure with the EU27.

This presupposes, of course, that Labour voting against the variant of Chequers package that is offered to Parliament would result in a general election and that sufficient time was left to extend Article 50. It is questionable whether a Corbyn-led government would wish to be distracted from its domestic transformative programme by such a second referendum and its connected complexities and uncertainties.

It is certainly unlikely that either the May government or the present Parliament will concede a second referendum. Indeed, the cross-cutting complexities of the Brexit permutations are not amenable to a vote between binary alternatives, underscoring that the 2016 referendum was inappropriate in the first place: there was no precipitating new overarching ‘new destiny’ issue; party political management reasons rather led to it.

A second referendum offering Brexit multiple-options would be problematic in content – for example, see the permutations offered in https://infacts.org/theres-more-than-one-way-to-count-a-three-way-peoples-vote/ – and could well be indeterminate in result, notwithstanding that this time round it would be billed the ‘People’s vote’. There is no simple solution to the complex problem of Brexit. Pretending otherwise is likely to cause more problems than solution.

Anything short of an astounding vote to Remain, would simply lay the ground for Leaver demands for yet another and a third vote, compounding divisions within and between the constituent countries of the UK to an even more dangerous tipping point.

A second referendum only really makes sense when framed between leaving with no deal, and extending Article 50 and staying in: leaving with no deal with its resulting economic and social damage, in that case could well come into ‘new destiny’ territory. If the majority voted for no deal at least they would be doing so with their eyes wide open, taking, perhaps, the heroic assumption that the consequences of the choices are communicated clearly and transparently the second time round.

But, as argued above, defaulting to ‘no deal’ option should be avoided by a responsible government and opposition.

Can Parliament agree on a ‘least bad’ option?

It is both possible and mutually desirable for both the EU and UK to negotiate a withdrawal treaty and accompanying political declaration exit that could be conceivably be accepted by the UK Parliament.

The UK would accept an equivalent CU and connected continuing harmonization to EU rules concerning goods infinitely after its formal exit from the EU, at least until alternative trading arrangements are thrashed out and finalised.

Such a Mark 2 Chequers agreement would resolve the NI backstop for the foreseeable future and preserve the continuing vital not-to-be-lost benefit of frictionless trade in goods to both parties.

From the EU standpoint, it would provide comfort that the UK would continue to align and conform to EU rules. In return for the UK jettisoning the unworkable FCA, the EU could offer some wriggle space to the UK on FOM. It could also allow the UK’s to progress FTAs concerning goods to the point where they could come into operation when the UK finally leaves the interim equivalent but still bespoke CU. In the meantime the UK could negotiate and enter into new service agreements with the ROW.

The prime minister could thus offer this the as the ‘pragmatic’ and ‘principled’ best available deal that will allow the UK to actually leave the EU at minimum net economic cost, while providing scope within a realistic timescale for Britain to progressively to identify and to reap the most advantage from its altered future relationship with Europe.

The ERG and other hard-Brexiteers, of course, would indict that to stay in the CU and SM indefinitely would make the UK a ‘vassal-state’ that will prevent it venturing out onto a world stage again as a buccaneering and proud free trading nation winning new trade deals on its own account. Their bawl that this would constitute a grass betrayal of the June 2016 democratic decision to leave the EU can already be heard. They are going to continue to shout that whatever happens, short of securing their desired no deal exit. That outcome – like the continuing CU and partial SM membership arrangement proposed here, was not on the 2016 ballot paper, when 52% of those who voted, simply expressed to leave the EU in preference to remaining.

The sensible majority in Parliament – across the parties – should simply rely on the facts to demolish the deluded and national interest-damaging hard-Brexit position. The actual prospect of independent deals – at least of the significance and scale needed to offset the loss of frictionless trade with our nearest and main partner, the EU, is to put it kindly, dim and distant, whose horizon has always extended way beyond January 2021.

Paul Krugman analysis on why existing customs union is better than relying on alternative free trade deals, provides a concise expert summary of that common-sense reality. It already is reflected in the government’s own economic analyses of the expected impact of different Brexit alternatives. Other studies have highlighted the particular adverse impact on jobs and incomes across areas most dependent on manufacturing industry, often located in either Labour-voting or marginal constituencies, most notably in the North-east, as described in more detail in previous posts, such as http://www.asocialdemocraticfuture.org/time-labour-protect-national-interest-voting-cu/.

Of course, for Parliament to exercise its collective wisdom, the Labour leadership would need to be prepared at least to refrain from impose a three-line whip against such a Chequers Mark 2 withdrawal deal.

This it might do insofar that the government will have saved them the trouble of negotiating a deal with the EU that could and would not differ materially very much from what Labour could negotiate with Brussels. Voting it down to precipitate an election that would inevitably be dominated by ‘what next for Brexit’ would very likely come across as self-serving; and rejecting a CU that would accord with current Labour party policy, which the majority of Labour MP’s are united in supporting – a unity that could shatter if attention shifted to the single market.

Other similar political calculations could also come into play. Tory hard-Brexiteers might well be joined by some ‘Lexiteer’ Labour MP’s; perhaps some hard-Remain Labour MP’s committed to nothing short of a cancellation of Brexit or at least a second referendum could even join them in the ‘noes’ lobby, providing a potential silver lining to both Mrs May and Jeremy Corbyn, by isolating their respective hard-Brexit and Remainer detractors and plotters.

The prime minister could claim that she had delivered Brexit in accordance with the referendum mandate, while Labour could claim that they have secured a result far more worker and jobs-friendly than otherwise would have been the case. Both leaderships would be served the national interest, while avoiding an election that risked the future break-up of their respective parties.

The balance of political risk would remain with Mrs May and her party. She would still have to withstand the venomous and destabilising attacks of the thwarted hard-Brexiteers who no doubt would strive to incite a rightwards-drifting rump membership to exert pressure on their MPs to ditch the prime minister.

If, on the other hand, she allowed the negotiations to drift to a point where a ‘no deal’ exit beckoned, the pressure for a second referendum to be called in time for such an outcome to be avoided, could become unstoppable.

2018 Brexit White Paper

31st July 2018 by newtjoh

The December 2017 interim withdrawal agreement (the draft Article 50 divorce treaty) requires Northern Ireland (NI) – specifically – to stay in regulatory and customs alignment with the EU. This to avoid a hard border between the two Irelands, which is an accepted red line for both the EU and the UK.

It would, however, create a customs border in the Irish Sea, unless the UK continued to remain in the Customs Union (CU) and Single Market (SM) past the transitional period posited to end in December 2020. Both end-states have been consistently rejected by Mrs May. The horns of her dilemma are thus. To escape them, beginning with her Mansion House speech, she initiated a process involving the loosening of some-stated red lines, even if almost imperceptibly, such as conceding that continuing to participate in EU agencies will involve some measure of at least indirect European Court of Justice (ECJ) jurisdiction.

Her slogan that ‘Brexit means Brexit’ was displaced by a more nuanced approach that, in effect, simply recognized the inevitable: that any agreement would require from both sides some measure of pragmatism and compromise, not least from the UK, which would suffer the most from a disorderly ‘no deal’ exit.

At the same time, with the resignations of Damien Green and Amber Rudd, her erstwhile deputy and home secretary, respectively, she lost her ‘soft’ Brexit majority within the Cabinet Brexit sub-committee. As time ran out for the UK to present a coherent package of proposals to Brussels that could stand even the remotest chance of being progressed to agreement with the EU no later than December, she finally took the plunge and convened a Cabinet awayday at Chequers on the last day of June and provided it with a firm brief to agree and produce such a package.

That it duly did without too much apparent discord. Initial impressions, however, were deceptive, insofar that within three days, the prime minister’s Brexit and Foreign Secretary resigned. It soon became apparent that Mrs May will struggle to get any subsequent agreement based on the package – as formalized in a Brexit White Paper (the white paper) published nearly a month later in mid-July – through parliament, as hard-Brexiteer opposition on her backbenches to it hardened.

