Brexit: deals and no deals

What is a ‘No Deal’ Brexit? Part of the (sometimes deliberate) confusion around this is that there are, essentially, three deals to be done between the UK and the EU. The decision tree looks something like this:

Chart made with SmartDraw

Deal 1: Article 50 Agreement

This is an agreement on the terms of separation. It includes things like:

  • Liability for pensions for EU staff;
  • Share of the European Investment Bank;
  • Funding commitments made by the UK for projects beyond March 2019;
  • Relocation of EU agencies in the UK;
  • Rights of UK and EU citizens after March 2019.

As Anand Menon says, a failure to agree on these basic terms could happen in two ways; the UK walking away from the negotiations or a timeout where no agreement is reached by  the March 2019 deadline. This is what Professor Menon called the Chaotic Brexit:

There is no Article 50 agreement within the two year period, and no extension. The talks fail, because of disagreement over citizens’ rights, the role of the ECJ, money, or perhaps some other issue we haven’t yet focused on. On Brexit Day, the UK ceases to be a member of the EU – but, politically and legally, all the outstanding issues remain unresolved.

At this point, as Anne Robinson used to say to defeated Weakest Link contestants, we would leave with nothing. The arrangements which apply to 60 percent of our goods trade and the regulatory framework which has governed our economy for the last 25 years would disappear. This would have the effect of increasing, rather than removing, barriers to trade. Rather like a football match or a road traffic system, rules are what enable international trade to take place. The morning after Brexit would not see a new freedom but a new chaos. It would be like waking up on a busy weekday morning and finding that all the road signs, traffic lights and road markings had disappeared. That would leave motorists free to do whatever they liked but good luck with your journey to work. If you ever made it that far.

Would the planes stop flying? Probably, says Professor Menon. Aviation agreements have the status of full diplomatic treaties and they are highly restrictive. Airlines are already warning customers buying tickets beyond March 2019 that they may not be able to fly. Once you put yourself outside the legal framework, life doesn’t get easier, it gets a lot more complicated.

Chaotic Brexit would also leave us in dispute with the EU, potentially leading to court cases and certainly creating an acrimonious atmosphere which would poison the UK’s diplomatic and trade relationships with the EU for decades. It’s really not something either side would want.

Deal 2: Transition Period

Assuming no-one walks away from the table and we do reach a deal on Article 50, we then turn to the terms of our future relationship with the EU.

No serious observers believe that it is possible to hammer out a post-Brexit trade deal with the EU that can be implemented on 30 March 2019. Even if both sides agree the Article 50 settlement, they will need a transition period to work out the detail on tariffs, regulations and dozens of other agreements that currently govern the UK’s relationship with the EU.

This might take the form of a specially negotiated transition period or simply an extension of Article 50. There are potential problems with both options.

Some say that a transition agreement would be as nearly as complicated to agree as a final trade deal, so doing it in the next 18 months would be nigh on impossible. Far better, they say, to extend Article 50 and stay in the EU until the deal is done.

The problem with extending Article 50 is that the UK would remain in the EU beyond March 2019. That would be unacceptable to many of the Leave supporting MPs and their backers in the media who would kick up no end of fuss about it. There would also the embarrassing question of the elections to the European Parliament in 2019. The UK would have to elect MEPs to a parliament from which they were due to resign half-way through the period.

I was at a Resolution Foundation event on Tuesday where both options were debated by the learned panel. The conclusion they came to was that it will be damned difficult either way.

Whatever the complexities, though, if we don’t agree a transition period, it is highly likely that we will leave the EU without trade agreements.

This would lead to what Professor Menon calls the Cliff Edge Brexit:

The Article 50 deal is agreed, but the trade discussions go nowhere: either they break down, or they have made little progress.

So there is nothing to transition to. Meanwhile continuing the UK’s Single Market membership and/or free movement is unacceptable to one or both sides. So on March 29, 2019 the UK becomes a “third country”, with no special relationship of any kind with the EU. WTO rules will apply to the UK’s trade with the EU.

This is better than the Chaotic Brexit because having reached an agreement on Article 50 it at least leaves the door open to a more constructive future relationship. In the meantime, though, the UK’s trade situation would still be difficult.

According to Jo Maugham, a leaked Treasury report on Brexit contains these paragraphs:

There is much talk of trading under World Trade Organisation rules but very few countries trade with the EU under WTO rules alone. As the Institute for Government points out, the EU has bilateral agreements with most of its trading partners:

Do other countries trade with the EU on ‘WTO-only’ terms?

