Coronavirus vs Brexit

The Government is using the pandemic as a smokescreen to obscure the damaging economic consequences of leaving the single market. Paul Teasdale asks: why is Labour letting them?

In recent months Keir Starmer has had successes in highlighting government incompetence in handling the Covid-19 crisis, but he appears reluctant to widen the attack. In particular, he has steered clear of Brexit where the failure is the policy choices rather than delivery.

I think that things have rolled out much as Johnson hoped all along. He does not care much about the content of the deal, just how it can be presented. He has a deal that avoids tariffs and the immediate disruption they would cause, and which does not hurt holiday makers too much. It could have been agreed two years ago, but negotiations were dragged out to give the impression of perseverance and, more importantly, to give less time for scrutiny and debate. He wanted to make the prospect of ‘no deal’ real so that people are relieved that it was avoided. A selection of symbolic gestures to “sovereignty” were made: leaving Europol, Erasmus+, European Chemical Agency, Euratom – nearly all of which add burdens to British industry or undermine security.

These symbolic gestures are probably what matter most to Johnson. The Tories have given up claims that leaving the single market will bring economic benefits. If Treasury officials are doing their job then Sunak and Johnson should be aware of the serious damage that would follow tariffs, so have avoided them; but this is far from the frictionless trade that was promised.

In his recent Spending Review statement, Sunak spoke of the difficulties ahead due to Covid-19 but said nothing of leaving the EU. He has an interest in stressing the damage coming from the worldwide Covid-19 pandemic rather the damage the Government has chosen to inflict in leaving the single market. Yet in her response Anneliese Dodds, the Shadow Chancellor, never touched the subject of Europe. Both should know that beyond 2021 the economic effects of leaving the single market will be much greater than the effects of Covid-19.

The downturn brought about by Covid-19 is not like a normal cyclical recession: the short-term effect is sharper and more widespread, but the recovery will be faster and the long-term effect less. The sectors hit hardest in 2020 are generally ones that have a high churn of businesses and employment even in the best of times. Once people feel safe going out again, restaurants and entertainment venues will open, and new ones will appear. They have relatively low start-up costs so individual business closures do not endanger the sector and the overall effect on the economy will be small.

In most countries, once a vaccination programme has been completed, there will be a fairly rapid recovery. Across the developed world there is a lot of pent-up demand as most people have had their spending constrained more than their earnings. Savings as proportion of income has leaped in all western countries – the savings ratio in the UK jumped from 6% to 27%. World trade will pick up, given a boost as the Biden administration turns away from trade wars. Some sectors may require temporary state support but there will not be a need for substantial scale macro stimulation. The deficit in public finances will shrink.

This gives a clear economic rationale for intervention to protect personal incomes in the short term, while restricting contacts to protect lives. That is what the welfare state is for – helping to spread income to cover bad times. Policies would be different if there were no end in sight.

Some countries will take longer to recover: those dependent on tourism; those with a weak health service infrastructure; and those leaving a customs union of which they have been part for over 45 years. World growth will pick up but the UK will be left behind. That is the choice of a Government that has stubbornly refused to align with the single market. A Government that claims (whatever the reality) to have followed the science on Covid-19 has rejected all scientific analysis on Brexit options.

There are important differences between the sectors hit by Covid-19 in 2020 and those about to be hit by Brexit. Indeed, sectors like hospitality, tourism and arts could benefit from a devalued pound which will attract tourists, draw in students and encourage people to make films in the UK. But leaving the single market will hit those industries that export goods or financial services. Even without tariffs, producers face new costs – filling forms, transport, larger stocks. The consequences of higher costs are predictable – far more predictable than, say, the spread of a virus; it is the most basic economic axiom that a rise in price leads to lower demand. These are generally sectors, like car manufacture and aerospace, that have high capital costs.

Averting tariffs means that there is unlikely to be an immediate downturn but there will nevertheless be lower growth rates for years ahead. Businesses in service sectors not covered by the deal are protecting themselves by relocating activities to EU member states – so the UK loses employment and government revenue. The extra costs of trade will discourage many producers from exporting (and importing) – particularly smaller businesses for which exporting is a small part of turnover. It will also put off inward investment – particularly important to the UK. As the economy becomes less open to trade it becomes less competitive, producers lose benefits of scale, consumers face higher prices, productivity growth lags, trade declines further, growth slows. We have a cycle that will not be broken by judicious state aid or by making the UK more of a tax haven.

Sunak has good reasons to try to put the blame for coming economic problems on Covid, rather than on government choices. But why has the Labour Party been complicit in this? Labour has become scared of speaking on Europe. Starmer appears to believe the lie pushed by the Tory press and Corbynites that Labour lost in 2019 because of its opposition to leaving the EU. Even it were true, it does not change the fact that leaving the single market will do immense damage (and that step was never proposed in 2016).

Starmer is repeating a mistake made by both of his most recent predecessors. Ten years ago, Miliband and Balls chose not to talk about public spending and the economy because they felt it was Labour’s weak area. They let the lie grow that the recession was caused by the Labour government’s borrowing and that austerity was a necessary consequence. In 2019, Corbyn and McDonnell refused to talk about Europe, the issue central to the election. The case for remaining in the single market and a vote on the deal was never made. A refusal to talk about a subject does not make it go away. For both Miliband and Corbyn it just grew.

In the short term, Starmer is right to mock the way Johnson has put empty gestures of “sovereignty” above the interests of the British economy and society, and to push the Government to rejoin the various agencies that it has chosen to quit for symbolic reasons. But there is little acknowledgment of just how much economic damage the deal will do. In a Guardian interview he said that “the public expect us to make this deal work”, ignoring the majority who are against it. He said that renegotiation of the treaty will not be central to the next manifesto. In his new year message, he said “our best years are still to come”. I know leading politicians have to be upbeat but there was no indication that the Johnson deal has put the UK on a path of relative economic decline. It will be some time before GDP even gets back to the level of 2019. It is certain that growth rates in the UK will lag behind elsewhere. We will see living standards and public services fall behind those in the rest of Europe. Starmer understands, in a way that Corbyn could not, that the hopes of Labour delivering better times cannot be fulfilled without closer relations with the EU. If he avoids saying this then he is letting Johnson off the hook and is creating future problems for himself.

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