Angela Merkel has every right to fear Britain's competitive edge

By now we were supposed to know the outcome of the “last ditch” negotiations over a Brexit deal. As it turns out, the UK and the EU have kicked the can a little further down the road.

However, today was never likely to be the end of matters. If a deal had been reached, it would still have had to be reviewed by the UK parliament and ratified by all the other EU member countries.

There are no prizes for guessing which country will most likely veto any such agreement – France. And even if “no-deal” had been declared over the weekend, I wouldn’t have ruled out yet another “last ditch” attempt, and it appears I was correct.

More importantly, though, today isn’t as momentous as you might imagine for substantive reasons. All along, both proponents and opponents of Brexit have exaggerated its immediate economic significance.

To listen to some of the debates you would imagine that the UK has been poised on a knife-edge between economic disaster on the one hand and immediate passage to Nirvana on the other. Yet almost 90pc of the UK economy does not consist of exports to the EU. Getting the conditions right for that 90pc is the primary matter.

Exaggerating the economic importance of European issues for economic success is nothing new.

When we joined what we now call the EU in 1973 this was supposed to be transformatory. The British establishment had observed with increasing anxiety the way that continental economies had been growing much faster than we had. They believed that if only we could join this club, then our economic performance would improve dramatically.

In fact, this was an example of extremely lazy thinking. The UK had under-performed the EU for a variety of reasons, including the terrible performance of our nationalised industries, the excessive power of trade unions and the inefficiency of much of private industry.

These things didn’t improve when we joined the EU. But they did improve once Mrs Thatcher got to grips with them in the 1980s. Funnily enough, we then started to out-perform the other members of the EU.

Later, the usual suspects argued that disaster awaited if we didn’t join the euro. In the end, we didn’t join and there was no disaster – at least not for us, but for some of those countries that did join it, especially Italy, this brought an economic catastrophe.

Successful economic policy-making is hard – far harder than the simple gestures that most of the British establishment seems to be obsessed by. Yes there is a sound economic case for Brexit, and indeed I have argued it on many occasions. But Brexit has never been a magic wand – and the same applies to having a trade deal with the EU.

In some areas, leaving the EU will bring tangible advantages to set against the costs. Being able to frame our own trade policy and to forge trade deals suitable to our economy, not needing to reconcile conflicting vested interests, is one of them.

The EU’s recent shenanigans and the frankly ridiculous French attitude over fish have surely been an eye-opener as to what we will now be free from.

Another potential gain concerns regulation. Bad regulation has been a significant factor holding back the EU’s economy. Brexiters have argued that being free of its shackles would allow us to adopt a laxer and more finely tuned regulatory system.

In practice, however, the UK establishment has been, and still is, reluctant to deregulate and move significantly away from the EU regulatory framework.

But the really important freedom concerns the ability to take a different stance on future regulation. Economies are changing so rapidly that there will need to be new regulations governing the new economy. This will apply most particularly to Artificial Intelligence and robots, as well as a whole host of digital issues.

On all past form, the EU will be inclined to over-regulate these sectors, as much as possible to preserve existing structures in aspic. At least we will now have the freedom to take a different path.

Yet many of the issues that the British Government needs to get right now in order to ensure British prosperity go beyond EU membership. All require the sort of radical, root-and-branch reforming approach that drove Mrs Thatcher’s government some 40 years ago.

We need to boost the level of real investment, both public and private. But we also need to tackle the appallingly poor performance of the public sector across a broad swathe of activities, including our blessed NHS.

And we need to tackle the gross under-performance of much of our educational system, including sorting out the woeful waste of resources in our bloated and badly focussed university system.

Perhaps the most important set of decisions that we face concerns taxation. As it happens, our membership of the EU has not much constrained our freedom of action here. But now we have a prod and an incentive to be radical.

All those people who obsess about the burden posed by the public debt, and urge a programme of large tax rises to curb it, have got things completely out of kilter. The most important thing for the UK outside the EU is to be ultra-competitive. The less we diverge on regulation the more important it becomes that we diverge on tax.

Far from contemplating a raft of tax rises and new taxes, the chancellor needs to embark on a programme of tax cuts, both corporate and individual. If he feels we cannot “afford” to make these cuts now he should frame his plans for current spending accordingly and at least announce a programme for future tax cuts.

Apparently Mrs Merkel and other European leaders are worried that outside the EU the UK will be a potent competitor for continental producers. We should bend every effort to make sure that, in this respect if in no other, they turn out to be right.

Roger Bootle is chairman of Capital Economics; roger.bootle@capitaleconomics.com

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