Not many. In 2016, of the top 10 trading partners with the EU by total trade, the US, China, Russia, Japan and India have a substantial number of bilateral agreements that go well beyond the terms of WTO trade. Of the top 20, there are no countries that trade on WTO rules alone with no bilateral agreements and no free trade deals.

If the UK left the EU with no agreements of any kind, then technically its relationship with the EU would be weaker than any of the EU’s main trading partners.

Trading under WTO rules would leave us in a slightly better position than those countries like Iran and Belarus, against which the EU has sanctions, but would have worse trading conditions with the EU than most other major economies. One step up from pariah state isn’t really where we’d want our relationship with our biggest trading partner to start.

Of course, a transition period doesn’t mean that we will definitely achieve a trade deal but it certainly makes it more likely.  It is possible that we might simply delay the Cliff Edge Brexit for a few more years but, having gone to the effort of agreeing a transition it seems unlikely that talks on the final deal would then falter,

Let’s be optimistic and assume we agree a long enough transition to move on to Deal 3.

Deal 3: Trade and Future Relationships

While it might be possible to agree the outline of the future trade agreement before March 2019, it is only with the Article 50 Agreement settled and a transition period in place that we can finally get down to the job of negotiating the detail of what the future relationship between the UK and EU will look like.

The options range from almost no change, where the UK stays in the single market and customs union, to varying degrees of free trade agreement. This table by the Institute for Government gives a succinct summary.

Essentially, the further you go to the right, the more independence the UK would have over things like immigration and trade deals with other countries but the less preferential the trade terms with the EU would be. This is the range of ‘soft’ to ‘hard’ Brexit options, though it is more of a continuum than a binary choice.

If the government is absolutely determined to be outside the EU customs union, something like the agreements made with the Ukraine or Canada look like the most likely options but these have been years in the making. Most of the discussion in the British media about the deal with the EU has focused on Deal 3 but there is a way to go before we are likely to reach an agreement on our future relationship with the EU. We need to do Deals 1 and 2 first.

There are, then, several stages to go through before we agree our future relationship with the EU and a number of points at which it could come to grief. A Cliff Edge Brexit is in no-one’s interest and a Chaotic Brexit would be a disaster. The former ministers who have urged the prime minister to walk away from the talks really should know better. ‘No deal is better than a bad deal’ is the silliest soundbite to come out of the Brexit process. ‘No Deal’ is a bad deal. About as bad as it gets. It’s not something that anyone should be wishing on this country.

 

 

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No-deal Brexit: it’s already too late

As things stand at the moment, eighteen months from now the UK will leave the EU without any agreement on trade regulation or tariffs, either with the EU or any of the other countries with which it currently has trade agreements. The arrangements which assure the smooth running of 60 percent of our goods trade will disappear. Once we are outside the regulatory framework, many products, particularly in highly regulated areas like agriculture and pharmaceuticals, will no longer be accredited for sale in Europe.  Aeroplanes will be unable to fly to and from the EU to the UK. Those goods which can still legally be traded with the EU will face lengthy customs checks. Integrated supply chains and just-in-time manufacturing processes will be severely disrupted and, in some cases, damaged beyond repair. Unless politicians do something, that’s where we are heading.

International trade and commerce doesn’t just happen. It is facilitated by a framework of agreements on tariffs, quotas and regulations. Without these, trade is either very expensive or, in some cases, simply illegal. Therefore, if the UK were to leave the EU without concluding a trade deal, things wouldn’t simply stay the same. They would be very different and very damaging.

Of course, it would be disruptive for the rest of the EU too, although it is much easier to find new suppliers and customers in a bloc of 27 countries than it is in a stand alone country with no trade deals. Even so, most of us have assumed that common sense will prevail at some point. No-one in their right mind would let such a thing happen so surely both sides will do what is necessary to between now and March 2019 to avoid it.

Incredibly, though, our government, egged on by ideologues on its own back benches, has been talking up the prospect of a no-deal Brexit, apparently as a negotiating ploy to make the EU realise that we are serious about walking away. Almost as soon as the no-deal idea was suggested, Philip Hammond said that he was not willing to set aside any money to fund it. In any organisation, that’s a sure-fire sign of a project that’s going nowhere. If the finance director won’t even stump up the cash for the planning phase, you might as well forget the whole thing. Mr Hammond said that he would wait until “the very last moment” before committing any money to prepare for a no-deal scenario. Which means it’s not going to happen because the very last moment passed some time ago, most probably before we even had the referendum.

