The decision of Britain to leave the European Union sent shockwaves across the world; sterling plunged in value, the FTSE 100 and 250 indexes crashed, and a dark cloud of uncertainty loomed. However, with the UK freed from the shackles of the EU, Brexit also presents an opportunity. Here are a few things Britain can do to ensure it lands on its feet post-Brexit and flourishes outside of the EU.
By leaving the EU, Britain will not only have to renegotiate its economic relationship with the continent, but with the 50 or so countries with whom the UK currently enjoys free trade with. Tariffs on global trade are currently at historically low levels, but it is non-tariff barriers – such as product standards and regulations – that we should be concerned with overcoming.
One way to achieve this would be to sign Mutual Recognition Agreements with as many OECD countries as possible. These bilateral agreements, widely used by the EU to trade with countries outside the union, are a more flexible means of overcoming regulatory barriers than outright harmonisation. Mutual recognition would open up new markets to British exporters, while significantly reducing costs for consumers.
We should focus on making incremental steps, sector by sector, at the global level
Longer term, Britain should seek to move to a more agile approach to trade. Rather than signing up to big, unwieldy comprehensive trade deals like TTIP, which often take years to complete, we should focus on making incremental steps, sector by sector, at the global level. An example of this is the WTO agreement on Trade Facilitation. Essentially it is a global agreement to streamline customs clearance and goods movement via the harmonisation of documents and procedures across the world. Not only would this more global approach allow wider access to emerging markets, but it makes sense in today’s world where trade is increasingly organised at the global level – indeed, an increasing number of EU regulations actually come from international bodies such as the UN and WTO.
Post-Brexit Britain should look to tweak its tax code in order to maintain global competitiveness and boost economic efficiency. The proposal of former chancellor, George Osborne, to cut to corporation tax from 20% to 15% is an astute policy move from an economic point of view. Sadly, we do not live in the elegant, abstract world of economic theory, and for Britain to slash its headline corporation tax rate – which is already low by global standards – would surely irritate the rest of the EU, just as difficult Brexit negotiations loom. A good idea, but one that should be shelved until Britain has fully departed the EU.
Britain should abolish the Bank Levy
Another, less controversial, way to stimulate investment would be to increase allowances for capital investment. This would free up cash for companies to invest in new buildings and equipment, while causing less upset on the global political stage.
With Brexit demonstrably damaging the dominance of London as a global financial centre, and segments of the financial services industry peeling away to Paris and Frankfurt, Britain should abolish the Bank Levy. Not only would this reassert London’s competitiveness, but it would send a message to the City that Britain is still the place to do business. Furthermore, the Bank Levy raised over £2.7bn in 2015 – abolishing it would free up that capital for firms to invest and provide the financial industry with cash to get through a challenging period.
The UK should follow the lead of New Zealand and phase out agricultural subsidies. In the 1980s, the Labour government in New Zealand radically overhauled state support to farmers. The result was a doubling of productivity growth (from 1% to 2.3%) and a steady increase in farm profitability. Agricultural production became more mechanised and the industry experienced an 11% fall in employment, freeing up labour to move into other areas where it could add more value. Rather than ending state support immediately, farmers should be given a five-to-ten-year period to adjust in order to smooth the transition.
Stimulus and Investment
Last Thursday, the Governor of the Bank of England, Mark Carney, surprised many in the City by announcing that interest rates would not be cut in the wake of Brexit, remaining at 0.5% where they have been for almost eight years. The primary reason for this, I suspect, is that Mr Carney and the Monetary Policy Committee recognise that cutting interest rates from 0.5% to 0.25% is unlikely to make a tangible difference. It is the demand for credit, not the supply that is the issue.
Therefore, with monetary policy exhausted, it falls upon fiscal policy to provide the British economy a much-needed boost through these tumultuous times. The government should finally start exploiting its historically low borrowing costs and embark on a serious overhaul of the country’s infrastructure. Splashing cash on new transport links, expanding road and rail capacity, and upgrading the country’s internet connectivity would boost demand in the economy and increase productivity. This isn’t going to be easy though. With the budget deficit standing at 4% of GDP, public finances are still in a worse position than they were at the onset of the financial crisis in 2008, meaning the government has precious little room to breath when it comes to spending.
The government should finally start exploiting its historically low borrowing costs
A potential remedy could be to co-ordinate monetary and fiscal policy. With interest rates on the floor, the most effective monetary stimulus option available to the Bank of England is to resume Quantitative Easing. However, the main benefit of QE was the stabilisation of the financial system, and with the financial system in a much less precarious position than in 2008 there is less of a need to provide banks with liquidity. Furthermore, much of the cash from the last round of QE ended up further fuelling the London property bubble. If QE were to be resumed, it would be more effective to use the money to fund well targeted infrastructure investment to ensure the benefits filter through into the real economy.
Re-establishing the relationship with Europe
Fundamentally though, the most pressing concern is for Britain to re-establish its relationship with the continent. The best option available is to join the EEA – the “Norway option”. British firms would retain access to the European single market and UK-based banks would retain their passporting rights, allowing them to continue cross-border services within Europe. British universities could continue participating in EU science networks and access European research funding. British citizens would still have the right to live and work in Europe and, more importantly, the UK economy would maintain its supply of hard-working European migrants who are vital to the construction and food-processing sectors, as well as the NHS. But above all, EEA accession would end the uncertainty posed by Brexit and undo much of the damage wrought on financial markets these past few weeks. Businesses would be given the clarity needed to resume hiring and make investment decisions, and the economy would regain its lost footing.
In order to succeed outside Europe, Britain must treat the challenge of Brexit as an opportunity to become a more competitive, efficient and dynamic economy. It must become more open and forge new trade links across the globe; it should reform its tax system to enhance economic efficiency; it should stimulate the economy to combat the immediate macroeconomic difficulties; it must re-establish its close economic relationship with Europe. In doing this, the UK can not only survive, but thrive outside of the EU.