The Brexit White Paper – room for improvement

Jul 19, 2018

The Government’s White Paper on The future relationship between the United Kingdom and the European Union (Cm (9593) is complex – and Parliament has set about cleaning it up. Many dimensions of the relationship set out within it remain unclear even if the EU were to agree to its conditions.

Free to be free like Ireland in 1922… or maybe not?

The UK will be leaving the EU on 29th March 2019. It will then be free to develop whatever policies it wants. Even if any agreement made with the EU may not satisfy people in the UK, or a certain body of political or economic opinion, the UK will in principle be free to be free in the years ahead. A powerful analogy can be made with the position that the Irish Free State found itself in following the 1921 Government of Ireland Act. Many Irish politicians were disappointed with the treaty agreed by Michael Collins in London yet, in the years ahead, they had the freedom to dispense with everything from annuities compensating landlords as part of the reform of land law to removing the British sovereign as head of state.

‘Every thing must change, so that every thing can remain the same’

There are, however, important qualifications to this analogy. In 1921 the Irish political elite and its people were united in a common purpose to free themselves entirely from the control and sovereignty of the British crown. The position in contemporary Britain is completely different. The judgement of the British administrative, intellectual and business elites was rejected by the electorate. These elites refused to accept the electorate’s judgement. The political leaders realised that they would have to appear to defer to the electorate but in practice their approach has been to try to ensure that as little changes as possible. The mantra is ‘every thing must change, so that every thing can remain the same’. Part of this has been an exercise in identifying why people voted to leave. Every reason under sun has been offered as an explanation except direct rejection of the EU’s constitutional consequences, institutions and policies. The approach has been that, when not actively identifying opportunities to vitiate its departure from the EU, as much of the present relationship as possible should be set in aspic.

The legacy of This Blessed Plot

Obtaining a balanced and objective perspective on Brexit negotiations will inevitably be difficult because Britain’s national debate about its relationship with Europe has for many years been toxic. The poisonous character of the debate has best been explained by the Hugo Young in his book This Blessed Plot. Young explained that membership of the EEC involved a complex and important loss of sovereignty from the start as part of what was essentially a political agenda of integration. This was presented to the public as little more than a technical trade agreement where possible constraints on sovereignty were of little significance.

Young characterised this approach as ‘mendacious reassurance’. It is best exemplified in the 1971 White Paper presented to Parliament by the Prime Minister Edward Heath that asserted that there was no fundamental loss of sovereignty involved. Young drew attention to the Lord Chancellor, Lord Kilmuir’s memoranda during the UK’s first application for membership in 1962. The Lord Chancellor recognised the constraints on parliament involved and said that these were so significant that the Cabinet would need to explain them from the start if it was to obtain political and public consent for membership of the EEC. Lord Kilmuir’s advice was ignored.

The consistent approach was to pretend that nothing of significance was involved. In the 1990sthe public began to have reservations about the extent of EU integration, particularly following the Single European Act and the Maastricht Treaty. They were elegantly reassured by the Foreign Secretary Douglas Hurd that Britain was winning the arguments in Europe – just as the full constitutional consequences of its treaties were slowly becoming evident.

The starting point for any discussion on the EU is a lack of trust

This means that any statement about EU policy on behalf of the British Government encounters a high degree of scepticism about both its veracity and accuracy. In the past when it has not represented a deliberate gloss on the objective position it has often turned out to be wrong. In relation to the EU British ministers have exhibited a capacity to mislead themselves about the consequences of EU agreements or policy. This pattern means that any statement or assertion that maintains, extends or renews UK involvement with the EU will be treated with suspicion and caution by a large part of the public and with hostility by many supporters of Brexit. The British political establishment will encounter a problem of trust of its own making.

What criterion should be used to assess the White Paper?

How should the White paper be judged? The appropriate approach should be to identify the main deficiencies of the EU and the institutions and policies that a country may choose to modify given the opportunity. That in term would be determined by the criterion of some sort of benchmark for good or desirable policy. A useful starting point is to recognise that a country may periodically wish to change policy or experiment with different forms of property rights and ways of managing and regulating enterprises. So the first test is whether it will be possible for a government to embark on a course of action such as nationalisation, privatisation or tax cuts without being constrained by undertakings agreed with the EU.

Maximising economic welfare and putting the Consumer first

The broad focus of policy should be the use of the price mechanism to maximise the welfare of consumers in the long-term. This implies liberal trade policies with no or very few tariffs of the sort proposed in the Policy Exchange paper Global Champion. The same liberal approach informs Policy Exchange’s approach to agriculture. The starting point should be the welfare of the consumer, policies to support farm incomes, and protection of the environment at the least cost to economic welfare. Policy Exchange’s paper Farming Tomorrow set out the way in which the CAP is defective.

