A Social Democratic Future

Policy paths towards equality and efficiency

Can the UK long term stay in a CU outside the SM?

by

The Confederation of British Industry (CBI) through its director-general has indicated that it considers that long-term continuing membership of the customs union (CU) is in accord with UK economic interests, even though continuing CU membership would appear to preclude the UK from negotiating bespoke trade deals with third party countries outside the EU.

It is indeed doubtful that future gains actually realisable from any such future deals would offset the economic costs of the UK losing the advantages of SM membership, given the concentration of trade that the UK has with its european neighbours.

Certainly it is difficult to see how a hard border between Eire and N.Ireland could be avoided – a key plank of the brexit stage 1 agreement between the UK and EU – if the UK exits the CU.

But is it really possible for the UK to continue in the CU indefinitely, while in parallel disengaging from the the obligations and processes of the single market(SM)?

Cutting a complex and uncertain reality to its essentials, post-brexit UK regulatory autonomy appears inconsistent with it maintaining regulatory alignment with the EU.

In the absence of such alignment, it highly doubtful that ‘frictionless’ trading of both goods and services can be maintained even if the UK retains some sort of de facto CU membership.

The UK could offer to continue to ensure such regulatory compliance through domestic regulations and processes. But there would need to some assurance assurance and compliance system that would satisfy EU SM requirements, that would appear, inevitably, to involve continuing ECJ oversight or something comparable, at least well into the medium term.

Yet both the May government the Labour leadership appear still appear to seek bespoke bilateral arrangements where the UK could continue to secure the advantages of SM membership, while jettisoning perceived accompanying unwelcome requirements, including free movement, ECJ jurisdiction, and in the case of Corbyn, restrictions on state aid.

But the French President, Macron, has recently made it clear again that continuing UK access to the single market, including its financial services, requires the UK to continue to contribute to the EU budget and to acknowledge European jurisdiction, as well as honour free freedom of movement of labour and capital, if it wishes to continue to benefit from the free and frictionless movement of goods and services.

He also did hint that that some bespoke tweaks relating to how UK adherence to SM requirements could be interpreted or portrayed might possibly be on the table (one example could be on how EU oversight of UK regulatory compliance is defined), while reiterating that no fundamental breach to the institutional SM architecture would be entertained.

The UK tactical bet seems to be that the attractions and importance of the UK as a trading partner will trump the determination of the EU
to conserve the complete integrity of the SM and its rules during this year’s negotiations. That appears wishful thinking.

Such a misguided approach detracts from a UK negotiating position that is best capable of maximising UK benefit from a least economically damaging settlement.

Corbyn and the single market

by

This week the leader of the Labour Party appeared to rule out any continuing UK de facto membership of the single market (SM) because it would prevent a future Labour government re-nationalising the railways, the water and electricity utilities, and the Royal Mail.

Corbyn appears also concerned that continuing UK involvement in the SM would likewise prevent the provision of selective state assistance or aid as part of a more interventionist industrial policy. This could possibly involve a state investment bank taking equity stakes in firms or supporting research and development expenditures, especially across new technology and medical research areas.

The detail of these plans, which were outlined in its 2017 GE manifesto , however, remain hazy, particularly with in connection with how will be financed without undermining confidence in the public finances.

Each element requires focused and objective debate and scrutiny measured against strategic social democratic ends. That requires potential and likely gains to be balanced against realistically-assessed costs. Otherwise Labour will risk being portrayed – not only by the Tories, but also by responsible and informed elements of the mainstream media, as economically naive, at best.

Crucially it is doubtful whether most – if not all – of Labour’s proposals will infringe current EU state aid rules, as discussed in , and https://d3n8a8pro7vhmx.cloudfront.net/in/pages/14074/attachments/original/1517224151/lexit_paper_finalONLINE.pdf?1517224151.

It is perplexing that at this crucial juncture in the brexit negotiation process that the leader of the opposition party is resurrecting a particular historic and ingrained left-wing concern about EU membership that is not informed by the actual underlying situation.

This is at a time when Labour needs to crystallise its brexit position in tune with the national interest, in order to effectively challenge and expose the government’s self deluding ‘let us have cake and eat it’ approach to the impending stage 2 negotiations.

Future funding of health and social care

by

Some measure of cross party consensus is needed on how to secure additional and sustainable funding streams for the NHS in order to bridge the current funding gap. This has been variously estimated as lying between 2-4bn in terms just surviving the current seasonal winter demand increase, and 20-30bn in terms of approaching best european levels of provision.