To prepare this country for the complete removal of trading arrangements that have been in place for decades would be an immense task. The customs implications alone are massive. Ports like Dover, Folkestone and Holyhead have no customs infrastructure. They have been designed and developed on the assumption that they are, to all intents and purposes, domestic ports. The proposed inland customs area would need to be vast to cope with the number of lorries. There was already a plan to build a lorry park in Kent in anticipation of increased traffic but this has stalled after local objections and is now subject to a judicial review. It is unlikely that work will start for some time even on this modest proposal. The idea that a fully functioning inland customs processing facility could be up and running in 18 months is just fanciful.

Much has been made of technological solutions to the increased administration brought about by Brexit but the specification for the new customs IT system was written before the Brexit vote. It was future-proof to the extent that it was designed to handle around three times the current number of customs declarations. The trouble is, that number is now likely to multiply by six, with many declarations from companies that have never had to use the system before. Increasing its capacity in time for the Brexit deadline will be challenging. It may well not be ready by March 2019.

As well as infrastructure and IT, HMRC will have to take on more people. A lot more. It has estimated that some 3-5,000 new customs  staff will be needed. Other departments face similar challenges. The Home Office has said that it will need at least a year to recruit and train the staff it needs to handle the additional border and immigration work. As the Institute for Government pointed out, customs alone has an impact on many public sector organisations. They will all need extra resources and organisation to deal with these changes. On top of that, new regulatory organisations will need to be built from scratch. Capability is a combination of capacity and ability. It’s not that the civil service lacks good people, it just hasn’t got enough of them for this colossal task. The British state doesn’t have the capacity to do Brexit in 18 months.

Chart by Institute for Government

There comes a point in any project when, if a certain amount of work hasn’t already been done, there is just no way you are going to meet the deadline, no matter how much money and resource you throw at it. Some things can’t be fast-tracked. This is especially true of recruitment, training and setting up new organisations. If anyone ever finds a way of microwaving the acquisition of skills and the bonding of teams they will become very rich. For now, though, these are not processes that are easy to speed up. As a colleague of mine used to say, nine women can’t make a baby in a month. Some things just take as long as they take and there isn’t much you can do about it.

The UK had a decade to prepare for the Olympics. Brexit is a much bigger job. If we had decided to make a clean break from the EU as a well-thought out and considered policy, it would have taken us years to plan and prepare for it. We should probably have started several years ago. As it stands now, it is far too late to do anything that will have a significant impact on the chaos that would follow in the wake of a no-deal exit from the EU. However much money the government throws at the problem, there won’t be enough. It is simply too late. Philip Hammond knows it, the civil service knows it and, most probably, Michel Barnier knows it too.

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No money behind the sofa for Philip Hammond

The Office for Budget Responsibility has, it appears, given up on the long hoped for productivity spurt. Chris Giles reported in the FT last week that it is to release a more pessimistic productivity forecast in this year’s budget.

For a time, a couple of years ago, it looked as though productivity might be on the rise again but it has stalled recently. The take-off never came. The ONS figures released on Friday show output per hour and per worker more or less where they were at the end of 2007. That’s almost a decade without any productivity growth.

As Gemma Tetlow explained, although employment is at record levels, much of the increase has been in the economy’s least productive sectors and firms, which has created a drag on productivity.

Britain’s productivity woes have deepened in the past year because less productive services companies have hired more staff, while higher value manufacturing has shrunk.

Albert Bravo–Biosca and Stian Westlake noticed something similar when they looked at the allocative efficiency of the UK economy in the decade before the recession. The net effect of new firms coming into the market, they found, was to reduce productivity; the opposite of creative destruction.

It appears that, after a brief post-recession respite, the economy reverted back to its tendency to create low productivity jobs.

Chart by Gemma Tetlow, FT

Also released last week were the ONS measures of economic well being. The ONS points out that the overall household income level didn’t fall as much as other measures because low interest rates reduced mortgage payments. That this effect is now spent as inflation is starting to bring down real household incomes. The general picture is that, whatever measure you use, the economy has barely recovered from the shock it experienced a decade ago. The UK’s post-recession increase in GDP is, therefore, mostly accounted for by an increase in population.