Trade reform, customs and tariffs

The complex proposed customs arrangement will apparently enable the UK to unilaterally cut tariffs and pursue free trade agreements with other countries. The proposal to continue to abide by the EU framework for the regulation of goods and agricultural products will mean that there are limits on how far the UK will be able address non-tariff barriers to trade. This will limit the depth and ‘quality’ of such trade agreements. Having the freedom to remove and lower tariffs will enable the UK to be a distinctive voice in international trade forums and will give the Government the scope to improve the welfare of UK consumers and economic agents by unilaterally lowering and removing tariffs. This is a significant step forward.

Farm reform

The UK will be out of the CAP. This means that the high protective tariffs on food and agricultural products can be modified and the structure of transfer payments and subsidies to farms can be reformed to focus help on smaller farm businesses. However, by continuing to apply EU regulations to agricultural goods, consumer choice will be restricted, important opportunities for innovation will be missed and would make international trade liberalisation more difficult because the EU rules on agricultural trade have been an important obstacle in multilateral trade reform.

Regulation of goods

EU law will continue to apply to the trade in goods. Much of this regulation is led by wider international agreements on standards and it would probably be mistaken to exaggerate the extent of the constraint that this will impose on the economy. The manufacturing sector only represents around ten per cent of GDP and services are much more important. The UK will be able to increase domestic consumption by lowering and removing tariffs on manufactured goods. The concern will be about ensuring such regulation is focused and proportionate in the way that much of it now is not.

Services

Services will not form part of the agreement and will not be regulated by the EU. This is welcome. It will be important to ensure that regulation of goods does not extend in unhelpful ways into services. One of the principal economic reasons for leaving the EU is to protect financial services from the long-term EU agenda of financial market regulation. At its most benign it involves 27 countries with no large whole international securities markets regulating the one country that does have them, and countries without private funded occupational pensions regulating the three –the Netherlands, Sweden and UK – that do have significant private pension provision. The White Paper’s approach appears to be along the lines of equivalence that has always appeared to offer a sensible option.

Science, technology and innovation will continue to be hindered

Innovation, technology and science will continue to be hindered by the EU. Policy Exchange’s work on innovation has identified significant problems with EU policy. The precautionary principle, the directives regulating the environment, chemicals, metallurgy, and gene technology all damage innovation. They combine to protect existing incumbent producers against innovators and challengers and to make innovation more expensive and slower. EU science policy is out of step with international science and the White Paper will maintain this defective position.

The mistake of thinking the rule book is about economics when it is about politics

The whole approach of the White Paper is flawed because it approaches the relationship as though it is a straight forward potential economic relationship. The first chapter is Economic Partnership. The EU is a political partnership where economic policy is a surrogate for political integration. Its regulation of goods is not principally to facilitate an efficiently functioning market but to extend the political reach of the EU’s institutions. As a result, much of its regulation is clumsy, expensive and poorly focused. It often has the consequence of creating valuable economic rents for particular business lobbies at the expense of consumers and the efficient functioning of the economy. That is why so many business lobby groups have been so energetic in its defence.

Common Market and Single Market rules have intruded into many areas remote from what is necessary to regulate a market in goods and services. There is no effective mechanism to prevent this than there was in the Treaty of Rome or the Single Market Act. The White Paper makes it clear that the UK will maintain the present body of regulation, when what is needed instead is a patient, methodical interrogation of the regulation in order to improve it. Applying existing EU regulation and its evolving iterations will not unblock one of the central problems of EU –UK relations: how to reconcile a common law tradition with a civil and administrative law tradition. Under the proposals outlined it will be very difficult to confine regulation of goods production.

The true test of Brexit: the possibility to change policy and change it again

Countries need to be able to experiment with policy. Things need to tried and ended easily in the same way that they need to adjust to changing events more broadly. The EU rule book on goods and services stands in the way of innovation and adjustment. Public sector procurement, chemical regulation and the use of ash from incinerators are all examples of awkward and expensive rules that would be beyond easy reform. Before a budget a chancellor presently has to seek permission on matters such as venture capital relief – lest they be scored as a state aid. It would appear that this would continue. Whitehall departments do not often know what and what does not constitute state aid. This was one of the problems of the new training levy. One department told companies one thing and another said something else.

The politics of the White Paper have been unfortunate. The EU has been an increasingly toxic issue for the Conservative Party and the wider electorate. The Prime Minister’s Lancaster House speech, February 2017 White Paper and the Conservative Manifesto united the Conservative Party. The present White Paper has not simply reignited a poisonous debate in the Conservative Party but has set up the conditions for the ulcer to continue to weep, become re-infected as all sorts of unexpected EU regulation, payments and comic bureaucratic initiatives are played out. As one former head of the Treasury has put it: we are definitely leaving the EU, but the argument about the relationship will go on. The problem with the White Paper is that the arguments will continue in an aggravated manner while many of the practical opportunities will be missed. There is a danger that in terms of public trust the White Paper may end up being a postscript added to the late Hugo Young’s book.

Author

Warwick Lightfoot

Warwick Lightfoot
Head of Economics and Social Policy Read Full Bio

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