2nd June 2016
* This is an edited version of a piece that first appeared in Prospect Magazine on line on 31st May 2016
Most of us have probably had more than enough of the EU referendum debate to last a lifetime. Visceral members of both camps will not change their minds over the next few weeks. My own view, as explained here, is that we should vote to Remain. The option to Leave will always be there, but the price of exercising that option tight now is not right. If we had to vote Leave, we should do so when a) we are better prepared for tough global conditions and b) if the EU, which curiously may be more amenable to change over the next few years than at any time before, refuses to do so.
For all of that, there is a short time left before we do have to vote, and much to be said in particular to try and influence those who are undecided or of weak persuasion, and those who may not even vote, especially among younger age groups. As the 3-week countdown to the referendum starts, the campaign basically boils down to three issues: the economy, and immigration and sovereignty.
The economy
Remain are widely credited with winning the argument on the economy, and will be keen to keep the focus on it. The economic case for staying in the EU has been endorsed by what Leave campaigners have called a ‘cosy clique’ of institutions and elites. These include the Treasury, Bank of England, the National Institute of Economic and Social Research, and the Institute for Fiscal Studies at home, and the IMF, OECD, the World Trade Organisation, the leaders of the G7, the ECB, and past and present US Treasury Secretaries among other policy-makers, except for President Putin. You decide is this is a cosy clique peddling a conspiracy or if there is something about their fairly common narrative that they really want us to take note of. No one, but no one on the Leave side has offered any empirical or reasoned economic work of comparable quality and credibility that suggests they are wrong.
Economists have opined about the modelled long-term costs and short-term costs arising from leaving the EU. Remainers have used some of the predictions to emphasise economic disaster, while Leavers have poured scorn on economic forecasting, and the sources of the forecasts. There are always uncertainties associated with precise economic predictions, but it is fair to say that there is now broad agreement that there will be potentially significant economic and unemployment costs if we decided to leave. Ian Duncan-Smith acknowledged as much last week, arguing it was a price worth paying.
But this isn’t about 1 or 2% off GDP for a short period. It’s much more than that. The reality is that uncertainty and unpredictability would result in weaker spending, investment and borrowing by households and companies for an indeterminate period of time, and that it would take a long time before the UK’s trade and economic relations with the EU could be put on to a new footing. In a nutshell, we would be poorer, and perhaps for some considerable time. The starting point for preparedness is not auspicious: households save less than before the financial crisis, the ratio of house prices to incomes is higher, and the external deficit is significantly larger.
Without access to the Single Market, which the Leave leadership has stated it neither wants nor needs, it isn’t clear how the UK would acclimatise to a new world. It says the UK could exist perfectly well inside the 161 member World Trade Organisation. But the WTO boss, Roberto Acevedo said last week that if Britain left, it would face unprecedented negotiations with all other members because UK membership of the WTO had evolved and been framed for 20 years by negotiations as part of the EU. Brexit, therefore, would have to lead to new arrangements on thousands of tariffs, quotas and subsidies and on access to markets on which banks and other service companies depend. At a stroke, the UK would lose preferential access to other markets covered by 36 trade agreements and 58 countries, negotiated by the EU. These new arrangements would cost billions of pounds, and have to be conducted by trade negotiators that the UK doesn’t even have at this point.
One economic statistic that, strictly speaking, should be put out to grass is the much touted £350 million a week, now rebranded as the £50 million a day, that the UK supposedly pays to Brussels, and that could supposedly be reallocated to causes, such as the NHS. The independent UK Statistics Authority has deemed the claim ‘misleading’, saying it doesn’t account for the rebate from the EU. If you want to check, look up the ONS’s so-called Pink Book, which is an annual, comprehensive review of the balance of payments, and dig up Table 9.9. The UK’s net contribution to the EU in 2014 was £9.9 billion, and it’s lower still, allowing for other monies spent by the EU in the UK. In any event, outside the EU, this money would be swallowed up the costs of having to ‘reboot’ our administration and governance systems, by the hit to public finances from a weaker economy (estimated at £20-40 billion by the IFS), and by additional years of austerity.
Immigration
On immigration, the campaign boot certainly seems to be on the other foot. In 2015, net immigration from the EU was 184,000, while from non-EU countries it was 188,000. These numbers were seized upon last week by the Leave campaign as a further example of the government’s failure and inability to stem the inflow of EU migrants. To the extent the official data are accurate, there were 2.9 million people of EU nationality living in the UK, and 2.15 million in the labour force. Foreign citizens of all nationalities represent about 8.5 per cent of the population. How realistic are the allegations that immigration threatens jobs and wages, costs the country, and adds to social pressures?