As the Resolution Foundation’s Matt Whittaker said, we can’t blame Brexit for all of this (my emphasis):

The bigger picture here is that household income per person remains no more than 5 per cent higher today than it did a decade ago. The decade before the crisis delivered growth in the region of 30 per cent. It’s easy to fixate on the impact on Brexit, but it shouldn’t blind us to other domestic challenges that have led to a tough ten years for living standards, let alone the last 12 months.

The OBR looks set to adopt a more pessimistic stance by downgrading its productivity projection at the forthcoming budget. That decision is being driven not by an assessment of lower productivity in a post-Brexit world (previous OBR outlooks have already incorporated some such assumptions), but rather by the conclusion that post-crisis productivity stagnation is more permanent than previously thought.

That’s the worrying bit. We were running into productivity problems before 2007 and the recession just made them worse. The British economy’s weaknesses, it seems, run deep.

The OBR has come to the conclusion that we are not likely to see much improvement in the near future. That is likely to mean less tax revenue and, most probably, a significant hit to the public finance projections in next month’s budget.

It’s only two years since the OBR found some money for George Osborne down the back of the sofa. Philip Hammond won’t be so lucky. The sofa is on the skip. Until productivity improves we won’t get a new one.

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Pricing political stability

Government borrowing costs have little to do with a country’s debt level but quite a lot to do with its perceived stability. That is why a country like Japan, whose debt as a proportion of GDP is one of the highest in the world, pays interest at 0.03 percent on its bonds. Oil rich countries like Russia, Venezuela and Nigeria, with much lower levels of debt, pay significantly higher rates of interest; 7.5 percent for Russia, over 10 percent for Venezuela and a staggering 16 percent for Nigeria.

Countries with governments that might do something bonkers are perceived as a much greater risk than those with populations that pay their taxes and elect moderate governments. Stable and boring countries are a lot less risky. Most stable and boring of all are the Swiss who charge investors a small fee for lending money to their government.


Source: Trading Economics

But occasionally, even countries perceived to be strong and stable do something a bit crazy, like elect a volatile and clearly incompetent president. It is unlikely that Donald Trump will be able to do any lasting damage. The checks and balances of the American state will see to that. The cost of servicing US government debt is still therefore relatively low when compared to much of the rest of the world. Nevertheless, the fact that they could put someone like Mr Trump in the White House at all makes Americans seem that bit less reliable than they once were. Consequently, compared to other safe-bet countries, US borrowing costs have crept up.

Historically, though, all government bond yields are low. In uncertain times, people look for safe places to park their money. Government bonds provide such safe places and the more people there are who want to lend money to a government, the less that governments has to pay to borrow. Therefore, though it may look perverse, as UK government debt has risen, the interest rates on that debt have fallen. Both are, to an extent, consequences of the recession. Government borrowing went up but so did the search for safe assets.

Chart by Economics Help

Should we, then, be worried about Moody’s downgrading the UK government’s credit rating? In the short-term probably not. Ratings don’t seem to make much immediate difference to government borrowing costs.

Nevertheless, Moody’s assessment of the UK was scathing:

Moody’s believes that the UK government’s decision to leave the EU Single Market and customs union as of 29 March 2019 will be negative for the country’s medium-term economic growth prospects. Aside from the direct impact on the UK’s credit profile, the loss of economic strength will further exacerbate pressures on fiscal consolidation.

Growth has slowed in recent months, with average quarterly growth of just 0.26% in the first two quarters, versus an average of 0.6% over the 2014-2016 period. Private consumption has slowed sharply and business investment has been weak since 2016, most likely linked to the Brexit-related uncertainty. While future years may see some recovery, Moody’s expects growth of just 1% in 2018 following 1.5% this year and 2.25% on average in recent years.

More importantly for the UK’s credit profile, Moody’s does not expect growth to recover to its historic trend rate over the coming years. The UK is a relatively open economy, and the EU is by far its largest trading partner. Research by the National Institute of Economic and Social Research (NIESR) suggests that leaving the Single Market will result in substantially lower trade in goods and services with the EU. In a similar vein, both the NIESR and the Bank of England estimate that private investment will be materially lower in the coming years than in a non-Brexit scenario.

