Jam tomorrow!

Professor of Economics, Robin Bladen-Hovell

Last Wednesday’s Autumn Statement was striking for its sobriety. Gone, largely, were the gimmicks that characterised previous Autumn Statements and rabbits were conspicuous by their absence from Philip Hammond’s first set piece.

The job, of course, was by no means easy. The austerity inheritance and recent adoption of the Brexit agenda saw to that. While the former continues to exert an unrelenting downward pressure on budgetary decisions, the latter has significantly increased the degree of uncertainty that surrounds the future thereby compounding the difficulty that the Chancellor faced in charting a prospective course for the economy. Added to this was the apparent desire to use the Autumn Statement as the first stage of a government make-over that seeks to associate the new government with more than austerity and Brexit, identifying the priorities of the new administration with the concerns of a poorly-defined group of low-to-medium income, in-work households classified as just-about-managing, or JAMs. Unsurprisingly, with so many competing claims, the resultant Autumn Statement offered relatively little to anyone.

As with all Autumn Statements it contained a variety of policy measures. The first and possibly the most important was the attempt to future-proof budgetary policy against the increase in uncertainty. This took the form of a significant relaxation of the budgetary framework within which government tax and spend decisions are taken together with the formal announcement that this would be the last Autumn Statement and that, from next year, it would be replaced by the Budget. The effect of this announcement is to provide the government next year with two opportunities to adjust tax and spending plans without either being necessarily perceived as an emergency response to changing economic conditions. Future-proofing the near term achieved. Over the longer-term, the commitment to reversing the effect of the financial crisis on the public purse during this parliament was relaxed to the point where the commitment has become simply lip service to the idea of there being a budgetary framework. To all intents and purposes the government can no longer be called for failing to achieve its targets because the targets themselves have conveniently all been moved into the next parliamentary period (2020/21). Moreover, the arbiter of whether these targets should change at any point before that date is the government itself.

Of course, much of this reflects the prospective effects of Brexit which, at present, are completely unknown. Fortunately, the economy has proven more robust since the referendum than was anticipated, with both exports and consumer spending stronger than expected. Background papers from the Office of Budget Responsibility (OBR) show total output growing over the year to the third quarter by 2.3%. However, this buoyancy has not translated into an improvement in government borrowing and the OBR predicts that government borrowing will continue to deteriorate, adding up over the next five years to a need to borrow some £122 billion more than previously predicted, with almost half of this increase due to Brexit itself.

Despite the improvement to exports, business investment declined in the third quarter reflecting the continuing effect of uncertainty on the sector and the prospects are for this weakness to spread more widely in 2017. Households, for example, are particularly vulnerable to the adverse effects of inflationary pressures that are currently building in the economy following the fall in sterling over the summer. Reflecting this, the OBR downgraded its forecast for output growth in 2017 to 1.4% which, while higher than the consensus forecast for the economy, is 0.8% lower than they predicted at the time of the Budget in March. Moreover, in a first-pass at quantifying the effect of Brexit over the longer term, the OBR also suggested that potential output for the economy will have grown by 2.4 percentage points less by 2020 than it would have done in the event of a vote to remain otherwise. It associates this weaker growth with two main factors: weaker investment and a reduction in immigration. However, in both cases the OBR acknowledged that considerable uncertainty remains.

In many respects, it was surprising that given the weakening business position, the Autumn Statement didn’t contain more assistance directed towards companies. Business taxation, including employer National Insurance contributions are scheduled to rise because of the decisions taken. Instead the corporate assistance appears to be primarily focused on the longer term – road, rail and broadband infrastructure – none of which will significantly impact in the short term. These investments, alongside investment in R&D and skills, are directed at improving productivity, an area where the UK has lagged the field for many years, reflecting the lack of a clear industrial strategy for the country. Recognising this lack is therefore welcome but much more is required before we can say that a major change in policy direction has occurred.

Another area where the Chancellor had to deliver was in relation to assistance for the just-about-managing households, or JAMs, whose prominence has risen in recent months on the back of commitments made by the Prime Minister. For this group the headlines included increases in the living wage from £7.20 to £7.50, adjustment to the rate at which benefits are withdrawn (the taper) under Universal Credit as income from work increases, together with a freeze on fuel duty and commitments to bear down on estate agent fees on those renting and raise the threshold for lower band income tax. However, these changes are dwarfed by the reduction in benefits of £3 billion that will impact on lower-middle income households in coming years since the effect of many of the measures announced fall largely on households who fall outside the JAM definition.