The purpose of this post is to consider the details of her package as set out in the white paper in detail sufficient enough to allow any assessment to be made of its likely fate, with a particular focus on the Facilitated Customs Agreement (FCA).

The white paper outlines a future ‘economic partnership’ with the EU, including:
• A common rulebook for goods including agri-food limited to (the relevant rules) those necessary to provide for frictionless trade at the border (avoiding customs and other inspections);
• On-going UK harmonisation with such necessary and relevant EU rules, when approved by Parliament or by the devolved legislatures;
• Continuing participation by the UK in EU agencies that provide authorisations for goods in highly regulated sectors – namely, the European Chemicals Agency, the European Aviation Safety Agency, and the European Medicines Agency – with the UK accepting their rules and contributing to their costs;
• The phased introduction of a new Facilitated Customs Arrangement (FCA) that would remove the need for customs checks and controls for goods traded between the UK and the EU as if they were within a combined and new customs territory, but where the UK could set its own tariffs for trade with the rest of the world (ROW);
• The negotiation of sector-specific arrangements for services and digital, providing regulatory freedom outside EU rules for the UK’s services-based economy;
• UK to be no longer bound to the Common Commercial Policy (CCP), the Common Agricultural Policy (CAP), and the Common Fisheries Policy;
• Freedom of movement (FOM) to end, to be replaced by a negotiated migration policy covering UK and EU nationals.

Trade in services, therefore, which accounts for over 80% of UK output, although less than half of its current exports, will no longer be subject to EU single market regulation. This, the government accepts, will involve ‘some’ loss of market access to the EU for the largest segment of the economy: it follows that net economic loss can only be avoided if that is offset by an increase in service exports to the ROW, noting that such service exports are not really constrained by EU membership at present.

The UK Parliament could post-exit refuse to implement new regulatory standards and requirements decided in Brussels pertaining to goods, but with the knowledge that adverse economic consequences could follow. That would make any such freedom, however, very much an unappealing Hobson’s choice: a yes, of course you are free to leave, but beware that you will need to dodge the bullets in the process type of choice.

More fundamentally, the separate treatment of goods and services that lies at the heart of the package, presupposes that the EU will concede the divisibility of its cherished four overarching freedoms of capital, goods, services, and people in an arrangement with a third-party (the UK) that has chosen to leave its club.

Leaving aside these first-order obstacles or issues, the actual design – as sketched out in the white paper – of the FCA appears to require a leap of faith on the part of the EU for it to be accepted, at least without substantive modification during the negotiation phase. Such a process of modification will require May to further blur her red-lines, including a continuing role for EJC jurisdictional oversight over the operation and interpretation of the agreed regulatory alignment, probably to the point of her accepting that it must continue in a binding form – regulated by processes that the EU can control – until alternative permanent arrangements can be agreed and put in force, perhaps many years down the road.

A dispassionate analysis indicates that the FCA cannot really run; yet the alternative prospect of ‘no deal’, however, could serve to concentrate minds on both sides of the Channel for sufficient fudge to be shovelled on it for a vague version of a withdrawal agreement and accompanying political declaration to be presented to parliament close to the wire.

Will the facilitated customs arrangement (FCA) fold of its own contradictions?
In June a Government technical note on a temporary customs arrangement, set out most of the government’s stall as to what the FCA would entail. On the insistence of David Davies, the then-Brexit secretary, this temporary arrangement was strictly time-limited to end no later than December 2021, after coming into force when the implementation (transition) period in December 2020, whereas the white paper, published in July after the Chequers agreement and Davis’s resignation, wisely avoided such prescriptive time-limiting.

Indeed, to suppose that a comprehensive Free Trade Agreement (FTA) or other ‘permanent customs arrangement’ replacement to the ‘temporary’ FCA could be negotiated and put in place by 2021 was incredible; based on the experience of the less ambitious Canadian CETA agreement with the EU, such a replacement could even exceed six years to finalise, although it can be expected that efforts will be made to shorten that gestation period. The white paper is also indeterminate on the relationship of the FCA to any future replacement arrangements. This, again, is sensible; these will only begin to take shape after the UK formally exits the EU.

The FCA is offered rather as a temporary arrangement that would prevent the need for a discriminatory and fragmentary NI backstop to come into play, once the transition period ends in 2021. The alternative of a border in the Irish Sea is, of course, unacceptable to both the UK government and parliament. It follows that the FCA cannot be strictly time-limited while it remains an interim arrangement put into place to avoid a hard NI border: it will need to remain in place until alternative replacements are agreed and put in place, whenever they are. The FCA would hardly be worth the candle, in any case, for either party, if it was to be the temporary short-lived arrangement that it sometimes touted to be.

In terms of the mechanics of how it will work, the FCA will replicate existing EU customs union (CU) processes to allow the UK to collect the full the correct EU common tariff (CET) for imported goods deemed destined for EU27 countries, before remitting it back to Brussels. Goods imported from non-EU (ROW) countries – but deemed for domestic consumption – would alternatively attract a UK-set dedicated domestic tariff (presumably lower than the CET tariff, in most cases).

The white paper expresses the hope that this dual-tariff combination would facilitate the greatest possible trade with the EU and the ROW. The flow of goods between the UK and EU, particularly those involving deep and inter-connected supply chains (engine made in Germany, gearbox in Italy, car in UK etc) would remain unimpeded. The UK, at the same time, would be freed to strike new independent trade deals.

It also supposes that the correct EU or UK tariff will be applied and paid ‘up-front’ ‘up to 96%’ of the time, reducing the need for non-EU imports to be either tracked within the UK and/or the tariff to be adjusted retrospectively, to just 4% of occasions.

Trade experts have already cautioned that this appears an optimistic hope that is not evidence-based. A forensic analysis by the UK Trade Observatory, for example, Decoding the Facilitated Customs Arrangement , points out the stated or implicit assumptions that the white paper appears to rely upon to derive that figure, are heroic. Most notably, ‘trusted traders’ or Authorised Economic Operators (AEOs), as they will be known, will be responsible for the importation of 100% finished goods and of 81% of the remaining total of intermediate goods (those used as inputs into finished goods) imported from non-EU countries that, as such, will be subject to either the CET or the UK tariff when the transition periods ends in December 2020.

The EU CET tariff on finished or consumption goods, such as on foodstuffs, can be expected to be appreciably higher relative to what the UK will freshly set for imports from non-EU countries destined for domestic consumption once the FCA comes into operation as envisaged in January 2021. A strong incentive would therefore exist where the UK duty was levied – especially where the imported goods in question could easily be broken down and distributed in small loads, for them to be deemed as destined for domestic consumption or use and then split up into smaller lots, once they enter into the UK jurisdiction area. They could then be trans-shipped to the EU, whether across the NI border or other UK borders with the EU, with the dishonest trader or other agent profiting form the difference between the domestic UK and EU tariff.

Some batches of intermediate goods could be also split up to evade correct payment of duty, for the same reason. In short, the existence of the dual-tariff will therefore tend to encourage agents of ROW countries to import goods and re-export to them to the EU via the UK to secure the benefit of a lower domestic tariff: the bigger the difference, the bigger the potential trading arbitrage profit, and the bigger the incentive to cheat.

The white paper’s implicit assumption that approved or trusted traders will never levy the wrong duty, whether that is due to commission, to negligence, to the dishonesty of other agents, or to simple error, preventing any consequent loss of revenue to the EU – or related loss of trading advantage to EU27 members, is, to say the least, implausible, therefore. The EU chief negotiator, Michel Barnier, in his initial public response to the white paper cites that precise real fear as shedding doubt on the workability and acceptability of the FCA. That it would allow the UK, as a non-member third-party, to collect tariffs on behalf of EU outside its legal structures and purview, and that it would involve added bureaucracy and thus additional costs for the EU to monitor, was likewise cited.