Moody’s is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit. While the government seeks a “deep and comprehensive free trade agreement” with the EU, even such a best-case scenario would not award the same access to the EU Single Market that the UK currently enjoys. It would likely impose additional costs, raise the regulatory and administrative burden on UK businesses and put at risk the close-knit supply chains that link the UK and the EU. Also, free trade arrangements do not as a standard cover trade in services — which account for close to 40% of the UK’s exports to the EU and 80% of Gross Value Added in the economy — given the prevalence of non-tariff trade restrictions and the need to align regulations and standards. In Moody’s view, the differences of outlook between the UK and the EU suggest that the most likely outcome is now a rather more limited free trade agreement which may exclude services: the UK’s desire to pursue its own regulatory policies and to avoid the jurisdiction of the European Court of Justice will make finding an agreement on services challenging. Moreover, any free trade agreement will likely take years to negotiate, prolonging the current uncertainty for businesses.

Aside from the direct impact on the UK’s credit profile, weakening growth prospects are likely to exacerbate the government’s evident fiscal challenges. And this is likely to be happening during a period in which policymakers will be increasingly distracted by the twin challenges of sustaining a domestic political consensus on how to operationalise Brexit and reaching agreement with EU counterparts.

In other words, Brexit has made a bad situation worse. Although the rate the UK pays on its borrowing is low, it now has a lot more debt relative to GDP than it has had for several decades. Even small rises in the costs of refinancing that debt will put extra pressure on public finances.

As I said before the Scottish referendum, there is a lot to be said for living in a 300 year-old country with a reputation for political stability. Voting to leave the EU dented that reputation. The government’s poor handling of the aftermath and the antics of some of our government ministers haven’t done anything to repair the situation. Sure, it’s still unlikely that a British government will do anything completely mad but we don’t look as strong and stable as we once did. Over time, the cost of government borrowing is likely to reflect that.

It is ironic, then, that some of the politicians who told us in 2010 that if we didn’t control the public debt the bond markets would slaughter us, are the same politicians who have brought us to this pass. Some of them want us to go further and quit the EU without paying anything. They tell us that electing Jeremy Corbyn would make the UK like Venezuela. Yet unilaterally repudiating an international treaty would be more Venezuelish than anything a UK government has done in decades. It would be a sure-fire way of making us look like a basket-case.

The rest of the world thinks we are a bit crazy but, for now, seems to be giving the UK the benefit of the doubt. The Brexit vote was an uncharacteristic outburst from a usually sober and rational nation. Despite the ridiculous posturing of some of our politicians, people still believe that something sensible will be sorted out eventually. But the closer we get to the Brexit deadline without any meaningful progress, the more risky the country will start to look. Being volatile, bonkers and a bit maverick might look like fun but there is a price to be paid for it.

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Brexit – no job for dilettantes

“Is this really all we’ve come up with?” shouted the boss as his team stared dejectedly at the sparsely populated flip charts. “If we don’t get some creative ideas soon this will have been a complete waste of time.”

The strategy away day wasn’t going as well as he’d hoped. His part of the business was in trouble. He needed some new ideas quickly but his team weren’t coming up with anything. Shouting at them, which usually worked when he wanted to make people work faster, didn’t seem to be making them think any more creatively.

I am reminded of this every time I hear government ministers talking about Brexit. A bit of creativity, innovation and imagination together with some unspecified whizzy technology will mean that the complexities of leaving the EU can be easily dealt with. It can’t be beyond the wit of man, can it? This is just the sort of thing corporate executives say when they really haven’t a clue what to do next.

Rafael Behr wrote an excellent piece on this yesterday. The hard-line leavers in government, he says, don’t want to get into the messy details of leaving the EU and accuse those who attempt to do so of over-complicating things and creating obstacles:

Some Tories have moved on from the question of what needs doing – the referendum answered that with the single word “leave” – and are applying themselves to the problem of how it might be done: how to protect industries that rely on the single market; how to organise the Irish border; how to support agriculture without EU subsidy. Others shrink from that challenge. They find comfort in the saccharine simplicity of restating the original cause. “Hard” Brexit is the place to which some Tories retreat to avoid getting their hands dirty with compromise. If things go wrong, they can blame the pragmatists for sullying the dream.

The prime minister wasted a year indulging that tendency. One May loyalist describes frustration in cabinet committees when trying to get radical Brexit ministers to focus on detail. Every obstacle is belittled as a symptom of weak faith; every workaround is treated as a trap laid by unrepentant Europhiles seeking to abort the whole thing. No assurance by ex-remainers that they have accepted the referendum is trusted. This leads to a vicious cycle: the only people in government prepared to engage with the question of how Brexit might work are those who didn’t vote for it, which reinforces the zealots’ suspicion that the “softies” are closet saboteurs.

Detail is for sissies. How hard can it be?