Taken together, the key points of interest in the Autumn Statement seem to be tacit acknowledgement by the Chancellor that the UK will pay a (potentially significant) price for Brexit. Economic momentum enabled the Chancellor to avoid making a major policy response to the referendum result in the short-term but nothing in the Autumn Statement prevents such a response being required in the future once the shape of the departure begins to emerge. As for the just-about-managing households, here it looks very much that, like Alice in Wonderland, it will be jam tomorrow.

Early response to the Brexit vote

Professor Robin Bladen-Hovell, Professor of Economics

With financial markets unwinding their immediate response to the decision to leave the EU, the initial dust from the referendum is beginning to settle and the nature of the likely short-term effect of the referendum on the economy is starting to emerge. While short of the gloom and doom prospects painted by the Remain Camp prior to the vote, the picture that is starting to take shape appears grim for the next few years at the very least with considerable opportunity for it to become grimmer should some of the downside risk-factors fall unfavourably.

The immediate response to the referendum result was a sharp decline in the UK stock market with the FTSE100 falling just over 5½% by June 27th while the broader FTS250 fell by just over 13½% in the same period. These effects, however, have been transient with the headline FTSE100 which represents larger, more internationalised, companies recovering within a week of the referendum and the FTSE250 eventually recovering the losses by August 5th.

Sterling also fell in the days following the referendum: 8% against the dollar and 6% against the euro. However, unlike the stock market movement, this decline has not been reversed as UK citizens who have travelled abroad over the summer have discovered to their cost. A falling, or depreciating exchange rate means that we receive fewer dollars or euros in exchange for our pounds than was previously the case or, put another way, each dollar or euro costs more sterling to acquire. Other things being equal, these changes make goods and services exported by the UK cheaper in foreign currency terms while increasing the price of goods and services imported into the UK, a potential stimulus to net exports and the demand for goods produced by the UK.

However, the overall benefits of this decline are likely to be small and temporary in nature. UK producers who depend upon imports for raw materials or components will find the benefits of the depreciation offset, at least in part, to the extent that depends upon the international character of their supply chain. Ford UK, for example, recently announced that 60% of their components for cars produced in the UK are imported from aboard with the result that increasing cost pressures will offset a significant portion of the benefit that otherwise flows from a lower exchange rate. Moreover, over time, the benefits of the depreciation will be offset more generally as domestic prices across the economy adjust to increased import costs.

Unfortunately, alongside the movement of the exchange rate, evidence is beginning to accumulate as to the deteriorating state of consumer and business confidence that was predicted ahead of the referendum. The evidence takes three forms: the sharp decline in the July Consumer Confidence Barometer produced by GfK NOP (UK) and the Markit/CIPS UK Purchasing Managers Index published for the same month and the equally dreadful results from the August CBI Business Confidence Survey. In each case either the headline figure or a key component recorded the sharpest decline since 2009 – in the case of the Consumer Confidence Barometer the 11 point decline represented the sharpest drop for more than 26 years.

Such movements suggest the onset of a slowdown in the economy with anecdotal evidence pointing the finger in large part to increasing economic uncertainty following the referendum. In the face of increasing uncertainly, households and firms are likely to delay decisions regarding expenditure generally and investment in particular, thereby reducing the level of aggregate demand in the economy and lowering growth.

Although no official economic data about the actual state of the economy has been published to confirm the onset of a slowdown in economic activity, or otherwise, City and other economic forecasters have in the main all revised down their predictions for the economy this year and next. Examining matched forecasts of output growth, produced by the same forecasters in June and July show, on average, a reduction in the growth forecast of 0.3% for this year and 1.6% for growth in 2017. Predictions for unemployment and inflation deteriorate similarly over the same horizon and the key factor influencing this worsening outlook is the referendum result.

This weakening of confidence seems to have played a key role in the decision by the Bank of England to relax monetary policy at last week’s meeting of the Monetary Policy Committee which cut the headline Base Rate to the historically low level of 0.25%. The cut was accompanied by a package of measures, including an Asset Purchase Facility known as the Term Funding Scheme, that are designed to ensure that banks pass-on the benefit of lower rates to households and firms. Despite this, however, the Bank of England’s actions are likely to have very little effect on the economy in practice. Base Rates have sat at 0.5% for since March 2009 so last week’s change is very small beer. Equally the relationship between interest rate policy and the economy is complicated and much more effective at constraining demand when policy is tightened than it is in expanding the economy when policy is loosened, sometimes compared with trying to move a weight with a piece of string: it works well when the string is tightened but doesn’t necessarily do much when the string is loosened.

