The Brexit Debate

One of the most puzzling refrains heard throughout this seemingly endless referendum campaign is 'no-one is just giving us the facts'.  Seriously?  Is that maybe because it is impossible to predict the future with any degree of certainty?  There are plenty of statistics and data out there if people care to look but Remain or Leave, it doesn't matter - both choices rely on a degree of guesswork as to what the impact will be.  It is however possible to state where we are now and how we got here; so here are some of the aspects of the 'debate' that concern me and the conclusions/questions I draw from them ...

1) Britain contributes £350 million per week to the EU budget.  Britain receives £190 million per week from the EU in agricultural subsidies, research grants, development grants and the like.  The net contribution is therefore around £160 million per week, or less than 0.5% of GDP.  Not a huge price to pay for access to an economy the same size as that of the USA and more than 500 million consumers.  Would we get a deal at that price outside the EU ?  We just don't know. ...

2) Britain joined the EU in 1973 when it's economy was known for being 'the sick man of Europe' with high unemployment, high inflation, falling exports, and failing industries. Since then, while inside the EU, the economy has recovered and is now the 5th largest in the world, behind only USA, China, Japan and Germany.  We can't know how Britain would have fared if it had remained outside the EU or how Britain will fare if it leaves but purely in terms of population size it is unlikely that Britain would have or will overtake any of these apart from possibly Germany.  So I am unsure why Brexitters consider EU membership to be a hindrance.  Will our economy be any further up the league table in 10 years time if we are outside the EU?  Unlikely - it is more likely to shrink in relative terms.

3) Because Britain has close to zero unemployment, inward migration is driven by continuing demand for additional labour from businesses.  Cutting off this source of labour, as Brexitters intend, implies wage rises to compete for a smaller pool of labour, which ultimately will make UK-plc less competitive and cause unemployment to rise.  This will have the effect of reducing wages again until they settle at an equilibrium point with a lower GDP as a result of there being fewer people in work and at lower wages.  Either that or the Brexitters' wishes on immigration have to be ignored, even if they win the referendum, in order to keep the UK competitive.

4) Only a half our current net annual inward migration figure of 330,000 comes from EU countries.  Leaving the EU is unlikely to put a halt to immigration, due to point 3 above - in fact it is likely to mean that immigration from poorer, non-EU, countries increases to meet the needs of business and of public services.  If Brexitters are concerned about cultural dilution it is only going to get worse if we leave the EU - we have more in common with our Eastern European neighbours than we do with those from outside Europe.

5) From WWII to the collapse of the Berlin Wall and the Warsaw Pact countries in 1989 the UK lived under the constant and imminent threat of conflict with the USSR.  Since then it has been the West's objective to encourage the former Eastern Bloc countries to convert into liberal democracies with market economies - welcoming them into the EU was a part of that process.  Many Brexitters aspire not just to leave the EU but to see it's break-up.  If that were to happen the Eastern Bloc countries are more likely to fall back under Russia's suffocating influence - or, worse, to see occupation/annexation as has occurred in Ukraine and the Crimea.  Without European solidarity in the form of the EU how would Europe coordinate any kind of response amongst 28 countries living at different degrees of proximity to the Russian threat?  Or are Brexitters relying on NATO for any such response, and if so don't they think that would represent a major escalation of tensions?  Personally I feel we should show more solidarity with these nascent European democracies and keep the EU together.

For the record, and as I have blogged repeatedly since the referendum was announced in 2013, I think the Brexitters will win but I think it will be the most short-sighted and depressing decision this country has ever made.  My wife and kids, luckily for them, are entitled to Irish passports so once free movement is abolished they can still tootle through passport control while I have to faff about with immigration/visas.  Or maybe once people realise what a pain travelling in Europe is without free movement it will be reintroduced - in which case, what was the point?

Will Brexit succeed in reducing immigration?

One of the many justifications offered by advocates of Brexit is that it will allow the UK to "regain control of it's borders".  I am doubtful that this is the case; it may do so, but if so it will come at a price.

Following Brexit, should that be the electorate's verdict, supporters and opponents alike will be hoping that the UK's economy continues to grow (as measured by GDP - the sum total of the nation's economic output).  For a nation's GDP to grow either the existing workforce needs to become more productive (generate more output, in terms of goods and services, at a lower unit cost) or the workforce needs to grow.  In the UK over the last 20 years or so, this demand for more labour has been met by immigration.  The UK's unemployment rate currently stands at 5.1%.  In such a low unemployment environment if a company wants to expand it's business but access to immigrant labour has been removed it will need to raise wages in order to hire more people - to poach them away from other employers.  This may appear superficially attractive, giving workers a pay rise, but in the long run it is bad news.  The UK has a long running productivity problem (currently worse than France's), which makes our exports relatively expensive.  This has led to us having the worst trade deficit in our history - we import massively more goods and services than we export.  If wages rise we become more unproductive and the deficit becomes worse - a situation which in the long run is not sustainable.