Barnier also indicated that although agri-food and pesticide inspections will not need to be undertaken at the border (material to the NI border context, where border food and animal-based traffic is significant), they will still need to be subject to EU rules and regulation. This would appear to rule out any real progress on a replacement UK-US trade deal involving a departure from EU food standards. The scope for significant new trade deals with the ROW seems to be limited largely to services. And even these are likely to be limited in scope for a variety of reasons, including the unwillingness of potential partners, such as India, to grant greater service access to the UK in the absence of UK concessions, such as visa liberalisation for their nationals.

But, in any case, it remains unclear, however, why the EU should give the UK – a state that has chosen to leave its ‘club’ and become a non-member third-party – special customs arrangements that add complexity and associated scope for error and confusion, in a way that is contrary to the efficient operation of both its CET and CCP, while allowing that same country to continue to benefit from existing, and to retain an input into new, FTA’s agreed between the EU and the ROW.

With respect to the harmonization of future UK and EU rules to the extent that such harmonisation is necessary for continuing ‘frictionless’ trade in goods between the UK and EU to proceed consistent with the NI backstop, the EU can be expected, as a minimum, to insist on interpretation and enforcement mechanisms that give the final say to its own institutions, most particularly the ECJ, rather than rely on the proposed institutional joint-committee structure that the white paper proposes; to do otherwise would risk the UK diverging from EU rules to the detriment of its members’ interest,without adequate or timely recourse.

Besides, the mood-music coming from, not only from Barnier and the European Commission, but also from key political leaders, continues to march to the tune that the four freedoms of the single market – goods, services, capital, and people – are both inviolable and indivisible.

A trite and an obvious observation, perhaps, but something must give if deadlock and a disorderly UK exit is to be avoided. Exactly what will depend upon whether the respective EU and the Conservative government ‘red-lines’ remain inviolable in strict practice and, if not, the extent to which both are willing to fudge them – or allow them to be flexibly applied – to secure the wider end of putting a negotiated deal together that could be offered to the UK parliament with at least some prospect of success.

The process and impact of Quantitative Easing (QE).

18th June 2018 by newtjoh

The Bank of England (BoE) statutory monetary policy remit or mandate since 1998 has been to secure price stability in a way that supports the government’s economic policy objectives. The Chancellor’s November 2017 annual letter to BoE Governor defined that as the achievement of ‘strong, sustainable and balanced growth’. The same letter, however, underscored the government’s ‘absolute’ continuing commitment to price stability. That BoE mandate is operationalized by a forward-looking ‘medium-term’ inflation target of two per cent, as measured by the Consumer Price Index (CPI).

The primary monetary policy instrument open to the BoE to achieve that target is through influencing short-term interest rates by changing the rate – the Bank Base Rate (BR) – that it levies for the near-term use of its own funds. But, BR, has been close or at its effective lower bound (ELB) – where reducing it further is expected to have little or insufficient impact on domestic real economic activity – for nearly ten years.

BR was reduced to a historic low of 0.5% in March 2009. It was then that the introduction of QE was also announced, in effect, to give a second string to the BoE monetary policy bow, in recognition that conventional monetary policy – changing BR – in the wake of the Great Financial Crash (GFC) had been rendered too weak to be effective on its own.

QE involves the BoE creating new money electronically and expanding its balance sheet massively in order to purchase financial assets, predominately longer-dated (5-25 years) government bonds (gilts), mainly from insurance and asset management companies, pension funds, and other non-bank institutions, https://www.bankofengland.co.uk/monetary-policy/quantitative-easing. £375bn of such assets were purchased between March 2009 and July 2012, across three phases:

£200bn between March 2009 and January 2010 (QE1);
£125bn between October 2011 and May 2012 (QE2);
£50bn extension announced in July 2012 (QE3).

There was then a lull until August 2016, when in response to Brexit uncertainty, the MPC announced, on top of a further cut in Bank Rate to 0.25%, another £70bn of asset purchases including a limited tranche of £10bn corporate debt (QE4).

For purposes of simplicity, post-GFC UK monetary policy (MP) can be defined as MP = BR+QE, with both acting in concert. The acronym, MP, in this post, is used in accord with that meaning. References to monetary policy relate to its more general non-time-bound meaning.

The impacts of MP, in practice, over time, have been and are affected by the complementing or offsetting impact(s) of fiscal policy (FP), as well by a raft of other macro-economic factors, some endogenous (internal) to the economy, such as productivity, others exogenous, such as changes in internationally-set energy prices impacting upon the domestic inflation rate.

Since 2010, with interest rates remaining at their ELB, and with discretionary fiscal policy contractionary in impact, and thus acting in an opposite direction to that of MP, QE has provided the primary, if not the sole, active policy mechanism or instrument to inject additional discretionary demand into the economy to sustain output and employment.

The Chancellor’s November 2017 letter confirmed that the QE asset purchase facility would remain in place during 2018-19. The BoE had still not sold back into the financial system any of the £435bn worth of the bonds that it has purchased under QE since March 2009. Maturing bonds are replaced or rolled-over. Such sales would take liquidity out of the financial system, tending to push up short-term interest rates, thus acting as a drag on expansion within the economy, all other things being equal.

The BoE jealously protects, however, its flexibility to reverse QE in the future, if its Monetary Policy Committee (MPC) considers that would be consistent with its primary price stability remit. The post-GDC QE programme remains very much unfinished business.

How QE works in theory

The honest answer is that even the central bankers don’t really know for certain (see Table 1, https://www.bankofengland.co.uk/working-paper/2016/qe-the-story-so-far ). The main identified transmission mechanism assumes that asset-holders, following changes in longer-term interest rates induced by QE, switch from lower-yielding and safe assets into higher risk asset classes more associated with increased real economic activity: the ‘portfolio re-balancing’ effect.

In that light, a Speech by Deputy Governor of BoE in 2012 suggested that as an immediate effect, QE1 had lowered long-term gilt yields by around 1% (100 basis points) between March 2009 and January 2010, and a 20% increase in their price. Investment-grade corporate bond yields, in turn, were lowered by about 0.7% (70 basis points), and high-yield corporate bonds somewhat more, by 150 basis points. Later QE rounds appeared to have been more muted in their impact on gilt yields, but this may have been due to other influences within the wider macro-economic environment, such as the intensification of the Eurozone crisis.

BoE-financed asset purchases increase the demand for longer-dated government gilts and other securities (5-25years); other things being equal, this should push up their price and reduce their yields (interest as proportion of price). The financial institutions selling such bonds to the BoE can then use the resulting receipts to acquire equities and corporate bonds. That they should do so rests upon impact of the QE process suppressing safe-haven bond yields, thus improving the relative the risk-adjusted returns of equities and corporate bonds, as an asset class. Such portfolio rebalancing should lower the cost of capital for firms issuing new equity or bonds by increasing their price or value while lowering their prospective yield (increasing potential receipts at point of sale and reducing their interest cost over time), so encouraging business investment. The BoE back in 2012 noted that given that both UK new equity and bond corporate net issuance rose sharply in 2009 compared to the preceding 2003-2008 period, that this provided some evidence that this may have happened, not only as response to the cuts in BR (which made equities relatively attractive as an income-earning asset), but also because of the immediate effect of QE1 on raising the demand for equities relative to gilts through the portfolio balancing effect.

Rising equity and property asset values that makes their holders, whether they are Middle England homeowners, or owners of substantial equity holdings, or firms with such assets, feel richer and ‘confident’ than they would otherwise be, and so more inclined to borrow, to invest, and to consume more, can provide a related but indirect ‘wealth effect’ transmission mechanism into real economic activity.

The injection of liquidity into the financial system by QE should also increase commercial bank deposits. Financial institutions selling bonds under QE will tend to deposit their receipts with their banks and/or use them to purchase higher risk assets that, in turn, generate receipts for the selling counterparty to deposit with their banks. This increase in the short-dated liabilities of the banks should encourage them to expand their direct lending to firms and to individuals to secure a return exceeding the interest payable to depositors – the ‘bank lending channel’. Little evidence is reported, however, that this happened, or was even expected. Banks preferred in the wake of the GFC to increase their reserves to cushion future anticipated asset write-downs of bad debts, even if that impacted adversely on their profitability.