In Britain we have long been seduced by the cult of the gentleman amateur – the swashbuckling chap who cuts through all the crap, ignores the boring functionaries and just gets things done. His modern equivalent is the disruptive innovator who circumvents the hierarchy, shakes everything up and trashes the industry’s long-held norms and beliefs. That the words Buccanneer and Brexiteer sound similar is no accident.

Boris Johnson, says Rafael Behr, doesn’t like his current job and he’s not very good at it. This, after all, is a man who doesn’t much care for detail. He has boasted about quitting his management consultancy job after a week:

Try as I might, I could not look at an overhead projection of a growth profit matrix and stay conscious.

I have some sympathy with this. Like many people, I have sometimes felt like chucking my job in after one too many PowerPoint presentations and I don’t like getting to grips with tedious detail either. My natural instinct is to look for the short cut or the new idea that will eliminate the need for mind-numbing processes. I’m one of those ‘surely it can’t be this hard’ types.

The trouble is, though, sometimes it is. What I have learnt over the years is that you often spend so long in the futile search for the disruptive idea, the paradigm shift or the next big thing that, had you devoted that time and energy to working through the messy detail, you would have solved the problem by now. Sometimes you have no choice but to do the boring stuff.

Brexit, I fear, is one of those times. It is riven with eye-wateringly complex detail nested within more eye-wateringly complex detail. There are hundreds of treaties and thousands regulations to be worked through. Thousands of lorries currently go through ports with little or no capacity for customs checks. As the Institute for Government pointed out, the customs point for Dover and the Channel Tunnel only has parking for 82 trucks because most of the trade for these ports is covered by the single market and customs union.

Perhaps one day X-ray machines, robots, airships and drones might be able to do all this but for now this is science fiction. Even if the UK’s new computerised customs system is implemented on time, its design was based on pre-Brexit assumptions. It may not be able to cope with the huge increase in customs declarations.

The further we move away from the EU, the more difficult it will be. The sort of clean-break Brexit advocated by Boris Johnson will require a hell of a lot of detailed work. I’m no expert on the construction of customs infrastructure but I’m guessing that it’s already too late to build enough capacity for 2019. Those who wanted the hardest Brexit were, for the most part, those who were eager for Article 50 to be triggered. If they had stopped to think about it, they should have been the ones arguing for the government to hang fire. A Brexit which sees the UK leaving the single market and customs union and starting out without a single trade deal with anyone, was always going to need far more planning and preparation than can be done within two years.

Yet it is the so-called hard Brexiters who are still maintaining the line that it’s not going to be that difficult and dismissing any suggestion that it might be. As Rafael Behr says:

Reality is coming on hard and fast. May’s true allies in confronting it are the people who warned all along that the impact would hurt. But she has a cabinet packed with people who insist that the collision is avoidable.

You can tell them by the Johnsonian way they twist queries about how it is done into rehashed arguments about why it must be done. And she has a party that prefers a game of hunt-the-saboteur to the boring homework of negotiation.

The time for flowery speeches peppered with classical references and Latin tags is over. This is no job for dilettantes. Those who can’t or won’t get to grips with projections, plans, numbers and tedious detail should go and find themselves something more interesting to do.

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Who needs low-skill migrants anyway?

The Home Office document leaked to the Guardian suggests that, after Brexit, life will be tougher for those EU citizens coming to the UK to do lower skilled and lower paid work. While those in “high-skilled occupations” will be granted work permits for three to five years, those earning less than £18,600 a year will only be entitled to a 2 year visa and will no longer be allowed to bring their families to the UK.

The paper also calls for employers to give preference to UK workers and suggests that they should complete an “economic needs test” to confirm that no suitable applicants are available before recruiting EU citizens.

The document is not government policy and it is not yet clear who wrote it or even how many ministers or senior civil servants have seen it. Nevertheless, it tells us something about the thinking on which future immigration policies are likely to be based.

The paper seems to be based on the following assumptions:

  1. There will be a continuing supply of workers who want to come to the UK so much that they will be prepared to put up with whatever restrictions and inconvenience the government throws at them;
  2. There is a ready supply of UK workers able and willing to do the jobs that are currently done by EU migrants.

The first of these is highly questionable. The most recent immigration figures showed a sharp reduction in immigration from the EU. The falling value of our currency, better opportunities elsewhere, continuing uncertainty about their status and, most probably, the toxic atmosphere in the UK have led to a drop in the number of workers from the EU15 and EU8 countries.