So, post-Brexit, wages will tend to stabilise at a level at which our productivity does not worsen and as a nation we are able to continue to compete.  Competition for employment is what constrains wage growth - when we no longer have immigration to provide that competition it will be provided instead by an increase in unemployment.  The market will drive up our productivity through the mechanism of falling exports leading to higher unemployment.  The final result of a Brexit followed by closing the borders will be a shrinking GDP, falling wages and higher unemployment.  That increase in unemployment has associated welfare costs which will have to come out of a smaller tax take due to the smaller size of our economy.

Overall post-Brexit Britain is not an attractive prospect, which is why I think those who vote for Brexit in order to reduce immigration will find themselves disappointed.  No government wants to preside over a shrinking economy, permanent recession and falling living standards - for this reason I believe Governments will continue to listen to the demands of business and the borders will remain open.  Globally, mass immigration is here to stay and our time would be better spent in finding ways to live with it.

Election 2015 - It's grim for Labour

Originally published May 2015.

Well what a depressing result that was. It is of little consolation but I called the result almost exactly back in March 2013 - http://theviewfromstalbans.blogspot.co.uk/2013/02/the-2015-general-election-is-far-from.html - I should have had the confidence of my own predictions to back it with money. Even Nate Silver got it wrong this time. What an opportunity missed!

So what of the future? We now have 2 years of uncertainty while the Tory party debates with itself over our future relationship with Europe; Labour's position is clear, as is that of the SNP, the Greens, the rump of Lib-Dems and of UKIP - it is only the Tory party that doesn't yet know where it stands on this key issue. In 2017 we could face the situation where the UK as a whole votes to leave the EU while Scotland wishes to remain in; that will be the final nail in the coffin for the Union - as the SNP will certainly demand another referendum at that point.

I see two major issues on the economic front - the first being the UK's continuing productivity puzzle and the second the build-up of private debt. Since 2010 wages have stagnated, though they are starting to rise again now, but our GDP per capita has not improved - our productivity is still awful (we are still behind France on this score). This harms our exports which is partly why we currently have the worst trade deficit ever recorded. This needs to be addressed by investment in infrastructure and by improved education and training to up-skill the workforce; the alternative is a low-wage economy which continues to drive wages down. But given that pressure on pay is now upwards, our productivity and exports may just get worse. Osborne needs to do what Labour proposed which is to allow himself to borrow for investment where the investment can be shown to have a positive impact on productivity; unfortunately this has been ruled out so he would need to break an election pledge to do this - but seeing as the Tories happily abandoned pledges made in 2010 when it suited them (no increases in VAT, no top-down NHS reorganisations, eliminating the deficit, reducing the debt, reducing immigration, rebalancing the economy, etc), I look forward to seeing Osborne wriggle his way out of this one too.

However, a bigger issue is the nature of the current 'recovery'. Thus far it has been driven by consumption paid for by a build up of private debt - the UK has the largest private-debt-to-GDP ratio on the planet, bar Japan. It is now back to pre-crisis levels. When interest rates start to rise this debt will become unaffordable and we will start to see defaults - just as we did in 2007-8. House prices will fall and the Banks' balance sheets will be impacted - we may we well see bank failures and the need for bailouts once again. The situation may be made worse by an additional surge of unsustainable pseudo-growth fuelled by people bringing forward their pension savings spending and a subsequent collapse in demand further down the line. We'll know whether this has been the case in a few years' time.

Another concern is for the future of the NHS. There is a financial crisis building, with 98 trusts thought to be close to insolvency. I fear that the Tories will use this as an excuse to privatise large parts of the service to reward the healthcare firms that have helped to bankroll their election campaign. This will be a disaster for the future of the service as study after study has shown that outsourcing to the private sector consistently provides worse value for money. Numerous studies show that our NHS as currently constituted is one of the most efficient and best value for money in the world. Outsourcing will therefore lead to less money begin available for front-line services, but on this point the Tories' policy decisions are likely to be ideologically-driven rather than evidence-based - a large proportion of the party has long wanted to privatise the health service in the name of shrinking the state. I fear for the future of our NHS.

So the banks and hedge funds got the government they wanted but I look forward to seeing how the Government now attempts to square the circle of their contradictory electoral pledges - slashing welfare while protecting the vulnerable, child benefit and pensions, achieving a budget surplus while cutting taxes, cutting immigration while remaining in the EU, growing the economy without immigration and without investment to boost productivity, keeping Britain open for business and investment with one foot in the door out of Europe - the list goes on and on. There'll be plenty to write about.

Cameron's utter failure over immigration

Originally published November 2014.

“Net migration to this country will be in the order of tens of thousands each year, not the hundreds of thousands every year that we have seen over the last decade,” he said.  “With us, our borders will be under control and immigration will be at levels our country can manage.  No ifs. No buts.  That’s a promise we made to the British people.  And it’s a promise we are keeping.”

David Cameron, April 2011

"Net migration to the UK rose to 260,000 in the year to June [2014] - an increase of 78,000 [43%] on the previous year ......  The figures show rises from both inside and outside the EU ......  Net migration is now 16,000 higher than it was when the coalition government was formed in 2010."