Bank lending to households and firms can, of course, in any case, be used to fund the purchase of existing assets for speculative capital appreciation purposes, rather than on new productive assets that can generate future additional output and income. As noted above, rising asset values can impact on real economic activity, largely indirectly, through the wealth effect.

The aggregate and distributional impact(s) of monetary policy (MP), as reported by the BoE

That very tendency of post-GFC MP generally, and of QE especially, to increase the prices of equities and property assets, has given rise to concerns about its distributional consequences and their possible impacts) on widening both class and generational inequality, with Conservative Cabinet Ministers expressing concerns about MP policy decisions made by unelected technocrats that reward the already-rich.

A growing sensitivity of the BoE to such claims is clearly discernible in recent speeches by senior staff and within its research output. A, March 2018, Staff Working Paper No. 270, modelled both the aggregate macro-economic and the distributional household income and age cumulative impacts of the reduction of BR from 5.5% to 0.5% between February 2008 and March 2009 with the introduction of QE1-3, claiming to be the first UK study to investigate the impact of monetary policy in such detail at the household level.

The methodology it applied, involved, first, modelling the aggregate impacts of MP on gdp, employment, wages, consumer prices, house and equity prices, using the main BoE macro-economic forecasting model. The counterfactual of what would happened if monetary policy had remained unchanged in response to the GFC was applied. Then the estimated macro aggregate impacts it generated were then mapped to the micro balance sheets of individual households. This was done comparing data from the government’s Wealth and Asset Survey (WAS) for 2012-2014 and the Family Resources Survey for household incomes to earlier surveys, covering household:

interest payments and receipts;
employment income;
financial, housing and pension wealth; and on the:
effect of prices induced by MP on household real savings and debt levels, fixed in nominal terms.

The impact of MP on different households was then further mapped, according to:

tenure status;
whether members were in or out of work;
age cohort.

Andy Haldane, the BoE’s current Chief Economist, summarised in his April 2018 speech, How Monetary Policy Affects your GDP, the results of that cumulatively across the 2008-14 period, graphically displayed across 24 charts. The headline results reported included that without MP, the:

unemployment rate would have been four per cent higher, gdp eight per cent lower, and consumer prices 20% lower;
overall impacts of MP income and wealth terms on different cohorts of society since the GFC proved positive and significant in overall; the average mean income household benefited by an estimated £1,500 a year, and £9,000, (charts 7, 8 and 9);
overall distribution of income and of wealth, as reported by the 2012-2014 WAS, between the end of 2007 and 2014 remained broadly the same: in a nutshell, the UK’s unequal income and wealth distribution appeared to have remained largely unchanged by the combined impact of MP (see Charts 5 and 6).

Drilling-down on the distributional impact of MP:

half of the total income gains in real cash terms was concentrated to the benefit of the top two income deciles; but, in percentage gain terms, Haldane advised, they were ‘reasonably evenly spread out, despite being slightly lower for lower-income households and negative for the lowest income decile’ (see chart 10 and 11, respectively);
the young gained proportionately more from the positive modelled impact of MP on inducing lower unemployment and higher wages – an outcome related to the relative greater pro-cyclical propensity of the young to participate in the labour market compared to older age groups if provided with the opportunity, (see charts 14 and 15);
households around retirement age, however, gained the most from the modelled impacts of MP on their total wealth (see chart 16);
higher income decile households secured higher additions to their utility (welfare) than did lower-income deciles (chart 22), but the welfare benefits of having a job, and its associated job-satisfaction and self-esteem benefits, were concentrated in favour of the young (chart 23).

Haldane offered some additions. Notably, the social welfare benefit of enjoying improved levels of subjective satisfaction or happiness (utility) as result of having a job and/or improved job security, as well as from higher levels of income and wealth, was computed. Regression analysis was used to translate WAS-reported changes levels in household happiness into a notional-income equivalent. Reduced unemployment and arrears were found to have an especially statistically significant impact in explaining survey-reported changes in household happiness. Strikingly, a reduced probability of being unemployed was associated with a notionally deduced income-equivalent effect on household well-being of £7,300, compared to an actual reported average household income of £32,500.

Disentangling and quantifying the particular effects of QE must have presented an even more challenging task to the researchers. Charlie Bean, the deputy governor of the BoE the time, in the speech referenced above, noted that equity prices did rise substantially during both the periods covered by QE1 and 2. This was no doubt related to multiple reasons, including the continuing impact(s) of BR being cut to 0.5% that by reducing bond yields tended to make financial investment in equities relatively more attractive. His tentative conclusion was that equity prices probably rose by about 20% and 10%, as a direct consequence (my italics) of QE and Q2, respectively. This was on the back of the broad empirical fact that the introduction of Q1 and Q2 coincided with equity prices switching from a decline to growth trend, as well as on more analytic BoE econometric studies conducted at the time. The 2018-reported findings also stated that QE had the most modelled wealth impact on equities. Instructionally, lower income or younger households tend not to own equities (as they don’t tend to own housing wealth): the Bank of England quarterly-bulletin,2012, Q3, noted the richest 5% of households owned 40% of financial wealth held outside pension funds.

Only one chart (21) out of 24 in the latest 2018 BoE published research, reported QE-specific results. That painted a rather rosy picture, denoting that the overall impact of QE across the income distribution was positive, with all ten decile household cohorts enjoying an estimated c.20% average cumulative rise since 2007 in average real net income. There was some variation; the second to fourth deciles benefited from slightly under 20% gains, while the top decile enjoyed 30%. In that regard, the health warning that the direction of a modelled impact, rather than its precise estimated quantification, is more instructive, remains relevant. The translation of higher levels of household income and wealth attributable to MP to additions to their social welfare was appropriately captured by the near-logarithmic (constant percentage increase) across the distribution deciles that the survey reported, Haldane concluded, in preference to average cash increases per decile, invoking the diminishing the classical marginal utility of income principle that a unit increase in income is worth less to a rich person in marginal utility or social welfare terms than a poor one.

WAS is collected only from private households, excluding people living in publicly provided housing. As the authors of the working paper recognised, using the household as the unit of measurement hides inequalities within households; for example, young adults living with their parents while saving to purchase their own home were not be separately identified in the results. This is relevant as although MP does appear – according to the research – to have particularly benefited some groups, such as the established homeowners; other groups, including, tenants, or, indeed, the increased number of young people having to still live in the parental home (and not separately recorded) due to unaffordable housing entry costs, were likely to be disbenefited by the impact of MP on the house prices and rents. For members of Generation Rent, such effects, could be very significant, indeed.

Putting on one side survey sampling issues and the sensitivity of the regression results to different assumptions and specifications, the specifications and assumptions of the BoE model, or any other model for that matter, may or may not have captured the interaction of MP with other macro-economic and other quite possibly unidentified influence and their (temporal) distribution over time. As the FT economics editor, Chris Giles, has pointed out with respect to the economic modelling of different Brexit options, economic modelling depends on a lot on things that we don’t know. The BoE model patently failed, to take a notable example, to forecast the GFC as its specification failed to capture the actual behavior and impact of the financial sector.

Nor should sight be lost that the BoE is evaluating its own conduct of MP. Take one possible instance of that: its Chief Economist chose to introduce (no doubt an important and welcome dimension to macro-economic analysis) the impact on individual social welfare of MP in his analysis of the distributional impact of MP, highlighting that these were positive, as reported above; but these welfare gains only partially offset and compensated for what must have been much larger losses in welfare that followed the GFC that could have, in part, been made worse by the prior pursuit of monetary policy combined with failings in financial system regulation.

That said, all policies will involve winners and losers, who, in theory at least, could be compensated. And, after all, the remit of the BoE is not to secure some desired abstract distributional result, but, rather, to secure a medium-term inflation target consistent with future sustainable non-inflationary growth.

When measured against that benchmark, how effective has MP been?

Understanding the wider picture

It is important not to lose sight that any modelled positive changes in aggregate macro-economic outcomes and in micro household circumstances that may be attributable to QE, at best helped to ameliorate – and not to reverse or to overcome – the deflating cumulative impacts of the GFC and the following Great Recession. A state of stagnation now shrouds the UK economy. Many individuals and households are worse-off than they were in 2007: an unprecedented post-war outcome.