Local authority funding of social care in the community likewise must increase. But increased health and social care funding presupposes that sufficient political maturity and commitment to national rather than party ends, is present across the parties, a widely over-optimistic assumption, that also presupposes that there is cross-party acceptance that reducing the budget deficit should be downgraded in priority further (with respect to current as well as investment expenditure) and/or on the design and general acceptance of new levies/taxes to fund health and social care expenditure.

A problem with the latter is that such hypothecated charges – raised through national insurance and council tax bases – tend to be regressive without wider reforms of those systems: again, such reforms are not on the foreseeable horizon; especially so given the political crowding-out effect of the brexit process.

A possible way forward that the May administration could initiate in any future Green Paper on social care funding is to propose an additional social care levy on the top council tax band. This could be part a part of a package involving a cap on user charges on high worth wealthy homeowners unfortunate enough to suffer long-term continuing conditions, such as dementia, requiring expensive residential care.

It would, at least, lift the exiting fear of such households that they could lose entirely or most of the inheritances that they hoped to pass on to their families. It might also offer a better match between contribution, risk, and benefit than the present system does, as well better accord with the old fashioned, but still pertinent concept, of citizenship.

Another possible idea is for the Government to issue public health bonds with the coupon or interest calibrated to the achievement of defined delivery and public health results.

More high quality research that actually decomposes the input demands on, say, A&E services, is also probably needed. This would seek to quantify the relative contribution, and actual costs, of age-related conditions, differentiating between presenting circumstances. These can include acute emergency episodes, such as strokes and fractures, as well as premature discharge, lack of suitable primary care alternatives, such as domiciliary assistance with moving, shopping etc at home. Secular trends in drink and drug related ;attendances, accidents at home and work, should be similarly constructed. Costs and admissions related to car accidents and fires at home, for instance, should have reduced over the last 30 years. Have they?

Phase 2 negotiation options

by

Four main negotiating scenarios appear on the horizon at the beginning of 2018.

First, European Economic Association (EEA) membership, involving continuing Single Market (SM) access, along with its four freedoms, as well as continuing financial contributions, but with European Free Trade Association (EFTA) Court rather than European Court of Justice (ECJ) jurisdiction.

The UK could seek some possible tweaking to Freedom of Movement (FOM),and its exit from the Common Agricultural and Fisheries Policies, in order to make such membership more bespoke to UK needs, with associational tie-ins across areas, such as defence, medicines, and security.

Indeed some in the Labour Party project that an EEA arrangement, with some tweaking to FOM, to the Fisheries policy, and across other limited areas, is where the UK will, and should end up; and that end-point could then be sold as the least economically damaging option, while still  still honouring the Brexit vote and responding to connected primary immigration concerns across  leave voting Labour voting constituencies.

A de facto UK CU membership could possibly be then yanked onto UK EEA membership, as part of a permanent or indefinite post-brexit UK-EU deal, in place of a long-term 2019 transitional or ‘implementation’ arrangement. Ths remains current UK policy.

But EEA membership is not designed as a transitional phase in a journey towards an alternative trading relationship – at least, as it is currently constituted.

The UK being able to tweak FOM provisions is a doubtful and uncertain proposition, although the Cameron temporary brake proposal could possibly be resurrected.

And, of course, the negotiations are being conducted by the May government, not the Labour opposition. The prime minister is pushed to placate the hard brexit demands of a significant segment of Conservative MP’s, who will not hesitate to push for a disorderly brexit if the alternative that is offered appears to be, in effect, continuing practical adherence to EU requirements and processes, albeit outside full membership.

Second, an extension to Article 50 UK exit date in order to allow sufficient time to negotiate a Comprehensive Free Trade Agreement (CFTA), which, post any 2019 legal exit, is likely to take more than five years to conclude. Again, that would be anathema to the Tory hard brexiteers, but even more so. They would no doubt agitate that the democratic will of the UK population was being betrayed, supported by most of the populist media. It seems unlikely that the EU would be willing to agree such an extension, while the legal case for the UK to unilaterally declare an extension is contested.

Third, a disorderly (read: most economically damaging) exit.

Fourthly, and currently, the May government’s preferred expressed option, is a Deep and Comprehensive (or Special) Free Trade Agreement (CFTA).

Such a CFTA could be modelled on the EU-Ukraine Association Agreement (UK-Ukraine AA) rather than a EU-Canada CFTA-plus services model.

