The past fortnight was an eventful period in terms of Brexit impact. For one, there was a major government reshuffle, that saw popular ministers moving up the ranks and unpopular ones down – most notably Liz Truss replacing Dominic Raab as Foreign Secretary and Michael Gove being put in charge of ‘levelling up’ and the planning reform, both of which are electorally important policy areas.

On the international level, ‘Global Britain’ experienced ups and downs in its relationship with the US. Last week Global Britain celebrated a first diplomatic success, by brokering an agreement between the US, Australia, and the UK that gives some substance to its ‘Indo-Pacific Tilt’ strategy, while angering the French Government. This week, however, Johnson’s visit to the US was overshadowed by the acknowledgement that a Free Trade Agreement (FTA) with the UK was not high up on Washington’s priorities list, making another big Brexit promise look like a pious wish rather than a realistic policy goal.

However, the news cycle has quickly become dominated by the energy price crisis. Six energy suppliers have already collapsed due to high wholesale prices. Moreover, BP, Tesco’s and other owners of petrol stations all have announced fuel supply issues that forced them to ration supply to customers, which led to panic buying and long queues at petrol stations. The gas and petrol crises is only the latest addition to a growing list of disruptions caused by Brexit and the pandemic and arguably other factors.

Fuel shortages and increasing energy prices feel like a qualitative change in the impact of Brexit on the UK economy.  The impact on UK consumers now goes beyond fairly minor nuisances such as the absence of milkshakes at McDonald’s, shortages of pet food, or increasing prices of garden plants. It now starts affecting more basic commodities that none can easily do without. There are of course still people posting on social media that even queuing at petrol stations is a price worth paying for ‘sovereignty,’ that things were worse in the 1970s, etc. However, the prospect of increasing numbers of families having to choose between ‘heating or eating’ in the winter months, does seem like a new, potentially politically damaging prospect facing the Johnson government.

(Still no) Solutions

Whether or not Brexit caused the shortages may be an important question to ask in order to establish honesty about and accountability for what is happening. Yet, complex social phenomena are rarely caused by just one factor. Thus, while the energy and gas price hikes and lorry driver shortages are partly a result of Brexit, geo-politics (e.g. Russia restricting supply of gas to Europe) and the pandemic certainly also played a role. Yet, what is increasingly undeniable is that “Brexit is limiting our options for solutions” as Shane Brennan of Cold Chain Federation put it.

Indirectly, the PM has now acknowledged this, by finally caving in and agreeing to grant lorry drivers and poultry workers temporary exemptions from the strict post-Brexit point-based immigration system. The government’s reaction is consistent with Johnson’s habitual pattern to dealing with problems. Namely, doggedly defending his ideology-driven policies in the face of warnings from the industries concerned; until things get so bad that some action is inevitable; which then takes the form of kicking the can down the road without actually solving the problem. In this instance, allowing 10,500 EU workers to apply for UK visas that will allow them to work in the UK until Christmas, is one such non-solution. Indeed, industry representatives see these measures as a drop in the ocean.

What would a genuine solution to the shortages of low-skilled workers, which lie at the basis of most of the current supply-chain problems, look like?

Two ways forward seem possible. One would be for the government to acknowledge that it had underestimated the reliance of the UK economy on low-skilled immigration. This acknowledgement would then have to lead to a fundamental change to Patel’s new immigration system, which essentially shuts foreign low-skilled workers out of the UK labour market. That would be a technically feasible solution, but is highly unlikely to happen, because it would force Brexiteers to jettison one of the key assumptions of the Brexit project; namely, that ‘they need us more than we need them.’

The alternative would be a fundamental change to the UK’s business model away from its reliance on low-skill, and low-wage workers towards a higher wage model. Various Brexiteers have implicitly hinted at a preference for the latter solution. Indeed, Times columnist Iain Martin, for instance, sees short-term increases of low-skilled wages due to labour shortages as proof that ‘Brexit is working.’ From this perspective, labour shortages have retrospectively become part of the plan. The crucial flaw in this argument is of course that wage increases that result purely from rationing of labour supply, will hardly lead to positive economic outcomes as economic activity will be reduced and demand may not be met.

If labour shortages are to be solved – rather than celebrated as a Brexit success – without abandoning the restrictive immigration policy, the crucial question becomes: are there enough idle British citizens that could fill the gaps left in the work force by the end of free movement of people? Truss, Kwarteng, Patel, and the other authors of ‘Britannia Unchained’ certainly seem to think so, given that in their view the country is populated by workshy freeloaders who need to be put to work. UK demographics characterised by low birth rates that lead to a ‘baby bust’ tell a different story, of course. Moreover, the regional mismatch in the distribution of available jobs (mostly in the South-East) and available workforce (mostly in the North of England and in peripheral regions), means that it is highly unlikely that the UK economy can function without considerable amount of immigration.