That interest rates remain at their ELB nearly a decade later, reflects the empirical reality that the UK has still not had a proper recovery yet, nearly 10 years on from the GFC. Its muted, uneven, and incomplete nature was spelt out in Speech by Andy Haldane, May 2016, Whose Recovery? in some evidential detail. He catalogued that actual real per capita gdp has barely moved since 2007, while net national income (after taking account of remittances of income and profits to foreign countries) fell, and net disposable household income flat-lined. Real earnings remained five per cent below their 2009 peak in 2016, and, although the incomes of the poorest income deciles did rise, this was largely because of the redistributive impact of pensions and benefits.

Increases in income and in wealth over the course of the decade have been largely captured by higher income and older households; while the real disposable incomes of pensioner households rose by 9%, the incomes of working age adult households fell by 3%. The median income household enjoyed little benefit, mirroring a similar long-term trend in the US. Consistent with that, Haldane postulates that half of all UK households have seen no recovery in their real inflation-adjusted income since 2005 (although he was reporting in 2016 using BoE analysis of data available then, the economy subsequently has not showed signs of a material recovery, rather, if anything regressing further). Regional inequality – measured by gdp per head – also widened.

The real actual income of younger people fell further and recovered more slowly from the GFC than did older age groups. Although MP impacts on their employment income especially, as was reported and considered in the preceding section, may have helped them, in the sense that their economic position in its absence would have been even worse otherwise, that countervailing influence was not enough to prevent the economic position of that group worsening, when considered and measured over the course of the last decade. The growth of self-employment, part-time-working, and zero hours contracts within the labour market, no doubt, was connected to that outcome. Total employment levels recovering to record new levels conjoined with downward pressure on wages and job security.

The different presentational slants of these two speeches by the BoE Chief Economist are marked, no doubt related to the different purpose and target audience of both. They are not necessarily contradictory, but it takes quite an effort to reconcile them. The connecting thread between them is that MP served to prevent the economic fall-out of the GFC from being substantively worse than it proved, on ‘an umbrella doesn’t stop but protects from the rain’ basis. Economic conditions were maintained that allowed many to either return or to enter the labour market and so secure better incomes and enjoy welfare levels higher than would otherwise been the case in the absence of MP. What MP has not done is to put the economy on a recovered sustainable growth path.

Even more seriously that sin of omission is linked to one of commission or agency. Where liquidity created by QE flowed into the purchase of existing land, housing, and equity assets, combined with the impact of low interest rates, it will have tended to pushup such asset values, along with the corporate profits of companies in the property and financial sectors. Many middle-income deciles saw their wealth rise, even while their incomes stagnated. The entry of the young into owner-occupation became much more difficult – at least without a contribution from the Bank of Mum and Dad. The richest households benefited disproportionately from rises in equity values. Leaving aside the broad distributional tendency for MP in general and QE in particular to maintain the status-quo of the wealthy staying wealthy, the poor remaining poor, and those in the middle, and the young in particular, having to run faster to maintain their position, comes the rub.

The palliative process and effect of MP risks creating conditions conducive to another asset bubble-induced recession, which are particularly prolonged and damaging, rather than helping to build the foundations and providing the wellsprings of future sustainable and balanced growth in line with the stated macro-economic objective of the current government.

Conclusion: a problem of political economy

Intuitively it seems safe and fair to conclude that QE acting in concert within the wider MP response may well have helped to prevent the GFC from turning into another Great Depression. Not an unimportant outcome, of course: at least, when taken on its own terms. On the other hand, its immediate effect in helping to stabilise an economy in systemic crisis may have initially served to obscure that BR+QE can be inherently inadequate to secure sustainable recovery when interest rates remain at their ELB for a prolonged period. The UK economy appears to be in a near-comatose state, where fitful recovery alternates with stagnation. MP appears to have become the economy’s ‘life-support’, which, if reversed, could tip it back into prolonged recession or worse.

This lends support to the growing body of informed opinion that the current macro-economic policy framework has been overtaken by events, and that it requires strategic reform if the economy is to provide the future growth, incomes and public resources that its population expects and will demand.

The centre-left leaning think-tank, the Institute of Public Policy Research (IPPR) in March published Just About Managing Demand. This proposed comprehensive reform to the BoE mandate, including raising the inflation target by up to two per cent to allow the economy to ‘adjust permanently to a higher rate of inflation’, which would then allow interest rates to settle at a higher resting point, giving greater space for a rate cut to be made in response to a future recession. The fiscal rules would also be changed allowing fiscal policy to be used as primary activist policy lever in place of the ‘uncertain and unreliable QE’ to restore and protect levels of aggregate demand when interest rates are at their ELB, and where ‘government fiscal policy is believed to be overly restrictive’. The independent remit of the BoE would be further extended to allow the MPC measured against its medium-term inflation mandate to decide when such a stimulus was necessary and its quantification. The BoE would also gain an added power to ‘delegate’ that economic stimulus to a new National Investment Bank (NIB) in effect, linking it the introduction of a more interventionist industrial policy.

Other more market-oriented economists, including ex-members of the Monetary Policy Committee (MPC), such as Andrew Sentance, argue that weaning the economy off the addictive, artificial and harmful prop of abnormal and ultra-low interest rates, requires that they should rise and QE be unwound. Capital could then gravitate and be allocated to where it could secure the best return; the historical process of ‘creative destruction’ could then re-exert itself. Zombie companies, such as many high street retailers, would exit the market, releasing resources to the growth sectors of the future, capable of creating the new sustainable jobs that could replace the zombie ones extinquished.

The BoE faces a MP policy double bind, where interest rates need to rise to provide it with some reserve power to respond to a future recession or shock, but given the reliance of the UK economy on debt-financed consumption and high and rising house prices – at least in London and the South-East – and the current context of Brexit uncertainty, such rises could risk precipitating a downturn turning stagnation into actual recession that may or may not be followed by either depression or by a new process of creative destruction and rejuvenation; or rather, by much the same. Who knows?

The macro-economic framework is in a state of limbo, therefore, where the BoE is unable to achieve its remit in an economically, socially, and, thus over time, a politically acceptable way, but alternatives are stillborn. Something sooner or later will need to give.

Reforming the Current Macro-Economic Policy Framework

23rd May 2018 by newtjoh

Since the mid-nineties, the prevailing macro-economic policy framework – or ‘consignment’ as it sometimes called – has relied upon monetary policy to smooth the business cycle at a sustainable level of output and employment. In the UK, in 1997, it was given institutional backing, when the Bank of England (BoE) was given an independent mandate to achieve a medium-term set primary inflation target. The role of fiscal policy, in macro-economic terms, was relegated rather to the management of public deficits and debt.

This framework seemed to work during a period, often called the Great Moderation, when nearly all the advanced industrial economies, including the UK, enjoyed an unbroken period of steady sustained growth and low inflation. The business cycle appeared to have been all but neutered, if not banished.

That illusion was popped abruptly by the Great Financial Crash (GFC). The BoE in response reduced the base rate it charged for the use of its own funds from 5.5% in February 2008 to 0.5% in March 2009, when it also introduced the first phase of what has become known as the quantitative easing (QE) programme. £200bn of new money was electronically created and added to the BoE balance sheet to purchase long-dated government debt (gilts). This was in recognition that its main conventional monetary policy lever of base rate management had been rendered ineffective by short-term interest rates reaching their effective lower bound (ELB) – the point where reducing them further has little or no, and insufficient, effect on economic activity.

Rates remain at their ELB, reflecting the empirical reality that the UK has not had a proper recovery yet, nearly a decade on. Real gdp per head and average household income are barely above the level that they reached in 2007. The needed recovery in both growth and productivity is not currently on the horizon.

