A Brexit Budget to shore up Britain as it loses EU spoils
The loss of fine upstanding EU institutions from our shores is an early wakeup call on the wider costs to Britain. Even the hardest of Brexiteers had cause to pause to contemplate their moving across the Channel. While our European friends jostled to draw lots, akin to FIFA football draws, to pick up our spoils, Britain is also left reeling with more than the symbolic haemorrhaging of our standing and influence in Europe. There’s also the very real associated loss of wider economic business and tens of thousands of jobs.
Despite fierce competition for the privilege of hosting the institutions, European leaders are keen to avoid tough disputes and show unity as Brexit threatens to fracture the bloc. EU Council president Donald Tusk, who chaired the summit, tweeted: “Whatever the outcome, the real winner of today’s vote is EU27. Organised and getting ready for Brexit.”
The European Banking Authority (EBA) is off to Paris. The EBA sets rules and regulations for banking, used by the European Central Bank to carry out tests of the banking sector within the European Union. Located in London since its creation in 2011, it will now relocate across the channel before March 2019, when Britain is set to quit the bloc. It was thought that the EBA would go to an Eastern European nation to keep the balance, however Paris was chosen instead. Germany’s banking centre, Frankfurt, lost out early in the race, despite being the initial favorite to win the bid.
The European Medicines Authority (EMA) is going to Amsterdam, where pharmaceutical groups hailed the move, having feared the EU could choose a location which would have made working for the body less attractive to Europe’s best and brightest. But it was a narrow victory for Amsterdam. Italy’s EU affairs minister Sandro Gozi said the choice had left a “bitter taste in the mouth” for the team backing Milan to host the EMA.
In other news, German Chancellor Angela Merkel’s crown seems to be slipping as coalition talks with the Free Democratic Party, as she looked to bolster her government following her recent fourth election, broke down. Could her reign be over? Britain’s call for “imagination” and cooperation in Europe over the Brexit negotiations are certain to fall on deaf ears if Merkel departs. She is known for her pragmatism and may still come out fighting yet. Clearly though the fortunes of Germany will have a pivotal effect on the collective European Brexit stance and mindset.
Arguments continue over the Financial Settlement bill. The UK had already said it will pay budget contributions amounting to about £18bn (20bn euro) in 2019 and 2020. But the costs estimates have increased and the Cabinet has now agreed to raise the UK’s financial exit offer to just under £40bn in return for assurances on a future trade deal and agree to talks in December.
EU financial services axis is turning
On 5 December, UK Finance – the new umbrella trade body for the financial services industry combining a number of former associations across finance, banking, markets and payments – holds its Annual International Banking Conference. Not much cheer here as it looks across the water as Britain faces fresh EU challenges to its City premiership. There’s the real prospect of LCH – London’s clearing house – losing out, with 20 major banks now backing a new European institution. Brexit seems to be causing a retreat from multinational cooperation on regulation back to their own jurisdiction but arguably it could make financial markets less safe.
Meanwhile, the European Central Bank (ECB) has warned banks to pick up the pace on their Brexit preparations. Sabine Lautenschlaeger, vice-chair of the board of the Single Supervisory Mechanism, the ECB’s bank watchdog, said issues remain in preparations for both UK-based banks trying to access the EU and EU-based banks wanting to service clients in the UK. “My message to all affected banks is this: don’t procrastinate,” she said, speaking at a banking forum in Frankfurt. “No one will wait for you. When Brexit happens, you will either be prepared, or not. I advise you to be prepared.”
The ECB’s is currently assessing 20 applications from banks, including several British, US and Asian banks, wanting to move operations into Europe after Brexit.
Back in Parliament
Incredulously, but probably as a reaction to the painful reality, invective and ping pong of recent EU negotiations, there is a growing sentiment, fuelled by the fury over lack of due Parliamentary process and oversight, that the vote could actually be reversed. Wishful thinking! Even if there was the remotest chance, Theresa May won’t go there. Her premiership is weakened by the “Pestminster” scandal which led to the departure of Michael Fallon from her own Cabinet, closely followed by the debacle and departure of British aid minister Priti Patel, who had to resign following her folly and ill-calculated undisclosed meetings she held with Israeli officials in September.
Theresa May now sees herself as akin – or relegated? – to peacemaker between her Cabinet members, who are fairly evenly split between Remain and Leave. But it takes more than that to hold a cabinet together, let alone run the economy and preside over the country at large. Where’s the leadership? Is this Government running out of steam?
Parliament’s been hoping mad over not getting a say over our Brexit path. It still is, as the debate will at best be a ratification exercise with no real influence over direction. The list of parliamentary Brexit “Mutineers” continues to grow, and even within Conservative ranks. Add to this, the announcement that the leave campaign is under scrutiny from the electoral commission over its Brexit campaign. However, it won’t change anything – the die is cast now.
No joy from Stormont, where Theresa May is still reliant on Democratic Unionist Party (DUP) support for her premiership. DUP leader, Arlene Foster told, Irish Prime Minister Leo Varadkar he “should know better” than to “play around” with Northern Ireland over Brexit. While the Irish government has said any hard border with Northern Ireland should be off the table, an EU paper recently suggested Northern Ireland would have to continue to follow many EU rules after Brexit if a hard border was to be avoided. It hinted Northern Ireland may need to stay in the EU customs union if there were to be no checks at the border, which the UK Conservative government has said it cannot accept as it would effectively create a border between Northern Ireland and the rest of the UK. This one doesn’t seem to go away.
Time will tell if Philip Hammond’s budget will do enough to revive the fortunes of the economy, or the Conservatives weakening government, within the constraints he’s operating, which has meant he’s had to slow the rate at which he plans to cut government borrowing. Most worrying is the stark sobering reality of the Office for Budget Responsibility (OBR)’s downsizing of its growth forecasts for each of the next five years. GDP growth is now predicted at 1.4% next year (down from the previous forecast of 1.6%). In economist speak, this isn’t really growth at all. Forget Brexit – for which there is now an extra £3bn budget to cover “costs” (no doubt all the expensive accountants, lawyers and consultants) – this is really a story about our failure to recover from the financial crisis of 2008.
The Chancellor promised to make Britain “fit for the future” as an “outward looking, free-trading nation” once it leaves the EU in 2019. However, the budget was relatively light on giveaways. There was £400mn infrastructure spend to support electric car charging, a new £1.7bn Transforming Cities Fund designed to promote technology and improve infrastructure, a £2.3bn boost to investment in R&D, and reform to business taxation to help SMEs, plus a tightening of the tax loophole for multinational digital firms.
There was, however, an extra £15.3bn for the housing sector in the form of investment, loans and guarantees, as well as the abolition of stamp duty for first-time buyers from properties up to a value of £300k, which was greeted with open arms.
The Chancellor did announce a £1.5bn package to address concerns around Universal Credit and a range of measures to ease operational processes.
In terms of the normal economic indicators, following last month’s interest rates rise, we’ll look with interest at what the statistics reveal this month and gauge the likely impact of the Budget on these metrics. The Halifax House Price index is published in early December, followed by figures from ONS and the Hometrack UK Cities House Price Index all published later in the month.
23rd November 2017