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What happened to Brexit?

Joël Reland / Jan 2022

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The United Kingdom enters 2022 with its highest tax burden in 70 years, one of the world’s most ambitious plans for reaching net zero, a planned new state subsidy regime professed to boost domestic investment, and one of Europe’s most liberal regimes for non-EU migrants which is set to see net immigration remain above 200,000 a year for the rest of the decade.

A reader transported to today from early 2015 would be forgiven for thinking that Ed Miliband has just won a second term as Prime Minister and is looking to cement his political legacy. How is it then, that a year after the signing of the Trade and Cooperation Agreement, Boris Johnson’s Britain is in many ways appearing increasingly statist, increasingly European?

Spectator editor Fraser Nelson blames the ‘protectionist’ instincts of those sat around the cabinet table – ‘look around and you can see all kinds of Brexit opportunities not being taken’. Indeed, David Frost – the torchbearer for the Brexit true believers – resigned from Johnson’s government in December, citing concerns over the lack of movement to ‘a lightly regulated, low-tax entrepreneurial economy’. Yet on the other hand, think-tanker Ryan Bourne argues that judging Brexit Britain today is like judging Britain’s EEC membership in 1978: regardless of short-term inaction, in the long run ‘Britons’ regulatory instincts are more permissive’ than the EU’s and will thus be better served outside it.

There are elements of truth to both these arguments: Bourne is certainly right that it is too early to judge the consequences of such a profound constitutional change, especially in the context of a global pandemic. Yet at the same time the decisions of present politicians do matter.

The key point – which both miss – is that regulatory divergence from the EU is practically very difficult, as even cutting red tape requires a lot of time and bureaucracy to create new, supposedly more ‘light touch’ British regulatory architecture. If the UK wishes to diverge meaningfully in future, government must already be prioritising the most important (and complementary) areas to cultivate in the coming years: this cannot occur by ‘instinct’ alone.

So, where do the best-laid government plans lie? A closer look reveals three potential paths for Britain.

A first path is what we might call the Johnsonian approach. This would focus on re-gearing the British state to more efficiently invest in industry and in so doing support net zero and ‘levelling up’ goals. The centrepiece is the is the near-finalised Subsidy Control Bill, which could allow state subsidies to be approved more efficiently than in the EU, with most subsidy providers self-assessing their compliance with the rules, no longer requiring prior approval from the EU Commission.

Should the new regime work as hoped (there are some concerns over enforcement), the government would aim to speed up investment in priorities such as net zero, for example by investing in gigafactories. The reality is that much of this would have been achievable inside the EU – the main gains are in efficiency – but it would lay a clearer foundation for the kind of country the UK wants to be outside. Indeed, separate reviews of gene editing regulations and reform of agricultural subsidies are centred on similar ideas of greener, more efficient farming practices which naturally complement the principles of the new subsidy regime.

Of course, the rather large elephant in the room is that Boris Johnson’s premiership is hanging by a thread. Moreover, his two most likely successors – Rishi Sunak and Liz Truss – are both ideologically opposed to the bigger state which Johnson’s regime has ushered in. Should either take over, we might well see the approach to divergence focus far more overtly on deregulation.

Should this occur, the most likely focal point is financial services. Indeed, it is notable that the most coherent plans for divergence so far are emerging from the Treasury. It has published a ‘new chapter for financial services’ and launched a consultation with the aim of removing ‘unnecessary burdens’ for firms around transparency and making the UK listings regime simpler. Added to that, it has a roadmap to make the City the international leader in green finance, and plans to boost innovation and growth in fintech (financial technology) through a new policy framework and more permissive regulatory environment for small firms.

The two consistent principles across these reviews are making the UK a lower-regulation environment than European competitors, with the aim of attracting investment; and getting ahead of the EU in emerging sectors such as green finance and fintech. Emerging sectors are a potentially fruitful avenue for divergence, as there are few or no pre-existing EU regulations to diverge from, meaning much less cost to UK businesses. Should Truss or Sunak come to power, this seems the logical focus of the divergence agenda.

Yet all the above assumes that the government accepts that divergence is a long-term game: which requires detailed planning but gives limited short-term rewards. Such a modus operandi is not well-suited to the politics of Westminster. And so, a third path for divergence reveals itself: one governed by the whims of Conservative backbenchers. Whether Johnson is trying to cling on to power, or Sunak or Truss is seeking to ingratiate themselves, it could well be that divergence is used to appeal to this key political base.

For example, around 20 MPs including Brexit stalwarts Steve Baker and Esther McVey have already signed a letter calling for a VAT break on energy bills (only possible because of Brexit) to address cost of living pressures. The momentum behind this idea is growing, but – despite it being a relatively easy piece of red tape to slash – it would undermine the government’s wider plans around net zero.

Brexit granted the UK the freedom to make its own laws. Yet it did not change one seemingly immutable fact – the ability of the tail of Conservative backbenchers to wag the dog of a Conservative government. Should they continue to hold outsize influence over government, the chances of a coherent plan for divergence will rapidly recede.

Joël Reland

Joël Reland

January 2022

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