Regardless, increasing low-skilled workers’ wages does seem like a desirable policy. Indeed, there is a large academic literature that shows that the labour share of national income – the so-called ‘wage share’ – has declined considerably since the early 1980s. The big winners have been top earners (executives) and shareholders. In particular, the capital share of national income has increased quite dramatically in recent decades (see figure 1 p.23 here). Rebalancing that trend is important, but the point is that such a choice will have consequences – something the Johnson government is notoriously bad at accepting – and will require a strategy. It is naïve to believe that such a shift can be achieved simply by the play of the forces of supply and demand by locking out low-skilled foreigners from the work force.

In fact, the current low-wage, low-productivity equilibrium economic system is not a desirable position to be in and most certainly in itself part of the reason why some people who felt the current economic system is not working for them voted for Brexit. Yet, the reality is that the UK’s economy has greatly benefitted other groups who will not let go of their privileged position easily. Indeed, the UK economic system is strongly skewed towards the interests of shareholders – with strong shareholder rights enshrined in the Companies Act and other regulations – while labour protection is weak. It is unlikely that in such a system increasing wages will lead to a decrease in capital share of national income. Without accompanying change to the legal frameworks, shareholders have the power to resist any such trend. The consequence is that the only other options to off-set increasing costs for companies due to increasing wages will be that either the state is taking less money through taxes or companies’ pass the increasing costs onto consumers. The former will worsen the public deficit at a time where the public finances arguably are in worst shape since WW2 due to the pandemic; the latter almost certainly will lead to increased inflation, thus offsetting the benefits of increasing wages at least partially.

Whichever path policy makers choose, a shift towards a higher wage economy will require a comprehensive strategy that also addresses the issues of education, skill formation, and productivity increases and takes into account the complex knock-on effects changes in one part of the system will have on others (e.g. increasing wages on inflation and household purchasing power, but also on firms’ incentives to replace more expensive labour with automation, thus potentially destroying jobs). Of course, such a comprehensive strategy is another thing that the Johnson government has been notoriously bad at coming up with and sticking to. Indeed, rather than developing any comprehensive industrial strategy, the government continues its elusive quest of quick Brexit dividends through ‘regulatory reform.’

Symbolic Brexit Triumphs: Pounds, ounces, and the crown stamp

Last week, Brexit minister Frost published a new list of Brexit opportunities. At first glance Lord Frost’s list reads like a parody. The top four opportunities for regulatory reform listed are 1. Reintroducing the ‘crown stamp’ on pint glasses 2. Replacing paper shares of stock with electronic shares, 3. Creating a new database that repertories UK regulations 4. Removing the ban on the use of imperial measures. With the best will in the world, it is hard to see how any of these measures will make a significant difference to the fortune of the UK’s economy and the competitiveness of its companies.

Just like the list itself reads like a parody, so do the justifications. For instance, the existence of paper share certificates is considered a problem because, “[i]t is more expensive and takes longer for holders of paper shares to trade them and there is a risk of certificates going astray.” Just by how many percentage points GDP will increase thanks to the removal of these obstacles to share trade, the document does not say.

To be fair though, there are also more substantive proposals for regulatory reforms such as the proposal to change regulation to allow the spraying of ‘plant protection chemicals’ from drones. It is of course uncertain if allowing farmers to use drones to spray plants will make a whole lot of difference to their productivity or income (while the effects on the environment are still uncertain). More importantly, though, like for other items on Frost’s list, it is far from clear whether such a change in policy would have been impossible as an EU member, given that France for instance is already allowing drone spraying.

 

Beyond Frost’s bizarre ‘wish list’ of regulatory reforms, there are also more serious – in the sense of ‘worrying’ – attempts being discussed to generate the much-needed Brexit dividends through regulatory reforms. Most importantly perhaps, the government’s recent announcement of its intention to diverge from EU data protection regulation. Here, the possibility is being discussed to scrap the requirement of human checks on decisions made by AI and computer algorithms, as is currently the case under art. 22 of the General Data Protection Regulation (GDPR).

As so often, blinded by its ‘sovereignty first approach,’ the government is acting on the assumption that UK companies operate completely detached from the international economy. In such a world of full sovereignty, lowering data protection standards and thus diverging from EU regulations would make UK companies’ lives easier by lowering the regulatory burden and thus costs, making them more competitive compared with firms from countries with higher regulatory standards. Even in the ‘full sovereignty’ worldview, this argument is flawed, because consumers may value the security and quality provided by higher regulatory standards and thus allow companies to offset higher costs by selling at higher prices.  But the more fundamental problem with the government’s approach is that the vast majority of UK businesses do not operate in a British bubble but depend on access to other markets or trade with companies from other jurisdictions. For such companies, diverging regulations will not necessarily provide any competitive advantage, but rather double the regulatory burden by forcing them to follow a new set of additional rules rather than just one set of uniform rules.

From a Brexiteer point of view Frost’s list and a divergence for the sake of divergence approach makes sense of course. Brexit is a ‘symbolic revolution’ and as such about ideas and symbols not about substance or economic outcomes. Following the release of Frost’s list, for instance, the pro-Brexit press, unsurprisingly, focussed on the ‘crown stamp’ and celebrated its return as a ‘Brexit triumph.’