The macro-economic framework conceived during the Great Moderation – its application based on economic models that ignored the potential of liberalised financial markets to leverage debt – contributed to the GFC. It has been beached by the subsequent stagnation. In short, in its existing form, whether in design or operation, or both, it appears to be incapable of shifting the UK economy out of stagnation. It is thus unsurprising that policy attention is rotating back to the definition and ordering of the first-order principles of macro-economic policy, and to whether the BoE’s independent mandate should change.

The IPPR reform framework
A spring 2018 paper by Alfie Stirling, Just About Managing Demand, takes up that challenge. Produced as part of the centre-left Institute of Public Policy and Research (IPPR), Commission on Economic Justice , it reflects the view of the author, but follows the research and policy tramlines furrowed by the Commission; and no doubt will inform its final report.

Since 2010 monetary and fiscal policy has effectively pulled in opposite directions; monetary interventions injected demand into, while fiscal policy took it out of, the economy. The tendency of governments, with their short-term electoral horizons, to exhibit deficit bias, Stirling argues, has been supplemented by surplus bias: discretionary fiscal contraction or consolidation (fiscal austerity) is ostensibly used to reduce the deficit as a matter of economic necessity, but is effectively applied as a smokescreen to ‘shrink the state’ largely for ideological and political reasons.

The paper’s centrepiece proposal to overcome surplus bias, when interest rates are at their ELB, is to provide the BoE’s Monetary Policy Committee (MPC) with added independent powers to decide whether fiscal policy is ‘overly restrictive’ and in that event to set and quantify a rectification stimulus sufficient to substitute for the cut(s) in base rate cuts that the MPC would have otherwise made.

The operational implementation of that surrogate stimulus would then be delegated to National Investment Bank (NIB) – an institution presumably based on Labour Party proposals to establish a new National Investment Bank . The MPC to achieve its primary inflation target (as may be amended, as discussed below) would, in effect, align monetary and fiscal policy in default of the government.

A reformed and comprehensive set of fiscal rules, echoing and extending Labour’s Fiscal Credibility Rule, is also set out. The separation of current and investment public expenditure for control purposes (as New Labour’s Golden Rule did) would be reinstated. Five year rolling targets would be set for a zero-current balance, and for an operational debt target linked to a longer-term target level for debt.

Public investment (which supports long-term growth) would also be provided with a separate dedicated target, expressed as a minimum percentage of gdp over the same five-year rolling period. This minimum investment rule, however, would be subject to the proposed debt target; however when interest rates reach and remain at their ELB the zero-current balance and debt rules would be suspended, leaving the investment rule in place and operative.

The long-term debt target (which could be higher, lower, or the same, compared to a set baseline level) would no longer require the debt/gdp ratio to be lower at the end of each five-year Parliament. Rather it would be based on an assessment of the UK’s fiscal space – that is the scope available for increased public spending and/or lower taxes without threatening long-term fiscal sustainability and market confidence.

That assessment would be undertaken by the Office of Budget Responsibility (OBR) as a complement to its existing UK’s Fiscal Council (independent bodies set up by governments to evaluate fiscal policy), remit. It would involve, a macro-economic ‘cost benefit analysis (comparing) lower levels of debt against higher taxes or lower levels of spending’. The OBR would also be given the independent authority to assess the long-term impacts of different investment projects on gdp in line with methodologies agreed with government and independent economists at different levels of debt.

It would also be mandated to conduct a review of accountancy classifications of investment, identifying areas where revenue spend on human capital, on software, or other sources of innovation and growth, in addition to capital expenditure on physical assets, should be counted as investment for expenditure control purposes. Borrowing that adds to future productive capacity of the economy or provides a revenue stream would not be subject to the zero-current balance rule. Borrowing by ‘independent’ public corporations – as defined internationally – for investment purposes would no longer be scored as government borrowing or debt.

Stirling highlights that recessions tend to recur on average every 10-15 years, with the next one expected before long. To prepare for that inevitable – although time-uncertain – eventuality, Stirling moots some more radical revisions to the BoE independent mandate.

The BoE’s primary inflation target could be increased by up to two per cent. This would be to allow the economy to ‘adjust permanently to a higher rate of inflation consistent with interest rates settling at a higher resting point above their ELB’. Unemployment and nominal (money) gdp targets, acting alongside, or as intermediate guides to, that target, could also be put in place.
These revisions would serve dual but related aims: pushing up interest rates above their ELB would enable the MPC once again to use interest rates management as an effective policy instrument to prevent or forestall a future recession; they could also prevent monetary policy being prematurely over-tightened during a period of above-target inflation, driven, say, by an external price shock, such as an oil price hike induced by international political instability.

In sum, changes to the BoE mandate could involve the toleration of higher future actual and expected inflation levels to get interest rates above their ELB and hence to provide reserve monetary firepower to counteract the next recession; but if they remain or reach their ELB, an activist fiscal policy of a path and magnitude determined by the MPC could then be deployed to overcome government surplus bias, as a more effective fiscal alternative to QE. Changes to the fiscal rule framework and to the classification of expenditures for deficit accounting and control purposes, if implemented in their entirety, could institutionally prevent the cutting of economically productive expenditures during a recession, while providing a target for their expansion across the economic cycle, subject to a long-term debt target, which, however would only apply when interest rates are above their ELB. Borrowing for investment by public corporations defined as independent in any case would not count against the deficit or debt total.

Political timing and feasibility
The package covers a lot of policy reform ground. It does come across a bit as a future strategic policy primer for the Shadow Chancellor, John McDonnell and his team; providing, perhaps, both its strength and weakness.

The next government would need to wrestle with the impact of Brexit on the economy and the public finances. Where not already ceded by the May government, fiscal demands on the current budget on ever-rising health and social care demands, local education quality and effectiveness, on training and apprenticeships, and manifesto commitments would have to be faced.
An incoming Corbyn administration would raise borrowing to finance its re-nationalisation, affordable housing, and industrial policy programmes, including the establishment of the NIB, where not shuffled off-balance-sheet. The political context can only be expected to be febrile in the first place – whether related to a Brexit-related hiatus and/or a media-hyping of the first ‘marxist’ Labour government – however unfair and politically-motivated that charge may be.

Making substantive changes to the BoE inflation, to the OBR fiscal mandates, and to the fiscal rules, all in parallel, could risk political over-load. And, to work and to stick, substantive changes to certainly the BoE and OBR remits could not simply be foisted on, but rather would require extensive consultation with, and the support of, the key institutional stakeholders involved. That would take time; as would the establishment of the NIB.

Although a Brexit-hiatus could precipitate a general election before 2022, it remains the due date. A freestanding NIB that relied upon the election of a Labour government in 2022 would be hard pressed to be operationally ready to expand lending on a scale sufficient to counteract any future recession much before 2025; that is unless the present Conservative minority administration decided to develop its own prototype, which it should, but probably won’t.

Changing the fiscal rules – and changing the BoE mandate even more so, as discussed below – would in themselves be political acts. The 1997 new Labour reforms to the fiscal rules and its establishment of BoE independence and were made on back of an already emerging strong technocratic and political consensus in their favour and were introduced within a supporting economic environment. The new economic settlement it represented – along with Gordon Brown’s self- denying ordinance to keep within Conservative spending limits – a tilt towards the centre ground and the assumption of the mantle of economic competence.

This time round, one can almost already hear the crescendo din already that would envelop the new government; that it only wants to change the fiscal rules to pass on the consequent debt burden to its successors for its own political purposes etc. Although is unlikely that Labour would be elected in the first place without a compelling economic and political narrative that underscored the necessity and desirability of substantially increased levels of public productive investment to spearhead the economy’s escape from stagnation, it is far from certain, however, that narrative would be sufficient to persuade the OBR to sign-off the government’s spending plans, whether in terms of the ‘fiscal space’ available for increased investment or their long-term fiscal sustainability.

Economically beneficial public investment also not only needs to be sufficient in volume, but efficient in selection, in composition, and in execution. Varying public investment levels for counter-cyclical stabilisation purposes could, however, risk a return to fluctuating famine and feast conditions, unconducive to such efficiency. http://www.asocialdemocraticfuture.org/investing-productive-infrastructure/ in that regard it proposes remedial reforms to the public expenditure and planning system that are designed to better reflect the long-term economic benefit of efficiently selected and executed infrastructural investment.