Chart by Resolution Foundation

As Jonathan Portes says, before we have even taken back control, a lot of EU migrants have decided to leave anyway.

We’re not being more selective. It’s the immigrants who are being more selective. It’s not that we’re choosing to have fewer immigrants, it’s that fewer immigrants are choosing to come here.

Will there be plenty of British workers waiting to fill their jobs? Probably not. The idea that there is an army of workless people in the UK is even more out-of-date. The UK-born working-age population is no longer increasing. According to some estimates it has already peaked. In a speech last month, Bank of England MPC member Michael Saunders pointed out that unemployment is at a 40 year low and the underemployment associated with the recession is falling rapidly too. He concluded that there is very little spare capacity in the labour market. This, combined with the slowing down of migration from the EU, is already causing labour shortages in the most migrant-dependent industries.

Chart by bank of England using BoE and ONS data. The three industry sectors with the highest share of employment of EU nationals are manufacturing, accommodation and food services, and administrative and support services.

The authors of the Home Office paper may argue that they are simply reflecting the views of a majority of voters. As British Future’s report published earlier this week showed, people tend to think that the economy needs high skilled workers but that the number coming to do lower paid jobs should be cut back. We like doctors and scientists but we are not so keen on low skilled workers.

Or, at least, we are not keen on low skilled workers when they are called low skilled workers. Give them specific job titles, though, and attitudes tend to change.

It is striking, however, that even within this category respondents are able to make pragmatic concessions to secure the economic gains of migration: two-thirds of people (66%) would be happy for the number of seasonal workers coming to the UK – to work on farms, food processing factories or in hotels, for instance – to remain at current levels (55%) or increase (11%). That view is also held by more than half (55%) of Leave voters in the referendum, and 78% of those who backed Remain.

Digging down into the detail of attitudes to different kinds of lower- skilled migration there is further nuance. While the pubic would like to reduce low-skilled migration overall, there are numerous exceptions. Attitudes soften when people are asked to give their opinion about people migrating to do a particular job – whether that is care work, fruit-picking or waitressing.

But apart from the care workers, construction workers, waiters and fruitpickers, what have low skilled* EU migrants ever done for us?

It’s all very well to say, as some do, that we managed before (whenever ‘before’ was) without all these EU workers. Maybe we did but many of the things we now take for granted are dependent on migrant workers. As the FT’s Sarah O’Connor said, we’d miss those unskilled migrants if they stopped coming:

Have you ever noticed how supermarkets run out of fruit salads on sunny days when everyone decides they fancy a picnic? No? That’s because they rarely do.

I never really thought about the mechanics behind this until I interviewed a man who supplied temp workers to a British company that made bagged salads and fruit pots. Demand would fluctuate according to the weather, but British weather is notoriously changeable and fresh products have a short shelf life. So the company would only finalise its order for the number of temps it required for the night shift at 4pm on the day. Workers on standby would receive text messages: “you’re on for tonight” or “you’re off”.

Most of this hyper-flexible workforce had come to the UK from Europe. “We wouldn’t eat without eastern Europeans,” the man from the temp agency said confidently.

And if the rising cost of food and building work doesn’t worry you, the impact on the care sector should. Care homes are already experiencing recruitment difficulties. Lack of space in care homes has a knock-on effect on hospitals, which are themselves likely to suffer from staff shortages if EU migration is significantly reduced.

Just because these workers are low paid it doesn’t mean that they are not necessary. The government may be hell-bent on reducing the number of low-skill migrants but it isn’t telling us how it plans to deal with the consequences. People might not complain too much when they can’t get salad on a hot day but when their hospital is full and they can’t get help for their elderly relatives they will blame the government.

The government is under pressure to ‘do something’ about immigration. The trouble is, what it seems to be proposing is based on flawed assumptions and may well cause more problems than it solves. The fact is, we need these so-called lower skilled migrants as much as we need the engineers, scientists and doctors. But perhaps people won’t realise that until they have gone.

 

* The term ‘low skilled’ is contentious here. In a previous role I used to recruit care workers and I was amazed by their physical, mental and emotional resilience. If anyone thinks it is a low skilled job, I suggest they try being one for a day. However, it is these and the other jobs on this chart that will be designated low skill for migration purposes. What constitutes skill and whether it is high or low is a discussion for another day.

 

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Summer is over: now Brexit gets serious

Throughout my seven years at senior school, we had the same headmaster. Every September he made the same speech on the first day of term. Half of the year’s work, he said, was done in the autumn term, between September and Christmas. We should put the lazy days of summer behind us. It was back-to-reality and hard work from now on.