Those of us who do not value symbols of sovereignty over real economic and societal outcomes will start worry that the country may soon not just be a hostile environment for low-skill immigrants, but also an inhospitable place for anyone else to live in.

Very real Brexit losses

While Brexit dividends remain elusive, its costs are becoming increasingly clear and quantifiable. A recent study on trade tariffs estimates that customs duties paid by UK importers have increased by £600m due to Brexit in the first six month of 2021. These additional duties are currently mostly related to the ‘rules of origin’ in the Trade and Cooperation Agreement (TCA), which implies that only goods with a certain percentage of value added either in the UK or the EU can be traded tariff free. Products that fall below the threshold or that are reexported, on the other hand do incur tariffs. According to the Guardian, the complexity of the new rules has even led some companies to adapt the strategy of paying the additional duties without verifying whether their products would be exempt or not.

While small and medium-size companies will be hardest hit by these additional costs, the competitive disadvantages caused by Brexit is hitting very large companies too. Thus, M&S announced last week that it would close most of its stores in France, because they had become unviable due to new rules on trade in fresh and chilled food products.

According to the BBC there was some hope amongst UK exporters that once trade barriers on imports from the EU to the UK were in place, the EU may become amendable to renegotiating these rules and agree on easing them. Yet, the UK government has recently decided to further delay full border checks on imports from the EU until July 2022, which means the asymmetric post-Brexit trade regime will continue. As a result, BBC’s Faysal Islam BBC claims that “there is a private acceptance that after this Brexit deal, fewer sandwiches will be exported to France, and that is the price for the regulatory and trade freedom to export more elsewhere.”  The big question, of course, is: Which countries are you going to export perishable sandwiches and other chilled foods to if not to the countries right at your doorstep?

A high stakes root cause debate: Pandemic versus Brexit

From soaring energy prices, the collapse of energy suppliers, empty shelfs and supply chain problems notably in the food industry, and since this week also fuel shortages and queues at petrol stations, the government, of course, is doing all it can to downplay the contribution of Brexit to the various issues the country is facing. The government squarely blames these issues on the pandemic and the pro-Brexit press sees some of them as a self-fulfilling prophecy deliberately engineered by Remainers.

However, as the problems grow worse the government’s very successful strategy to shift the blame away from Brexit may backfire. For some time, the government has actively promoted the discourse dominant in the pro-Brexit press that Brexit may not be going quite as well as expected only because the EU is punishing the UK for exiting. Shifting the blame away from Brexit onto the pandemic, makes that line of arguments less convincing. If the pandemic further eases and a large part of the British public is convinced that Brexit is not to blame for the problems that are plaguing the country, who can you blame for the absence of Brexit dividends then?

Labour’s awakening?

Pressure on the government to justify the absence of Brexit dividends may further grow also from an unexpected side – namely the Opposition. Ahead of the Labour conference, Labour leader Kier Starmer has set out his labour strategy in a long essay for the Fabian Society. Rather surprisingly, Brexit is possibly mentioned more times in this one essay than in all his previous speeches as labour leader taken together. Indeed, it seems like labour may be smelling blood and finally muster the courage to come off the fence about Brexit. Starmer promises to ‘fix the wholes’ in the Brexit deal, which shows that the opposition starts seeing an opportunity to campaign on actual existing Brexit. More importantly, Starmer explicitly calls out Johnson’s strategy of concocting a ‘culture war,’ to consolidate his power. This shift by the opposition from either trying to avoid taking a stance on Brexit or trying to out-do the Tories on populist and nationalist rhetoric and symbolism, could be a major shift. Indeed, like I argued in previous posts, moving away from ideology and symbolism to talking about the actual economic and social problems Brexit has caused or aggravated is key to tackle the real grievances that led people to vote for Brexit in the first place.

What lies ahead?

The UK is facing an interesting few months that might very well turn into a ‘hot autumn’ for the Johnson government. While another extension of the grace periods has alleviated the border issues on the island of Ireland somewhat, the problem of course has not gone away. Lord Frost continues to invoke the possibility of triggering article 16, which would suspend the Northern Ireland Protocol (NIP) temporarily. Moreover, France’s Emanuel Macron – facing re-election next year and already Angered about the US-UK-AUS submarine deal, has increased pressure on the fishing quotas front. Tensions with the EU may therefore flare up again after a relatively quiet summer.

Adding to that the domestic problems of soaring energy bills, increasing inflation, food and petrol shortages, and the embarrassment of a continuously shrinking list of Brexit dividends from which big promises – such as the FTA with the US – are dropped, and only symbolic measures – such as the Crown stamp – remaining, things may soon become less comfortable for the PM. And that is before even mentioning the still not under control pandemic and - dare I say it? – the prospect of another circuit breaker lock down sometime during the Winter. Given all this, it is hard to see how post-Brexit Britain would remain for very long in what some commentators have seen as an emerging uneasy and unstable equilibrium either internally or externally.