Given that the levels of employment and labour force participation are at all-time highs, and that unemployment is roughly 5 per cent, the threat to jobs doesn’t stack up. On the contrary. In the healthcare system and a raft of other occupations, immigrants are less stealing jobs than filling shortages. It is possible that immigration tends to lower pay in a handful of specific sectors, but the fundamental issue of low pay in the UK, as elsewhere, is much more about a potpourri of factors ranging from weak investment and productivity growth, demographics, and the effects of new technologies on middle-level wage and middle-skilled occupations. Further, there is simply no empirical evidence that there is any material cost to the economy from immigration. In other words, immigrants, who tend to be younger and healthier, tend to contribute more in taxes and charges than they derive in benefits, and the reverse happens as they get older. Just like everyone else.
Pressure on public services, such as hospital waiting lists, doctor’s appointments, school places, and housing availability is clearly an issue that resonates with voters. Yet, the stock of immigrants is not an unmanageable problem, given total population size and growth if the government and local authorities fulfil a proper, enabling role. However, at a time when the government has chosen to lower spending on public services by 12.6 per cent between 2011/12 and 2019/20, despite a rising population, especially of older citizens, is there not a more poignant explanation for pressure on public services? To the extent there’s a resourcing problem, it’s less about immigration, and more about the ageing society. Tin any event, to check the flow of EU migrants overnight, we would have to both leave the EU and the Single Market, which requires participants to respect free movement provisions. You have to ask if the price of leaving both weighs against the significantly smaller cost of managing our migrant flows more effectively. We could do that with relative ease.
Sovereignty
The issue of sovereignty and taking back control has become a populist rallying call. Every nation state makes choices about how to balance high levels of economic integration (eg the Single Market in the EU) from which it derives material benefits, with some pooling of sovereignty, and some ceding of democratic decision-making. UK regions do this with regard to Parliament in London, as US states do with regard to Washington DC. It happens inside the IMF, WTO and so on. So, it is not strictly correct to say that the UK, one of the least regulated countries in the EU, would reclaim control of its sovereignty outside the EU.
Yes, the UK has to conform to sometimes annoying rules and standards for products, markets, the environment, and as some employers would say, workers’ rights. On Twitter, one of my followers who runs a small business in the financial services sector has argued vehemently about the burden he says he faces from EU red tape, and that leaving is a price worth paying for being shot of it. I don’t doubt that he is and feels genuinely constrained, and many small enterprises that don’t access the Single Market may feel similarly put upon. But financial services may have especially onerous regulations that most people would approve, and no system anywhere in the world caters adequately for all shapes and sizes of business. There are winners and losers.
In any event, on all major matters pertaining to public spending and taxation, national security and defence, education and welfare and so on, Parliament’s decisions are first and final in any case. Leave campaigners will insist that regaining control over EU migrant flows is of paramount importance, but voters will have to decide if this alone warrants leaving the EU. No one in the Leave Campaign leadership is campaigning to stop immigration. The key issue is how economic migrants will be accommodated, as indeed it is now.
Doom and gloom versus riskiness and cost
Finally, until now, both Remainers and Leavers have claimed it would be a disaster for the country to leave and remain, respectively. This won’t change. The truth, though, is more nuanced. The UK will neither sink without trace outside the EU, nor face a future of abundance and opportunity freed from the alleged Brussels yoke. We will not be over-run by migrants inside the EU, nor will we be condemned to permanent economic collapse outside it. We will continue to pool some of our sovereignty with others formally inside the EU, or less transparently outside. But the bottom line is that after an almost certain economic downturn post-Brexit, life outside the EU over the next several years and for our children will be riskier, harder and more costly.
Whether you’re a Remainer or a Leaver, you can’t duck the reality that the world has become a more dangerous place since the financial crisis. Great economic uncertainty and nationalism are rife in Xi Jinping’s China and Putin’s Russia. In the US, we may hope that Hilary Clinton goes to the White House to temper these pervasive trends, but a Trump presidency that would exacerbate them is a realistic possibility. In the troubled Middle East, the new era of low oil prices means a high likelihood of political and economic upheavals in and around Saudi Arabia. Emerging markets, once the hoped-for global economic pied piper, have lapsed into a growth hiatus and trade funk of unknown duration. And then there is the environment, terrorism and security, the fight for fairness when it comes to income inequality and multinationals paying taxes, the absorption of new technologies, collaboration and funding in science and innovation, and much more. We have the choice to remain integrated into our geography and try to deal with a complex world as it is, or to leave it to find our feet in a world we are told is benign, but that doesn’t exist. That’s a false prospectus.