I have long believed that something similar happens in business. This is the time of year when things get back to normal after the summer and there is a flurry of activity in the months before Christmas. After New Year people start sloping off on skiing holidays. That then shades into spring breaks and before you know it, it’s summer again. In the autumn, though, fewer people go away and the run up to Christmas is when a lot of the concentrated work gets done.

This autumn is also Brexit crunch time for a lot of firms. What might have seemed like an interesting intellectual exercise a few months ago is now starting to look a lot more real. At the end of September we will be 18 months away from leaving the EU. And as anyone who has ever run a major project knows, 18 months isn’t very long.

According to KPMG’s Brexit Navigator, the first decision-making deadlines are due this month. Any organisation that wants to set up an EU subsidiary, move people abroad or apply for EU regulatory licences needs to make those decisions this month if they are to have everything in place by 29 March 2019. It’s not only banks that will need to relocate staff. Pharmaceutical firms, airlines, media companies and the UK’s much celebrated games industry expect to move at least some of their people to the EU. Next July and August will probably be the Brexodus months. Many people will want to move at the turn of the school year. To be in place by March 2019 means moving next summer. That is less than a year away. Companies therefore need to start making decisions about relocation now.

August was a transition month for Brexit says Jill Rutter of the Institute for Government, the point at which both the government and the Labour Party acknowledged the need for some sort of transitional period after March 2019. The ticking clock has concentrated minds:

Why all this talk on transition now? On the Government side, it seems to reflect the increased power in the Cabinet of the Brexit pragmatists, most notably Hammond. He will be only too aware of the time needed for adjustment to cope with new processes at pinch-point ports – and will have heard the calls from the CBI and the Institute of Directors among others for early clarity on transition. Businesses are already warning that they need certainty about post-Brexit arrangements in the next few months.

Transition, not the final deal, is now the priority:

The Government also knows that the sooner a transition can be agreed, the less risk to business and the less it will incur nugatory spending on putting the mattresses at the foot of the cliff. Agreement on transition now is hugely more valuable than a last minute deal.

Therefore an off-the-shelf transition is looking more attractive as it can be done more quickly:

The other emerging recognition is that, whatever its demerits, a transition that mirrors (the other word of the summer) the status quo means one adjustment – not two – for business. The sheer complexity of negotiating a new deal for the transition and then a longer-term future partnership is just not worth the hassle. So, a time-limited period outside the EU’s political institutions but inside the economic ones offers an “off-the-shelf” answer.

Charles Grant, director of the Centre for European Reform, thinks that, despite all the posturing from hardliners, we will end up with the UK staying in the customs union and single market during the transition period. In other words, pretty much what we have now except with no vote. There simply isn’t time to negotiate and agree a bespoke settlement.

This would, he says, also get us over the money problem:

If the UK asked for a three-year transition and agreed to pay €10bn a year (roughly what it pays today), that would cover a large part of its share of unspent EU budgetary commitments. That would also ensure no hole in the EU budget in 2019 and 2020, the last two years of the current seven-year budget cycle – which would be a great relief to the European Commission.

An off-the-shelf transitional arrangement would certainly take the pressure off companies.  If trading rules are going to remain as they are for a few more years after 2019 there is less urgency. The trouble is, such a deal is far from certain and might yet take months to agree. This leaves businesses with a dilemma. Do they make arrangements for leaving the single market and customs union in 2019 or do they hang fire in the hope that something will be agreed?

As Faisal Islam said in his excellent summary of where we are at with Brexit, we are getting close to the point where companies will have to make a call:

[T]he clock is running down in another way too. The Government has been told by business leaders that they too will not wait around until Christmas before making decisions.

In the next three months, board meetings will occur where finance directors will put forward plans for the fiscal year 2018-2019. These plans will have to include an assessment of exactly what the legal position will be with the EU on 30 March 2019. If still unclear, many of these boards will have a responsibility to shareholders to activate ‘No Deal’ contingency plans that were prepared over the past year. This is most apparent in financial services, but is relevant across the economy.

Most organisations will do some sort of risk and impact assessment to determine how long they can afford to wait before making a decision. The longer we go without clarity on the transition phase, the more likely it is that companies will assume the worst and cut their losses. The clock is ticking and for many organisations the decision deadlines are getting dangerously close. As my old headmaster used to tell us, the autumn term is when the work gets serious.

 

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