While the current capacity for monetary policy to influence the economy is probably limited, changes in budgetary policy take longer to implement and are unlikely to be occur before the autumn should the slowdown in the economy be confirmed. This, in part, reflects the sensible decision to wait upon firm evidence of a slowdown in the economy and allowing its prospective depth to be assessed as well as judging whether it is likely to be temporary or more protracted. The delay also reflects the need for Philip Hammond, the new Chancellor to think through the detail of a new fiscal framework given George Osborne’s decision following the referendum result to abandon the budgetary target of running a surplus by 2019/20. The new framework will not represent an abandonment of austerity since government existing debt will still need to be repaid no matter what, but will have to reflect the new reality representing the changed circumstances following the leave vote. Any slowdown in growth will lead to tax revenues falling, worsening the deficit position and making that 2019/20 target less achievable. A discretionary stimulus, whether in the form of reduced tax rates or spending increases, will compound this with the result that the period of austerity will effectively extend beyond 2020.

All of this, of course, is before Article 50 is triggered and official negotiations to leave the EU commence. Only then will we begin to see what the Prime Minister meant by “a vote to leave is a vote to leave” and the precise shape Brexit begins to emerge. Taken together, all of this suggests that developments over the next couple of months will be critical.

Did Bank of England governor speech shore up confidence in Brexit UK?

Gabriella Legrenzi, Senior Lecturer in Economics, Keele University and Costas Milas
Professor of Finance, University of Liverpool have published an article on The Conversation in reaction to Bank of England Governor Mark Carney’s press conference last Friday.

“Bank of England Governor Mark Carney was admirably quick to read the unfolding economic dangers of a Brexit when the referendum result was declared. While stock markets and sterling plummeted amid developing financial stress, the governor’s statement immediately brought to mind the famous “whatever it takes [to save the euro]” intervention by European Central Bank chief Mario Draghi at the height of the eurozone crisis in July 2012…”

Read the full article here

Should the UK leave the EU? Thoughts on the forthcoming UK referendum on EU membership.

By Dr. Chris Tsoukis Senior Lecturer in Economics

The day of reckoning is approaching! The UK is due to vote on the 23rd June 2016, about one-and-a-half months away from the time of writing this, on staying in (the YES vote) or exiting from (NO – ‘Brexit’) the European Union. This development will be a defining moment in the, sometimes fraught, 40-something-year -old EU membership of the UK, which joined the EU in 1973. It will be defining not only for the UK, but also for the EU of (currently) 28, which, in the case of a Brexit, will see for the first time a ‘rolling back’ event that undoes integration.

This second referendum (the first one robustly re-affirmed the UK membership in 1975) has been prompted by some uneasiness in the UK about immigration from the EU and benefit tourism. Prime Minister David Cameron had promised that he would re-negotiate the terms of the UK membership with the EU and then would ask the country to either ratify the amended membership terms and vote to stay or reject and exit. The changes that the PM has secured amount to some restrictions on the benefits that new migrants are entitled to so as to curb benefit tourism; guarantees that the City of London’s financial industry will not be unduly harmed by excessive European regulation; and guarantees that the UK would be excluded from a (perceived) inexorable drive towards ever-closer Union. Critics may argue that the changes that David Cameron has secured amount to practically little; but they do help to assuage anxiety about issues of vital importance to the UK.
Much of the debate on membership that is now in full bloom centres on three issues:

  1. National sovereignty and related issues;
  2. The economic costs of benefits from a possible Brexit, with emphasis on trade;
  3.  Migration.

Accordingly, this contribution will be structured around these issues. It does not lay any claim on ‘objectivity’ – if that attribute ever exists, it should perhaps not be expected from someone who has made the UK his home over most of his adult life, but who remains a European national. This piece will attempt to deal with the issues with the seriousness that they deserve; the emphasis will be on analysis and information and the author’s opinion will only emerge gradually.