They include providing the National Infrastructure Commission (NIC) with a statutory remit to assist each government department to publish an annual Departmental Investment Plan (DIP). Each DIP should prioritise projects, according to their estimated economic and social return, incorporating auditable information on the methodology that it has applied to rank projects with reference to their expected economic return.

Such reforms could tie-in with changes to the fiscal rule framework that provide the OBR an added remit to assess the fiscal space available for increased public borrowing and debt. Splitting the function of assessing the micro-efficiency of individual projects from the more macro-task of assessing the overall fiscal space available for increased borrowing appears to align better with the respective roles and remits of the NIC and the OBR.

The point and sequencing of the proposed fiscal reforms referenced to likely future political and economic scenarios is not wholly clear. If Labour came to power in the aftermath of a Brexit hiatus it is almost certain that the economy would be in such a state that interest rates remained at their ELB. In that case, the new government could simply rescind the existing rules, and proceed to inject a fiscal stimulus financed by borrowing and begin to implement its industrial policy, including the establishment of the NIB. The OBR-brokered interaction between the investment and long-term debt rule in terms of assessing available fiscal space would come into play only when interest rates escape their ELB again.

The government would be able to call upon some substantive technocratic support to use fiscal policy as its primary instrument to escape recession. Prominent New Keynesian economists, such as Paul Krugman in the US, and Simon Wren Lewis in the UK, consistently made the case that monetary policy (MP) should have been complemented post-GFC, at the very least, by a fiscal stimulus, not contraction – a position that many mainstream other economists and organisations, including the IMF and the OECD have subsequently endorsed.

It could also point to empirical experience: the results of the Coalition’s conjoint reliance upon QE and fiscal austerity support the case that QE should have been, at the very least, combined instead with a conventional Keynesian fiscal expansion in public investment. Such an expansion where it utilised and safeguarded unused capacity within the economy could have protected and extended its future productive capacity, helping to lift the economic drag of falling and stagnant productivity.

A new Chancellor could also loosen fiscal policy in tune with the government’s own assessment of economic circumstances and requirements, without recourse to the MPC, as he could change the fiscal rules. In any case it would be unlikely that a newly-established NIB would be ready to spearhead the counter-cyclical response through expanding its ‘lending for business growth, housing, innovation, and social and physical infrastructure’ on sufficient scale to bring the economy back to a sustainable growth path.

For a new Labour Chancellor to press for a change in the BoE mandate, providing the MPC a power to initiate a fiscal stimulus, even though the BoE on number of occasions has disclaimed any wish to intervene in the direction and composition of fiscal policy, appears superfluous, save that it could provide an obstacle to future surplus bias if exhibited by a future government; that same government could then change the mandate again, however. Such a yo-ho would do little to bolster the credibility and purpose of an independent mandate.

Designing policy architecture to better prepare for the ‘next recession’ rather than escaping systemic stagnation now or, even worse, the prospect a Brexit-induced recession could therefore possibly put the cart before the horse. Without a period of economic expansion accompanied by rising pressure on wages and competition for loanable fund, neither interest rates nor inflation are likely to rise above their ELB to a point where rate reductions could be made to respond to a recession. The immediate policy reform priority is to escape stagnation in a sustainable way.

How necessary is (are) a BoE mandate change(s)?
A 2022 election could offer at least a time window for macro-economic framework reform to be considered and anchored to some semblance of a supporting cross-cutting and over-lapping political and technical consensus. On that score, the proposed reforms to the BoE’s mandate appear a rather tentative shopping list or one of possibilities. Many of the issues attached to raising the inflation target rate and/or providing it with a greater output and employment focus are not evidentially justified or explored – more attention is given to the proposal to empower the MPC to specify and delegate a fiscal stimulus to a newly-established NIB, as discussed above. The references, however, do provide a starting point.

With respect to raising the inflation target, the MPC has so far has recoiled from raising base bate above 0.5% This is despite headline inflation even exceeding three per cent – more than one per cent above its medium-term target – thus triggering the requirement for the BoE Governor to write an explanatory letter to the Chancellor. The majority assessment of its members has been that above target-inflation is mainly owed to conditions or factors external or outside (exogenous) to the domestic labour market, including rising oil prices and sterling depreciation linked to Brexit.

The BoE’s May 2017 Inflation report, in line with that, highlighted that the post-2015 fall in sterling was likely to keep domestic inflation above the two per cent target throughout the next three years, (author italics), further noting that where inflation settles once that upward pressure fades will depend on domestic (wage-related) price pressures, concluding that these were expected to build by 2020.

The MPC hitherto has been careful to apply its constrained policy discretion in accordance with its current mandate, focused on the medium-term not the short-term headline CPI inflation figure, so as not to chock-off any nascent or uncertain recovery, at least while spare capacity exists within the economy.

Given that institutional monetary policy context, what would be the economic point of modifying the primary inflation target to accommodate higher inflation and/or giving employment and output a greater weight within the BoE mandate? A slightly different answer to that of simply an interest rate buffer to counteract the next recession, which Stirling emphasises.

The underlying key problem is that the UK economy has failed to recover its pre-GFC secular real productivity and growth trend of annual average c2.3%-2.5% growth. The result: an unrecoverable massive 15-20% loss of potential GDP calibrated to the level it would have reached if that historic trend had been interrupted and thrown off-course by the GFC, the Great Recession, and then counter-cyclical fiscal austerity.

That lost stock of output and income foregone will rise further inexorably, if growth and productivity remain stuck in stagnation mode. In technical economic jargon the economy has suffered hysteresis (a change – in this case on UK gdp, whose initial effects persist, even when its proximate causes or source no longer exist).

A fiscal expansion combined with falling immigration that causing the labour market to further tighten and thus trigger wage inflation, but without it accelerating, could usher-in a new expansionary economic environment that could allow the economy to break out of that circle. How and by what mechanism(s)?

As labour inputs become relatively more expensive, investment in the upskilling of the indigenous labour force, as well as on additional and improved physical capital stock, should be encouraged, in turn, inducing an associated shift in the employment structure towards the formal and away from the insecure gig economy, pushing-up both overall (total factor) and labour (per unit period) productivity.

Infrastructural investment should also increase both the capacity of the economy and its total factor productivity; for example, improved connectivity should lower costs and expand the pool of labour that is available to work in higher productivity and thus higher paid jobs.

But if the MPC references the likelihood of rising domestic wage pressure to the current supply side-capacity of the economy, it risks taking the current compressed productive potential of the economy (for the purposes of MP) as an immutable given. The associated output gap (the difference between aggregate demand and the capacity of the domestic economy to meet it without inducing above-target inflation), has been significantly revised downwards since the GFC by the OBR.

The latest May 2018 BoE Inflation report appears to fall into that stagnation trap. Striking a more hawkish tone than its predecessor a year earlier, it notes that ‘labour demand growth remains robust with a very limited degree of slack left in the economy’ with productivity growth remaining muted, limiting ‘the pace at which output can grow without generating inflationary pressures is likely to be modest’, before diagnosing that ‘ongoing tightening of monetary policy (up to 2020-21) would be appropriate’ albeit that any future increases in Bank Rate are likely to be ‘at a gradual pace and to a limited extent’.

It is not altogether clear what that could mean in practice. It does suggest, on one hand, however, that the BoE does not intend to raise interest rates at a speed and magnitude sufficient for the MPC to draw upon a four to five per cent interest rate buffer to counteract the next recession, assuming that a Brexit-related one is avoided. On the other hand, even modest and slow rate increases could impede or even reverse the productivity-enhancing economic expansion outlined above.

In that case desired increases in personal and household income and improvements in public services will not be possible. Given the existing linkage between consumption and confidence to house prices in the UK, if rates were raised more substantively, such increases could even precipitate a home-grown recession, especially in a post-Brexit environment, which can only be anticipated to be uncertain at best.