BBC News, November 2014

The Tories' ridiculous 2010 election promise was never remotely achievable and they knew it.  They never had any intention of honouring it - it was merely another of their deceptions (alongside, for example, the notion that public spending caused the financial crisis) designed to get them into power.

Cameron and company are guilty of deception and utter hubris.  No ifs. No buts.

How UKIP misleads voters on immigration

Originally published November 2014.

Back in 2013 I wrote a blog post in which I predicted that UKIP's surge in popularity would fade before the 2015 election and that the Conservatives would win with a small majority.  It is looking increasingly likely that I got that badly wrong, though the Tories may still turn out to be the largest party in May.  I have to admit though that I am perplexed by the persistence of UKIP because as far as I can tell they are conning their potential voters on numerous fronts - in this case on immigration.  According to a recent YouGov poll, immigration is the top issue concerning most UKIP voters with the economy in second place.  This is interesting as the two issues are inextricably linked but UKIP's views on the two issues seem completely contradictory.

For instance one of the reasons UKIP supporters cite for their support is that foreign workers drive down wages.  This is true, but driving down wages is surely an objective of UKIP and Conservative economic policy - this, as they see it, is the route to increasing Britain's productivity and competitiveness.  This has been one consequence of the emasculation of the trades unions and the reduction in their ability to maintain wages through the lever of collective bargaining.  I would expect UKIP, as the self-proclaimed heirs to Thatcher, to support this.  Lower wages are the expected outcome when the Conservatives talk of creating a 'flexible workforce' - a workforce with no rights and no representation.  For 'flexible' we should read 'exploitable'.  Marx wrote of capital's need for a 'reserve army of the unemployed' for this purpose - what the Tories are creating, and which UKIP would presumably support, is a 'reserve army of the low paid' ie. people working part-time/zero-hours and competing with each other for the right to increase their hours - with no chance of instead increasing their rates of pay.  One way to prevent this undercutting of wages would be to implement a mandatory living wage - do UKIP support this?  Of course not - because it interferes with the free-market and makes us uncompetitive apparently!  UKIP can't have it both ways over this - they can't support right-wing supply side policies and then complain about the inevitable outcomes - to do so is to treat the voters as though they are idiots.

So instead of a living wage UKIP urge us to stop immigration, but I wonder whether their supporters are aware that almost the entire growth in GDP since 2010 has been due to an increase in the working population - ie. due to immigration.  We now have more people in work in this country than ever before but our productivity has remained constant despite higher (though now falling) levels of unemployment and static/falling wages.  What this means is that without immigration our GDP would have been lower, therefore the tax take would have been lower and so either taxes would have had to rise or even deeper cuts in services would have been required.  I wonder whether UKIP supporters understand this.  Going forward the same argument applies - if we want to keep taxes from rising and services from being decimated we need to maintain immigration - ie. we need people coming into this country who pay taxes and place few demands on public services.  To give Nigel Farage his due, he has acknowledged this and has publicly stated that he is willing to live in a poorer country with a lower standard of living if that is the price of controlling immigration - but I am not sure his supporters have taken this fully on board.

As alluded to above, migrants to this country, taken in aggregate, are net contributors to the country's finances - paying more in tax than they take in services.  This is logically obvious as it tends to be those that are young, fit and healthy that are the most willing to take the risk of moving to another country to live and work.  However to hear UKIP supporters talk (and also many Conservatives) you would think that most migrants that come here are a burden on the country - for instance you hear them talk of 'benefit tourists' ie. those that come here solely for the purpose of claiming benefits.  The reality is that unemployment amongst migrants is lower than amongst the indigenous population, which means that taken as a group the immigrant population more than pay their way.  In the case of any in-work benefits (tax-credits, etc) that immigrants may receive this is again a function of low wages - any tax credits or other benefits paid to people in work is a direct subsidy to the profits of exploitative employers.  If the employer isn't prepared to pay the level of wages their workforce need to live on then the taxpayer has to step in to make up the difference; the problem that needs addressing here is corporate welfare, not immigration.  I don't think all UKIP supporters understand this and instead believe that immigrants are a drain on the country; the question that needs to be asked of them is whether they are are willing to live with poorer services as a result of curtailing immigration in order to address a non-existent problem.

Another argument frequently used is that we are small island with finite space - immigration puts a strain on local infrastructure and drives up rents and house prices.  This is true.  However what is also true is that as immigration makes a net positive contribution to our economy we are perfectly able to build housing and infrastructure to cope with the additional demand if we want to - we just need to set the appropriate level of taxes to make it happen.  If instead we insist on slashing taxation on the indigenous population and therefore also on immigrants then the infrastructure will inevitably suffer.  Again this is the logical outcome of right-wing thinking - and it doesn't sit well with UKIP's plans to cut taxes - for example removing the top tax band and abolishing inheritance tax.  We should instead be embarking on a program of housebuilding and refurbishment for rent to rebuild the stock of social housing depleted over the last 30 years.

So in summary what UKIP supporters should think about is that a withdrawal from the EU and a halt to immigration will lead to Britain having a smaller economy and thus becoming a poorer country with a lower standard of living and worsening public services.  Do they understand this and is this what they really want?  I am not sure that the answer is 'yes' on either count.