I suspect that, like me, very few Independent readers will be attending street parties and breaking open the bubbly to celebrate our national liberation on “Independence Day” this Friday. Even for the Freedom Fighters of the Brexit movement, 31 January promises to be something of a damp squib: a postponed Brexit date leading to an unchanged relationship with the EU for at least another year. So what’s ahead of us?
For the moment, there is a sense of relief that a decision has been made; business confidence has picked up; the level of acrimony has subsided. I don’t buy the false bonhomie in the “let’s all pull together chaps to make Brexit work”, but equally I don’t see the point in extended mourning, waiting for the opportunity to say “I told you so”.
In all likelihood, the government will produce an outline agreement in the coming year on the new relationship with the EU sufficient to avoid a major shock and serious disruption. Like the existing “political declaration“, it will be an agreement to make agreements. The detail will have to be fleshed out in years to come, and most likely not on terms advantageous to the UK.
A sensible first step would be to keep trade tariff free. There have been some hints from Boris Johnson this week that the UK should start slapping tariffs on German cars. The silly mini-Trumps in government should remember that the founder of the Conservative Party, Robert Peel, scrapped tariffs, unilaterally and unconditionally. Britain became a bastion of “free trade“ for most of the next 170 years: no nonsense about waiting for “trade deals”. The loss of single market access will be painful enough for the UK without unnecessary tit-for-tat tariff wars.
If there is one potential positive to Brexit it is that it gives an opportunity to re-examine from scratch some basic assumptions about where the country, and specifically the economy, is going.
Like a lot of Remainers, I have cheerfully trotted out the debating points about how bad Brexit would be for the City and the poor old bankers and traders who might have to relocate, or lose their bonuses on the 20 per cent or so of Euro-centred business. And I have argued that the government should be giving priority to the City acquiring “equivalence” status, to maintain as much market access as possible and avoid shifting so many jobs out of the UK. I have, however, always suspected that the City will adapt quickly and smoothly to Brexit – certainly more easily than British manufacturing .
We all have a stake in the earnings of the City, to the extent that its high earners and institutions contribute substantial tax revenue: £29bn in 2017-18 is not to be sniffed at. But it would be useful to ask what other economic function our financial services industry actually performs. I was prompted to pursue this question after attending a discussion this week with a group of fund managers, city lawyers and private equity investors organised by the think tank Radix.
The theory is that UK financial markets connect savers with companies who need to borrow capital to invest, creating jobs and economic growth. The public put their savings into pension funds and other savings vehicles, and – bingo! – the money finds its way into new factory machinery and shiny new office blocks, where wealth is generated. That seems to happen in different ways in Germany, Japan, France, China and the United States.
Not here. I was taken aback to hear these City insiders using the word “extractive” to describe their own industry as one which sucks out wealth rather than creates it.
In the UK, very little capital is invested in companies below the FTSE100. Not much gets to the middle-sized growth companies – the so-called “gazelles” who will provide the productivity improvements the country desperately requires. Instead, large margins are creamed off to pay mergers and acquisitions fees, private equity fees, fund management fees and bonuses, and CEO salaries. A lot finds its way into property markets, chasing inflation in asset values.
I recall causing a stir a few years ago at the Mansion House by likening the City to the extractive enclave economies of Africa where a mine or oil refinery employs sophisticated technology and a few people behind a barbed wire fence. Some revenue goes to the government, if it’s tough and smart and honest enough to capture it. But there is little or no connection with the small farmers and village industries outside the barbed-wire fence.
To get capital flowing out of the City of London into the rest of the country, the government needs to re-establish a Regional Growth Fund to help finance private investment, supporting wealth-creating businesses in “left behind” Britain. Private investment won’t flow into these arid areas without public irrigation.
Government must also use its most powerful lever: tax. It should start by removing the tax deductible status of debt interest which encourages dangerously high levels of leverage and a lot of tax dodging. Crucially, it disadvantages those who invest in risk capital since dividends are taxed but interest is exempted. George Osborne set out a plan to remove this bias but never pursued it.
In addition, the country needs to divert capital away from domestic property and land in the south east. Going after high value property – so that investing in a factory in Humberside could gain equivalent returns to investing in new housing in Surrey – would be a sign that the government is serious about rebalancing the economy.
I don’t see much to cheer about as “B-Day” approaches but if it proves a catalyst for reforming our horribly distorted, wealth extracting, tax-pampered financial sector, that would be a plus.
Sir Vince Cable is a former leader of the Liberal Democrats and a former secretary of state for business