Going back to the 1957, when it was called the European Economic Community (or, Communities), the EU has always been driven by a double motive: Firstly, to leave behind, once and for all, the possibility of strife on the European Continent by building stronger links between countries; and relatedly, to deal at a regional level with issues that were of a regional/continental character. (Note: The word ‘region’ is used here in the sense of ‘European continent’.) Post-war reconstruction, trade and foreign policy were all of that nature. Subsequent developments took naturally lots of twists and turns, but the logic running through them was always the same: to deal with regional issues at a regional level. The ‘subsidiarity principle’ that was gradually established guaranteed that issues that were best dealt at a national level because of national importance (e.g., education, health, housing, etc.) should remain in the domain of national policy-making; as such, the ‘subsidiarity principle’ became a guarantee against excessive centralisation.

Today, the amount of truly regional issues has proliferated: From the environment to trade to migration to foreign policy, and many others that the global village continuously presents us with, these are issues of paramount importance that must be dealt with at a regional level, if they ever have a chance of being resolved. There are several of these that in reality are global, not even regional; but even there, the EU has a greater chance of intervening effectively if it acts as a regional bloc rather than as a disparate collection of national voices. In all these issues, uncoordinated national decision-making will in all likelihood lead to inaction, ineffectiveness and national initiatives turning against one another. To put it slightly more technically, co-operative solutions are superior to the individual ones that are motivated by partisan self-interest. This is a key point that has been well explored and verified in various subject literatures, including those in economics, politics, and game theory.

Being part of the EU naturally entails being part of this joint decision-making: Much of the time, the UK must follow legislation that has been decided by the European Commission or by the inter-governmental conference of the heads of national government; legislation into which it may have had little or no input. But, on the other side of the same coin, there will be a few issues which will have been determined by the UK’s decisive influence, and then these decisions will be carried out at Union, not just national, level. Much has been made of one side of this coin: the ‘loss of sovereignty’; but the other side, that UK-sponsored legislation will be followed by all, is not emphasised. We should be clear: Pooled sovereignty is not lost sovereignty. Pooled sovereignty means a drive for co-operation and greater effectiveness; and because the UK is one of the bigger EU countries, full engagement will ensure that the UK’s voice will be heard more than average.

The UK’s clout in the world also hinges on the UK’s influence inside the EU. A more isolated UK will obviously carry less weight, enjoy less of a ‘special relationship’ with either the US or the rest of the world. So, once again, exit in a time of interdependence in the global village will mean less, not more, clout for the UK, both in the region and internationally. Britain will find itself following and not leading, which means practically even less, not more, sovereignty.

Yes, there is of course the big issue of the democratic ‘deficit’: EU decision-making is bureaucratic, opaque, and expensive. But the answer here, in the mind of this author, is to seek reform with a view to strengthening the European Parliament: the only body that can enhance democratic, transparent decision-making by the European people against the confused horse-trading resulting from the current inter-governmental decision-making processes. Once again, full engagement is the answer, which carries greater promise that the UK’s voice will be influential.

There is often talk, and some confusion, related to the Council of Europe (CoE) and the associated European Convention on Human Rights (ECHR). The CoE comprises a Parliamentary Assembly and the European Court of Human Rights. It is not to be confused with the EU or the European Court of Justice or European Parliament, to which they are entirely separate. (Note that the CoE, Parliament and Court, is located next to the European Parliament in Strasbourg but that is a coincidence.) The CoE is an independent inter-governmental organisation, whose remit is to debate and enforce human rights, democracy and the rule of law among its 47 member states. Exit from the EU does not mean or preclude exit from the CoE and the ECHR, and vice versa. All signatory countries have judges on the Court and often receive admonition and penalties on matters that are in the jurisdiction of the Court as stipulated by the ECHR. There is lots of debate going on as to what are the appropriate boundaries of the Court’s jurisdiction; but this discussion is entirely separate from (the question of) EU membership. Suffice it to say that exit from the European Convention on Human Rights and the CoE will leave the UK outside the mainstream of Europe. (The CoE’s ‘membership’ of 47 is much wider than the EU membership of 28 and practically encompasses the entire Europe.)