The EU-Ukraine AA was finally ratified in 2017 by the EU27. It, in essence, offers most of the the benefits of the SM and Customs Union (CU), including tariff-free access for goods and passports for services and with associated customs cooperation, Trade Observatory Briefing Paper on Ukraine/EU associational agreement. 

Regulatory alignment, including to EU competition, to state aid, to anti-dumping and to public procurement regulations, is also enshrined in the agreement. The FOM SM full membership obligation, however, is excluded, dealt with instead by a visa liberalisation and work permit system.

It also offers Ukraine the option of ‘buying in’ to a number of EU common programmes, for example, to the Horizon 2020 research programme, to EU agencies such as Europol. Prospects of participation in a wider set of EU common policies, such as transport, environment, employment and consumer protection policies, with political cooperation across justice and home affairs, foreign, security and defence fields is included.

But the EU-Ukraine AA was offered by the EU as an inducement for a country formerly in the erstwhile USSR political and economic orbit to move politically closer to it (and by extension NATO) and away from Russia.Ukraine confirmed its self perception and wish to be perceived as a European state looking westwards: a stance not universally accepted across its geographical area,  exposing the political fault lines involved. As such the agreement could indeed be viewed as particularly exceptional and special.

The replicability of the treaty to the UK-EU Phase 2 negotiations is open to severe doubt, insofar that these will be driven by a quite different set of political and economic imperatives.The Ukraine and the UK vastly differ in in economic characteristic and importance to the EU. The exponents of the treaty, however, point out that it could offer a precedent framework in which the UK could progress its own bespoke agreement with the EU, a process that could be propelled by the UK’s relative economic and political importance to the EU.

A bespoke CFTA, where the EU offers tariff-free access to the UK that has exited its regional trading bloc could possibly raise charges that the WTO Most Favoured Nation (MFN) rule, discriminating against other Non-EU potential trading partners, had been infringed.

Similar to the Canadian CFTA, the UK-Ukraine AA took many years to negotiate and ratify, meaning that a long term transitional agreement would be required. Full circle almost back to the first EEA option.

Most seriously, the negotiation of a CFTA involving continuing UK frictionless trade with the EU and its continued enjoyment of the benefits of SM membership while jettisoning key obligations, such as FOM, rests upon the willingness of the EU to flexibly adjust the institutional architecture of the SM to Britain’s particular interest or requirements. Why should it?

Further views on stage 2

by

Most experts on trade matters are clear that a bespoke Comprehensive Framework Trade Agreement (CFTA) between the UK and EU can be expected to take at least five years to negotiate after UK exit. For example:https://blogs.sussex.ac.uk/uktpo/2017/12/15/magic-realists-and-economic-realists/.

The Stage 1 negotiation process showed that the EU calls the shots in this process. It has confirmed that the purpose of the impending stage 2 exit negotiation phase is to secure full agreement on the divorce deal, including the outlines and parameters of the future trading relationship between the two parties, the detailed negotiation of which will follow later.

Insofar that the UK chooses to pursue a bespoke CFTA in line with current government expressed intentions, it is most unlikely to be operative by 2024, at best.

Assuming that the UK does irreversibly leave the EU in March 2019, subsequent to a UK Parliament vote, but then continues with de facto single market (SM) and customs union (CU) membership regime for two years until early 2021, some of these experts, as above, have pointed out that would mean the UK falling off the cliff in mid-2021, leaving a hiatus until a new CFTA is ratified.

It follows that transition period involving continuing de facto SM and CU membership or, alternatively, postponement or extension of article 50 until 2024 or when the CFTA actually becomes operative, is required.

That, however, would be unacceptable to the conservative hard Brexit wing. They could bide their time until the Brexit divorce is legally sealed in early 2019, and then agitate for ‘real Brexit” without continuing SM and CU de facto membership: in other words, a disorderly exit.

Meanwhile it appears that the May cabinet has authorised an approach where the UK will seek from the EU, a transitional deal where the benefits of continuing CU and SM membership are retained, viz: frictionless trade in goods without tariffs and without border customs checks, but with some regulatory divergence in key sectors to the UK interest, as well as, say, exit from the Common Fisheries Policy: the ‘let us have our cake and eat it’ option.

It is almost certain that this approach will be rejected by the EU next spring; perhaps that will serve to further clarify minds.

The prospect of de facto five year SM and CU post 2019 transition period-at least involving continuing FOM, EOJ jurisdiction, and membership fees, does not appear yet to have been accepted or understood by Labour, at least in public discourse or in policy terms. Perhaps that will change when the fixed parameters of the stage 2 negotiations, as set by the EU, become even more visible by March 2018, as above.