Is increasing the inflation target to, say, four per cent, the answer, then? Raising the inflation target by up to two per cent could allow the economy in Paul Krugman’s words to ‘adjust permanently to a higher rate of inflation’, offering space for rate cuts to be made in response to a future recession. The ghost of accelerating inflation continues to lurk in the background, however. Economic actors might well take a supposedly one-off increase in the medium-term inflation target to be the thin end of a wedge that they should grab while they have the chance, resulting in insufficient passage of time for any productivity-enhancing adjustments to take root before pressures to tighten to retard insipient accelerating inflation become difficult to resist. It would also entail a quite marked discontinuity in the BoE mandate that could suggest instability and further changes, undermining its credibility.

What is not open to doubt is that allowing inflation to rest at a higher level would require – if international competitiveness is to be maintained – a commensurate increase in productivity across the tradeable sections of the UK economy; relying on sterling to depreciate in compensation instead, itself would add to domestic inflationary pressures.

Also, the Chancellor, facing higher public-sector nominal wage claims from health and other public-sector workers could well be forced to resort to fiscal drag and/or additional taxes to protect the current budget balance, dampening the translation of real wage into real disposable income growth in the process. Such dampening might well be desirable in terms of securing a shift in resources within the economy towards investment, but such suppression of real wage growth by stealth taxes cannot be expected to hold for any extended period.

An alternative might be to suspend inflation target temporarily while the economy escapes stagnation. It cannot be expected that the BoE would instigate such a change itself. But if imposed by the Chancellor, the effect would be nearly akin to abolishing the independent mandate of the BoE altogether.

Yet another variant could include raising the inflation target explicitly only for a temporary or time-limited period, on the basis that the retention of two per cent medium term target would conserve continuity. The aim would be to influence wage-bargaining behaviour so that real wage inflation tracks productivity, rather than inducing beggar-my-neighbour escalating, rises. That desirable outcome would tend to depend on, however, not only on the credibility of the new temporary, and necessarily, contingent target rule, but also on other emergent factors that may affect the labour market and wider economy. Perfect alignment of real wage inflation and productivity remains a heroic assumption.

Besides the existing inflation target is a medium-term one, although its precise time-span can be open to definition. The same desired end-result of a productivity-enhancing expansion could therefore possibly be engineered by more informal and less disruptive institutional means. The annual Chancellor’s letter to the Governor could be used to adjust the weight balance accorded to price stability and real economic activity, for instance. The MPC could continue to operate within its existing 1997-set medium-term two per cent target but with reference to a political tilt for it to be administered it in future with greater regard to employment and output considerations, as new economic conditions and times require.

An imperfect analogy might be a judge instructing the jury to decide a case on the balance of probabilities rather than beyond reasonable doubt. The underlying and overarching importance accorded to price stability would necessarily be diluted, however, with attendant possible implications for the credibility and certainty of the target. That said, a case can be made that the advantages of price stability was overstated within the existing framework and that events have tended to suggest that in some conditions its strict adoption can retard rather than induce strong and sustainable growth.

In that regard, tilting the MPC mandate towards output and employment considerations could also be achieved by moving to a nominal annual gdp target of, say, five per cent. This would combine or mix real output and inflation into a single target; it could be achieved by various permutations of both: for example, two per cent real growth and three per cent inflation, and vice versa. Such variability could gnaw at its overall credibility and certainty, however.

Or the target could be split equally, 2.5% for each; reducing uncertainty but at the same time also the flexibility that may be needed to allow the economy to recover its historic secular growth and productivity path. When taken in the round, as a 2013 Deputy Governor Speech on nominal income targets, pointed out, insofar that the existing mandate does take cognizance of output and employment objectives, many proposed alternatives can appear more different than they are actually are.

The issue really boils down to the relative weight that should be accorded to employment and output relative to medium-term price stability, for what period, and in what circumstances. Incremental evidence-driven change in emphasis subject to continual review might ultimately prove the best friend of radical reform.

A personal experience of the US health system

9th May 2018 by newtjoh

Justin Webb, writing in Unherd, a BBC Today presenter and its former US correspondent, vividly illustrated why the private insurance-led US health system is so inefficient, is so wasteful of public and private resources, and is so non-transparent. Relaying his own experience after his son, Sam, was dignosed with Type- I diabetes -an incurable and potentially fatal condition – he showing how its operation adds to the stress and ill-health of the families who need to use it.

Essentially the opacity of the funding and pricing – largely through employer insurance contributions, annually averaging over $12,000 in 2015, subsidised by $260bn worth of tax deductions (a fiscal private welfare subsidy), complemented by individual user payments, and by direct public means-tested subsidy to poor households covered by Medicare – of complex treatments and drugs, prescribed by health providers whose knowledge of their relative efficacy to alternatives, which while greater than the patient and their family, are still subject to uncertainty and risk, means that none of provider, funder, and patient understand, or has a direct incentive to contain, the costs involved.

A former adviser to President Clinton, practising surgeon, and prolific writer, Atul Guwande, in a 2009 case-study of two socially-demographic similar Texas counties, found that per capita Medi-aid costs was twice as high in one compared to the other, https://www.newyorker.com/magazine/2009/06/01/the-cost-conundrum, because of its hospital doctors’ tendency to over-order surgery and other expensive treatments, not only because they financially benefited from higher fee-for-service income but due to conflicts of interest emanating from their status as hospital investors with a stake in securing higher turnover. The most important difference he concluded between the highest and lowest-cost areas was the absence or otherwise an overarching management culture driven by patient-care imperatives unclouded by intervening provider-focused financial incentives.

It echoes this writer’s personal experience of the Indian health service , which is dependent on a similar private-insurance, provider-led, medical care provision model. It excludes the majority of its poor population from access to accessible and quality coverage, greatly adding to avoidable mortality and morbidity outcomes, while putting even many non-poor households into penury.

The ruling Indian BJP party, led by Narendra Modi, announced earlier this year did announce significant extension to publicly-financed insurance programmes to poor households, outlined in, http://www.asocialdemocraticfuture.org/indian-budget-2018/ . If, and when, it is implemented, this National Health Protection Scheme (NHPS) – the Ayushman Bharat in Hindi – will become the world’s largest health insurance scheme. Central and state governments (with a 60% central, 40% state apportionment) are expected to pay the insurance premiums of an additional 100m households, or 500million people, that it is expected to cover.

But, even if fully implemented, the NHPS will cover only around 40% of the 1.3bn-plus Indian population, still leaving many households with low to moderate incomes, as well as poor people, uncovered, and exposed to an associated higher risk of morbidity and/or of catastrophic health costs. It has thus attracted the epithet ‘ModiCare’, derivative of the US insurance support MediAid scheme for the poor and uninsured.

It will need to overcome similar problems to those that beset the US system, as illuminated in Webb’s piece, related to its reliance on a predominately privately provided hospital sector funded by insurance to provide secondary and tertiary health care to the population in general. It is unlikely that resulting costs will be contained within the available or future public budgetary funding envelope.

The renowned American Nobel Prize winner, Kenneth Arrow, who demonstrated the self-correcting nature of perfectly competitive markets in his ground-breaking price-clearing general equilibrium model, in a seminal 1963 article, Kenneth Arrow’s 1963 article, also clearly explained why the inherent imbalance of information that exists between the providers and consumers of medical care, interacting with the risk and uncertainty connected to disease and the efficacy of its treatment, is inimical to the development of an efficient market in medical care provision, tending instead towards the over-consumption of treatments and drugs, to their monopolistic pricing, and to sub-optimal outcomes. Icentives for providers, patients, and public-funders to shop-around in order to effectively contain costs, is reduced by the moral hazard connected with health insurance and the institutional arrangements that need to put in place to regulate and manage that uncertainty and risk and its asymmetrical distribution.

His analysis remains topically relevant to the future health prospects of millions of people across the globe.

Depressingly, it could be a long waitbefore economic rationality trumps entrenched private interest across the American health sphere and its imitators, thus removing an unnecessary drag on national and global GDP, and saving countless people their lives and health.

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