The economic costs and benefits resulting from EU membership have also received a fair amount of attention. Here, people naturally turn to economics for enlightenment. Unfortunately, there is no agreement even among prominent commentators: Based on sophisticated technical analysis, the HM Treasury Report (2016; details at the end) shows a negative economic effect of Brexit, arguing that the typical UK household will lose about £2000 to £5000 per annum, depending on what the trade regime will be after a Brexit. These numbers are not trivial, but they are hardly show-stopping (or show continuing!). Against that, equally respected authorities, e.g. Minford et al. (2015; reviewed by Tsoukis, 2016), have come to different conclusions: Motivated by the basic assumption of economic theory that free trade maximises national welfare, they estimate that there is loss involved in EU membership: This results because there is free trade with other EU countries (this trade amounts to about 50% of UK trade) but restrictions in trade with the rest of the world (the other 50%). The sums involved here are also not enormous (they are couched in more abstract terms such as ‘loss of 1% of GDP’). So, these numbers are rather small to sway the debate either way (small in the big picture), too uncertain (such is the nature of the economy, it cannot be precisely be quantified and/or predicted) and reliant on too many assumptions and hypothetical scenarios for comfort.

Behind the lack of agreement, the deeper problem is that it is rather futile to seek precision in estimates about such momentous events; the economy is too fluid a system to allow reaching reliable and concrete conclusions – such is the view of this economist at any rate. Thus, decision should be taken on matters of principle based on the big picture, with technical calculations playing only a subsidiary role. And the big picture, in the mind of this author, is the interdependency and the regional problems that need regional solutions, as argued.

In a Brexit case, the UK’s net contribution to the EU will of course cease. The UK Treasury and the British taxpayer will benefit from that. But the amounts involved are, again, not show-stoppers if compared with the size of the UK economy. Against that, the UK will lose the support that it receives towards regional cohesion and regeneration, transport infrastructure and in sectors such as agriculture.

Naturally, the costs/benefits of Brexit depend on what arrangement will be followed after it, particularly in relation to trade. This is an area of considerable uncertainty, but three possible scenarios may be discerned:

  1. The ‘European Economic Area’ (EEA) scenario, with Britain pursuing free trade with the EU but having its own trade policies towards the rest of the world; such as the arrangement currently in place with Norway. It is well known that this is politically feasible but an admin and logistical nightmare, as the authorities need to track all goods imported into the UK and the EU from the rest of the world and adjust the tariffs when they cross the UK-EU borders. E.g., there will be an incentive to import from the world a good ultimately destined for the European market first into the UK with its (presumably) low tariffs and then transport it to the European market; this will have to be intercepted at Calais and the extra EU tariff will be levied there; a nightmare, considering the volume of such traffic and the tricks that will no doubt be employed. In such a case, there will no doubt be pressures for external tariffs to be harmonised. If so, the UK will follow policies decided in the EU without any say in them. There is a similar danger in policies in other areas, e.g. migration.
  2. A special trading arrangement may be pursued, like the one Canada is about to conclude with the EU. Even proponents of Brexit (e.g. Minford) agree that something like that must be done in order not to disrupt the existing close links between the UK and the EU. But it will be hugely time-consuming and laborious to negotiate.
  3. Britain may opt to trade freely with all countries (incl. the EU) under World Trade Organisation (WTO) rules. Guided on abstract theory, proponents of Brexit (e.g. Minford) argue that this is the best world. The reality is, as the former WTO Chairman (2002-13) Pascal Lamy reminded us (Newsnight, 19/4/16), the world does not work like that. There is reprocity: I give you access to my markets if you give me access to yours. There is no free trade in the abstract – all countries impose trade restrictions of one sort or another. As a result, Brexit without negotiation of a new arrangement (costly, as argued above) would deprive Britain of the EU market (currently 50% of the UK trade) plus the countries that are associated with the EU with agreements (another 15% of UK trade).

A probable net result here is that in the case of Brexit, Britain will lose access to the big EU market (the biggest economy in the world, taken as a whole), with very uncertain benefits, if at all, from access towards the rest of the world. Uncertainty and protracted negotiations will be the by-word here for many years and on all fronts.

Then there is migration, a vexed issue. The complaint here is of big inflows of EU migrants, seeking higher welfare benefits here, displacing local workers from work and putting pressure on local resources (schools, health). But only about half of the immigrants into the UK last year (2015) were of EU provenance, the rest came from third countries. And benefit tourism exists, but may not be as dramatic as often claimed. It is well known in the literature that immigration benefits the host economy overall, as it provides fresh, cheaper labour; witness construction, health, agricultural and domestic workers. Against that, competition by immigrants for work may put downward pressure on wages for certain sections of the population and may increase the chances of unemployment (the effect of the legendary ‘Polish plumber’). The affected workers, even communities, lose out from migration. In other words, immigration has distributional effects (benefits and hurts different people), an issue that deserves more attention in both the literature but also in public discourse (where the voice of local communities is often ignored).