By then it could be clear that the real choice is either a disorderly exit or a status quo where the UK continues as before until 2024 or later, but without influence; that is, unless, the UK seeks to postpone Article 50 divorce with EU assent.

Beveridge 2.0

by

The LSE is holding a conference February 2018 focused on how the future development of the welfare state can best overcome the challenges of globalisation, ageing, technological change and automation, income inequality, and related pressures on demand for services, their costs, and public capacity and willingness to pay for them.

The new director of the LSE has provided a broad but succint summary scoping analysis in

Asocialdemocraticfuture will aim to contribute to that debate through its
policy and research area.

Labour and the Single Market

by

The EU decision early this month that sufficient progress had been made in the brexit stage 1 negotiations to proceed to stage 2 was predicated on the May government, in effect, recognising that the UK will continue to adhere to adherence to customs union (CU) and single market (SM) processes during the anticipated two year post-March 2019 transitional period, so staving off the imposition of a hard Eire/NI border.

Many in her party are still wedded to the illusion that it can be avoided without continuing de facto continuing SM and CU membership post 2019, or find it convenient for their own purposes to pretend that is the case.

In response, Keir Starmer(KS) has suggested that the UK is moving to a Norway European Economic Association (EEA) arrangement, implying continuing FOM, UK membership contributions, and fealty to ECJ jurisdiction. Meanwhile John Mcdonnell(JM),while also highlighting the advantages of continuing adherence to SM, rules out continuing FOM.

Quite likely both front benchers are flying mutually understood kites, but JM risks mimicking the hubris of the government brexit approach by holding out that the UK can maintain the benefits of the SM, while ditching free movement.

As suggested in a hybrid option where the UK proceeds into the medium term on the basis that it will proceed to negotiate a CFTA while maintaining adherence to CU and SM processes, appears at present most likely as that would avoid the economic damage of a disorderly exit, but would allow the political can to be kicked beyond a 2022 election.

Brexit Phase 2 options

by

The UK faces either a Comprehensive Free Trade Agreement (CFTA) based on the recent EU-Canadian agreement that will still disadvantage UK services, and which – on current information – would take us well past the two year transitional period post March 2019 legal exit, ending early 2021; or a long-term Norway European Economic Association (EEA)-type arrangement involving continuing adherence to the single market with its four freedoms, including FOM, as well as continuing membership fees and fealty to EoJ jurisdiction on SM matters.  

The former would inflict continuing economic damage while the latter is logically absurd (why not just stay in and retain influence) and is likely be politically unacceptable due to the self serving unwillingness of the political class to ‘disrespect the will of the people’, despite the population being sold brexit on a false prospectus, or more kindly, one that was based on imperfect and incomplete information, a deception that is now steadily and surely emerging.   

A hybrid of these two options, perhaps – the author of this post, like others, suffers from imperfect information on this complex, technical and unfolding story – is more likely: extended de facto continuing UK CU and SM adherence until a CFTA is agreed sometime mid-next-decade. This could allow UK exit from the CU, while allowing continuing indefinite UK SM  involvement for services. Such a hybrid would allow the political brexit can to be kicked down down the road past a 2022 election
[Read more…] about Brexit Phase 2 options

Is there a housing shortage?

by

The issue is one of the deficient supply of affordable housing: a problem concentrated in London and other high cost areas, but still present elsewhere.  And, although new net supply  increased to 217,000 in 2016-17, that figure is likely to prove  a peak and still below projected demographic growth levels, leaving aside the impact of the supply backlog that has built up since the GFC.  Recent supply totals comprise mainly homes built at prices way beyond the means of first time buyers with even less than upper quartile earnings in some areas, let alone average or below average earnings.  The private housing market is broken, suffering from multiple housing and land market failures. That has significant and  extensive deleterious macro-economic, as well as social, impacts, noted and highlighted by FT commentators, such as Martin Wolf and Chris Giles, to name just a couple. It  needs to be replaced by a partnership model where 70,000-100000 dwellings are provided for either affordable rent or discounted home ownership terms accessible to those that cannot purchase. Deflating the cost of land directly should be an essential ingredient of such a partnership model, and would help to reduce its public expenditure cost.  Insisting on at least 40% of all dwellings provided on new developments (beyond a minimum size) to be affordable as a mandatory, certain and transparent requirement would serve to reduce land costs; that change could be backed by changes in the compulsory purchase rules allowing public authorities to compulsorily purchase land at existing use values as a last resort in order to provide affordable demonstrably needed in their local areas.