June 10, 2019
How to create Brexit facts
Over the weekend we got a glimpse of the Brexit dynamics we are likely to see under a new Tory leader. Boris Johnson proposed two fiscal measures likely to create significant new facts for the UK’s future relationship with the EU. One is a refusal to pay the £39bn, the negotiated total financial settlement included in the draft withdrawal agreement. The other is a massive Salvini-style income-tax cut, in the form of an increase in the upper threshold for the lower tax rate of 20% from the current £46000 to £80000.
Regarding the EU settlement, a point many of the commentators overlook is that the number is already lower because of the delay in Brexit. If this matter went to litigation under international law, the UK would be held liable over its exit costs. But the adjudicated sum would not the same as the one agreed in the withdrawal treaty. Some of the line items in that settlement are beyond dispute, but not all of them.
The issue would only arise if Brexit went ahead in November without a deal. The EU will certain not renegotiate that aspect of it.
A potentially even more extreme fiscal measure was offered by Michael Gove, who promised to abolish VAT - not just reduce the rates but get rid of the system altogether. If that were to happen, it would be impossible for the UK to enter into a customs union with the EU. The UK could, however, still enter in a Norway-style regulatory deal.
Gove’s chances of securing the job are sliding after he admitted to having taken cocaine before he became a politician. Johnson is still very much the odds-on favourite to win. The other candidate who seems to be having a good campaign is Jeremy Hunt, the foreign secretary. Our expectation at the moment is that Johnson and Hunt will be the two to emerge on the final shortlist.
But beware of the power of intruding events. Gove was seen by many as a potential compromise candidate until the drug revelation. This leadership race is scheduled to go on for another month.
The tax-cut promise is politically risky. After a decade of austerity, one could make a case for investment in health and education as fiscal priorities. If the Tories were to conclude that a Thatcherite tax policy would lose them an election, they could abandon Johnson as quickly as they rallied towards him. We presume, however, that his gamble will work.
So does Roger Bootle, the conservative economist who is calling for a Salvini-style simplification of the tax code. What we are seeing here are the first signs of policy divergence between the UK and the rest of the EU. Tax is, of course, largely a matter for member states, but a combined fall of income and corporate taxes in the UK has the potential to turn the UK into a de facto tax haven from the perspective of the EU. If you were seeking a mechanism to stop future re-entry, tax cuts ensuring major divergence would be an ideal device.
Johnson says he wants to fund his permanent tax cuts from the funds set aside for no-deal preparations and - we presume - out of the savings from the £39bn. This seems inconsistent to us. If the UK were to leave without a deal, the funds set aside for no-deal preparations would be used - and probably much more would be needed than has been budgeted. But if Johnson wants to leave with a deal, he will have to pay the £39bn in full.
We still believe that Johnson is unlikely to go for no deal as a first choice, rather making a serious attempt to sell the existing treaty - with a few hyped extra bells and whistles to deflect from its content.
And finally, we noted a revealing comment by another Tory candidate, Sam Gyimah, who stands no chance of winning the contest. He is quoted by the Guardian as saying that there were a large number of Tory MPs in favour of a second referendum. We don’t know, of course, what MPs truly believe, but there is a reason Tory MPs cannot support a second referendum. They would lose their seats at the next election, which is very likely to be earlier than the scheduled date of 2022. The question to ask is not how many Tory MPs are in favour of a second referendum, but how many MPs are willing to give up their career for it. And the same goes for Change UK MPs and other independents, who would face an election at a time when they are not ready.
This is also the reason why we are sceptical of claims that the UK parliament has the power to prevent a no-deal Brexit through a no-confidence vote. This is the turkeys-voting-for-christmas option, as it would trigger an immediate general election forcing those who trigger the vote to explain themselves to their constituents.