So, policy-makers should take appropriate measures to alleviate the distributional impact of immigration and spread the benefits more evenly (e.g. with unemployment benefits, support to local communities, etc.). In this way, immigration could be beneficial to all. Add to this the fact that immigrants work and pay taxes and can rejuvenate demographically both local communities and the (ageing) UK as a whole. With these considerations in mind, one comes to the conclusion that immigration, if managed properly, is part of the solution and not part of the problem, from a longer-term perspective. Human history is a history of migration; the issue will not go away. The best approach to it is a European-wide response (that would alleviate, e.g., the Syrian crisis) and managed immigration at national and local level. Working at EU level can help formulate more effective responses to the challenges than those achieved by isolated initiatives. At the same time, the millions of European expats in the UK and hundreds of thousands of Britons in the rest of the EU will find themselves stranded and confused in the case of a Brexit.

The question of membership of course involves still wider considerations: Despite the many criticisms it can and does receive, the European Union is a zone of economic prosperity, political liberty and social solidarity. Do we want this to break up? Are we sure of the alternatives that will emerge? If the break-up process of the EU begins, for the first time in its history, what is the ‘economic atom’ that will emerge, the smallest unit that will be immutable to break-up? If it is in the interests of the UK to be an independent, free-market economy, might that not be the case also of Scotland or Wales versus the UK or Catalonia versus Spain? Might we therefore see a large number of regions breaking away from the conventional current states? What will be their number? Who can guarantee stability in this possibly chaotic world? These considerations may lead one to suggest that wholehearted engagement and work towards reform, rather than exit, is the way forward.

So far, I have not touched Britain’s contribution to the EU, as, in a sense, the referendum is about the opposite, the EU’s contribution to British life. But one cannot conclude without a reminder of how much poorer Europe will be without one of its biggest, richest, influential, most culturally vibrant and diverse countries being an integral part of it. Britain’s history has always been interwoven with that of Europe, even though the UK has had a more cosmopolitan engagement and outlook than most other countries. A strong asset to Europe, Britain has always contributed to European civilisation, economy, public life, political strength. In equal measure, it benefits from European culture, ideas, lifestyle. These are two-way streets; a rupture would leave both sides poorer.
I started by saying that objectivity cannot be expected here, it might not even be possible; against that, I promised that I would offer an analysis without clichés or slogans. But I cannot help ending with one headline: Britain needs Europe and Europe needs Britain. The hope is that the British people will vote on the 23rd of June to remain a part of the common European home.

References:
Minford, P., with: S. Gupta, V. P. Mai Le, V. Mahambare and Y. Xu (2015): Should Britain Leave the EU? An Economic Analysis of a Troubled Relationship, Second Edition, Cheltenham, UK: Edward Elgar in association with the Institute of Economic Affairs, 2015.

HM Treasury Report (2016): The long-term economic impact of EU membership and the alternatives, April 2016. https://www.gov.uk/government/publications/hm-treasury-analysis-the-long-term-economic-impact-of-eu-membership-and-the-alternatives

Tsoukis, C. 92016): Review of the Minford et al. (2015) volume (see above), South-Eastern Europe Journal of Economics (SEEJE), Spring 2016, Vol. 14, No 1, pp. 97-101, http://www.asecu.gr/Seeje/issue26/issue26-tsoukis.pdf

The EU Referendum: Stay or Go?

Professor Robin Bladen-Hovell

Robin (1)

“Should I stay or should I go?”
With the onset of the Official campaign, the past three weeks have seen a flurry of information regarding the EU referendum, including a report on EU membership from the Treasury, a high level statement from Barack Obama placing the UK at the back of the queue with respect to a trade deal with the US, together with the “delusional tax” evaluation by the OECD concerning UK prospects should we leave. Although none of contributions originate from the Official Remain camp, they were all clearly directed towards influencing people in that direction.

At one level, the argument for Britain leaving the EU is simple. It rests upon cost/net benefit considerations revolving around the question of how much we actually (and should) pay to be a member of the club, together with an argument about what the club is for. Here the main contention by leavers is that the club should not be about “every closer union” and that, by leaving, Britain will be able to forge an economic and political renaissance, re-establishing what is described as national autonomy across a broad range of areas. These are, of course, big questions with both sides of the debate claiming that the referendum will settle the matter of Britain’s EU membership for the foreseeable future.

euflag

“If I go there will be trouble”
EU membership impacts upon the UK through various channels with the result that the effects of leaving are likely to be felt broadly across the economy. The EU is, at its heart, a trading bloc that has removed border taxes on trade between member states and, by pooling sovereignty, has established a common external tariff with respect to trade from non-member countries. With 28 members, the EU represents the world’s largest trading bloc and is the top trading partner for 80 countries globally, comparable to the United States in terms of its share of world output. The Single Market offers members unimpeded access to a market of 500 million people.

The benefits that flow from this trade are, perhaps, the least contentious aspect of the debate, commanding widespread agreement on both sides. Removing barriers to trade is beneficial, allowing countries to specialise in those goods and services that they are relatively more efficient at producing, increases competition and technological innovation, and leading to economic growth. Recognizing the need to address this issue the Leave Campaign has offered various visions of UK prospective trading relationships in a post-exit world, the most complete perhaps being Michael Gove’s contribution involving Britain joining a free trade area that “extends from Iceland to the Russian border” and, perhaps most importantly for that side of the argument, “free of EU regulation”. Unfortunately, this vision is aspirational at best, disingenuous at worst and almost certainly not deliverable in the way that Michael Gove describes.

The pattern of trading arrangements across Europe are complex but at their heart sits the EU. Norway, Iceland and Liechtenstein, who are often offered as examples of the arrangements that a post-exit UK might follow, interact with the EU via the European Economic Area. Membership of this area involves all three countries accepting EU regulation, including the so-called four pillars that guarantee free movement of goods, services, people and capital. An alternative, bilateral, arrangement that operates between Switzerland and the EU is somewhat looser but still requires free movement of people and is more restrictive in terms of Swiss access to the EU when it comes to selling services in the Single Market. Given the importance of the service sector, particularly financial services, for the UK economy it is far from clear that the Swiss model would necessarily be in our best interest.

For most, our experience of the EU is through the regulatory framework that impacts upon our lives. Much of this regulation is to ensure that businesses face a level playing field when trading in the Single Market, though recent developments in the areas of social protection, sustainability and human rights have raised questions about whether the EU is straying too legislatively far from its core purpose as a customs union. The Single Market means that businesses are affected by regulations concerning product standards, competition and company merger policy, employment conditions, such as the Working Time Directive, and EU-wide rules relating to health and safety, and consumer protection. Some of these areas, particularly where they involve a social dimension, have been seen as contentious in the UK where rolling-back the influence of the State has characterized domestic policy to varying degrees since the 1980s.

The effect of this is that, for some commentators, EU legislation is seen as an unnecessary burden on the UK economy and a challenge to UK sovereignty. The burden is typically expressed in terms of the annual cost to business and the figure referred to by Vote Leave in this respect is the £33.3 billion estimate proposed by Open Europe. But this figure isn’t an estimate of the economic burden of regulation overall since such a measure needs to weigh-up the benefits of regulation against the cost. Regulations that affect working conditions may, for example, impose a cost on business but be highly beneficial to individuals and families. A measure of economic burden should capture this.

A more subtle form of the regulatory argument, eschews the issue of measuring the burden and focuses instead on the prospect of the UK being able to deliver a more tailored and flexible regulatory environment once free of the confines of the EU. How this might work in practice though, is not always made entirely clear. In terms of business regulation, for example, trade with EU member-states in a post-exit world will require that our exported goods and services meet European product standards at a minimum. This minimum level of compliance, however, is unlikely to suffice should we, for example, successfully negotiate an alternative preferential trade agreement with Europe.

Switzerland, with its bilateral agreement with the EU, is able to side-step EU legislation in relation to the environment and competition policy but is subject to the same freedom of movement rules in relation to people as the rest of the EU, including the Working Time Directive which is the rule most commentators claim is the most burdensome.

Other areas where departure from the EU may have considerable impact is in relation to the decisions made by foreign companies to locate and invest in the UK. The UK currently offers an attractive location for such investment. Indeed, according to the recent Attractiveness Survey undertaken by Ernst and Young, we ranked first among European nations and fourth globally, behind the US, China and India, as the most attractive location for overseas investment.

This attractiveness stems from a variety of factors but the most commonly cited, by 72% of respondents in the Ernst and Young survey, is access to the European Single Market. However, attractiveness is fickle and the vulnerability the UK-position in this beauty contest is shown by the fact that 31% of respondents also indicated that they would freeze or reduce investment until the outcome of the referendum was known. A decision to leave could therefore have serious long-lasting consequences. How serious is perhaps best illustrated by looking at the 2014 position in more detail. Foreign companies in 2014, invested almost £28 billion in the UK. The investment was broad-based across the economy, creating some 31,000 new jobs, largely through investment that led to construction of new facilities. Even where the investment involved acquisition of an existing concern, however, potential benefit will still occur, including the take-up of new technology, improvements in management and adoption of new ways of working within the acquired company. As the survey indicates, a decision to leave would place a question-mark against future overseas investment for a number of reasons. First, over half the investment inbound to the UK originates from other EU countries and this investment is attracted by factors other than simply establishing a toe-hold in the Single Market – the companies already have that in their home country. Our stepping outside the EU will therefore introduce an additional hurdle for these investment decisions to clear if they are to continue. Second, favourable decisions regarding investment are more likely to occur in a stable economic environment, uncertainty generally being associated with a decision to wait-and-see; safer rather than sorrier. This uncertainty may be quite protracted if we decide to leave because it is so unclear what our trading and wider relationships with Europe and the rest of the world will look like at the end of the withdrawal process. Business that is risk averse is likely to reflect this uncertainty by withholding investment until the dust has settled.

It is, of course, impossible to consider the advantages or disadvantages of staying-in or leaving the EU without some perspective on the cost of club membership. Here figures from the Treasury indicate that, in 2015, the UK’s gross contribution to the EU budget of some £12.9 billion. The size of this and other member’s contribution is largely determined by the size of the economy, or Gross National Product, and together these contributions establish the so-called “own resources” of the EU. These resources are allocated to broad spending categories within a financial framework that operates over a planning horizon, currently 2014-2020 alongside a ceiling for total EU expenditure overall. Year–to-year income and spending is subsequently matched through an annual budget round.

Approximately 88% of the EU budget is returned to member states. The larger part of these payments take the form of regional assistance to the least-developed parts of the EU, largely Eastern and Southern Europe, together with support for agriculture, rural development, fisheries and measures for the environment. For a variety of reasons Britain receives relatively little from these budgets with the result that we have remained a net contributor to the EU for most of our membership. It was largely because of these relatively low receipts that we negotiated the rebate on our contribution in 1984.

The Treasury estimates our net contribution (payment minus receipts) stood at £8.5 billion in 2015, considerably less than the £350 million a week figure promoted by the Leave Campaign. Moreover, even the Treasury figure overstates our net contribution because it ignores EU spending that accrues directly to UK businesses and other non-governmental institutions, such as Universities, and it also assumes that EU revenue generated by the common border tax and administrative expenditure are associated with the country in which they are made rather than benefiting the EU as a whole. Adjusting for these issues produces what the EU refers to as the budgetary balance for each country, which in Britain’s case was net contribution of £4 billion in 2015 which comes to roughly £77 million per week or £62 per person: roughly the price of filling a medium-large sized family car with petrol.

There are, of course, other areas of contention between the Leave and the Remain camps. Issues like migration and our ability to control borders are commonly put forward in this respect. Even here, however, there is strong persuasive evidence to suggest that the UK as a whole has benefitted in terms of the standard of living, albeit modestly, from net migration. Moreover, it is unclear that this competence would return to the UK should we choose to leave but then seek to negotiate an alternative trading arrangement with Europe.

“An’ if I stay it will be double”
Overall, the argument to remain in the EU appears compelling, at least from an economic point of view. The objections of the Leave campaign echo a debate that has been ongoing for over six decades reflecting a schism regarding the role of the nation-state within the EU. Despite what is claimed by both sides, I find it difficult to believe that the referendum on 23rd June will mark an end to that debate within the UK. That may be an important message for the Remain Campaign particularly if the outcome in the referendum is close. Perhaps Clash had the referendum in mind when they wrote their song.

Professor Bladen-Hovell is one of Keele Management School’s Economics lecturers.