Labour Brexit is the path to Labour Austerity and Labour Failure

‘Remain Labour’ Policy Briefing February 12th, 2019

 

The exchange of letters between Jeremy Corbyn and the Prime Minister have clarified the kind of Brexit that Labour might support in the House of Commons. Here, Remain Labour provides the first public economic analysis of such a “Labour Brexit” and considers its political implications for a future Labour government.

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Remain Labour is the grassroots network that helped lead the anti-Brexit charge at the Labour Conference in September that negotiated the party’s policy with the party leadership. It is thus highly attuned to the subsequent evolution of the leadership’s position and the political and economic ramifications.

 

Producing an economic analysis of any proposed Brexit deal is difficult and time-consuming. Consequently, we have lacked until now a robust analysis of the likely effects of the kind of Brexit that the Labour Party favours. However, recent developments have changed the picture and make it possible to now assess the impact of a Labour Brexit.

 

The first development is in Labour’s Brexit policy. For us, there are four disappointments in Corbyn’s letter. There is no mention of a People’s Vote. The commitment to obtaining the ‘exact same benefits’ as we currently enjoy has been dropped. The party is now only talking about ‘a’ customs union rather than ‘the’ existing customs union. However, the focus of this briefing is on the new stance on the single market. The policy set at the party’s Conference requires “…a relationship with the EU that guarantees full participation in the single market”. However, Corbyn’s letter says only that Labour wants ‘close alignment with the single market”.

 

The shift in wording may seem slight, but the difference seems clear to us: it is the difference between being inside and outside. Most importantly for any economic analysis, being outside the single market would therefore not entail freedom of movement and hence we cannot expect a Labour Brexit to deliver the economic benefits of freedom of movement.

 

From an economic point of view, the position now taken by Labour is now comparable with the deal agreed between the UK and EU by Theresa May. For that reason, the second development, it has already been thoroughly analysed by economists looking at the government’s deal. Such analyses include the government’s own, one from the National Institute for Economic and Social Research and one jointly from the Centre for Economic Performance at the London School of Economics and The UK in a Changing Europe unit at King’s College London. All three come to broadly similar conclusions but consider distinct Brexit scenarios. For the detail of this work we have chosen to rely on the LSE/Kings one, published in November, as it includes a scenario comparable to a Labour Brexit, with a continuing customs union but no freedom of movement.

There are then two main Brexit economic impacts that Labour needs to consider:

  • on GDP, including GDP per capita

  • on public finances and anti-austerity spending.

 

Apart from the damaging effects themselves, both of these have the capacity to be politically debilitating.

 

The LSE/Kings report, The economic consequences of the Brexit deal, concluded that the damage to the UK economy from the kind of deal now proposed by Labour would be reflected in both GDP and GDP per capita that are significantly lower than they would be if the UK continued within the EU. The effects would accumulate year by year until after 10 years they amounted to the figures shown in the table below (where the two rows of figures reflect two distinct sets of modelling assumptions).

GDP: Labour Brexit and the risk of Labour Failure

The reduction in GDP per capita is estimated by the LSE/Kings team at between 1.9 per cent and 5.5 per cent and may be politically potent. Put simply, if Labour wins the next election a Labour Brexit will reduce growth during its period of office. That means that Labour will get blamed for low growth, with the Conservatives and media allies putting this down to Labour mistakes rather than Brexit. For example, being outside the single market will mean that large manufacturing firms will take their new investment elsewhere in the EU – decisions the Tories will blame on a Labour government. Economic failure then puts at risk the prospects of a second term.

 

Public Finances: Labour Brexit and Labour Austerity

The reduction in GDP per capita is expected by the LSE/Kings team to lead to a consequent reduction in government income. This loss of income would greatly outweigh savings from reduced spending on budget contributions to the EU. And since the state of the public finances in turn constrains any government’s spending plans, the effect on a Labour government would be considerable.

 

The report concluded that the net cost to the public finances of a Labour-type Brexit after 10 years would be between 0.4% and 1.8% of GDP per year. Based on an estimate of the UK’s 2018 GDP of £2.1 trillion , this equates to a loss of between £9 billion a year and £39bn per year with a median estimate of £24bn a year.

As one of the report’s authors, Jonathan Portes, told us,

“This is probably a fairly good approximation of what Labour policy would deliver – if free movement is not on the table. If, however, Labour were to accept free movement, at least in a modified form, that would open up the possibility of a much closer relationship, including for service trade, which would be far less damaging to the economy and public finances.”

 

To put these figures in context:

- The cost of Labour’s higher education proposals in its 2017 manifesto, including both abolishing tuition fees and restoring maintenance grants, has been estimated at £9bn a year. Thus the cost of a Labour Brexit is likely around three times the cost of the revolution Labour planned in higher education.

- The Institute for Fiscal Studies estimated the cost of the welfare improvements in the 2017 manifesto at £4bn a year. Thus the cost of a Labour Brexit is likely around six times the cost of Labour’s welfare improvements.

- Or, to use a common yardstick for large public spending issues, it is equivalent to adding 6p to the basic rate of income tax.

Overall, Labour itself estimated its increase in public spending would amount to £44bn a year in its 2017 manifesto. Thus the price of a Labour Brexit would likely be the elimination of about half of all of a Corbyn government’s anti-austerity spending.

A future Labour would therefore come under pressure to cut a wide range of its anti-austerity policies. Potential victims include tuition fees, welfare and pensions, childcare, schools and the NHS.

 

Even that may well be understating it. The IFS thought Labour’s 2017 tax-raising plans optimistic and suggested they might raise far less, especially in the long term. Combine that with a Brexit-inspired loss of income closer to 1.8% than 0.4% and Labour could find itself not increasing spending but cutting it. In short, a Labour Brexit runs the real risk of forcing the next Labour government to impose Labour Austerity.

 

Again, the political consequences for a Labour government have the potential to be poisonous.

 

Labour Brexit support, Labour Austerity and Labour Failure

For Labour to consider supporting Theresa May to get her deal through paints a very bleak future picture for a Labour government’s ability to implement its austerity reversing policies. At the level of accuracy that can be expected from any Brexit economic forecast, there is no difference between the deal May is proposing and a Labour Brexit of the kind described above. The economic and political consequences of such a Brexit would be equally painful.

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1. EU Exit: Long-term economic analysis, November 2018; https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/760484/28_November_EU_Exit_- _Long-term_economic_analysis__1_.pdf.

The Economic Effects of the Government's Proposed Brexit Deal; https://www.niesr.ac.uk/sites/ default/files/publications/NIESR%20Report%20Brexit%20-%202018-11-26.pdf.

The economic consequences of the Brexit deal; http://ukandeu.ac.uk/wp-content/uploads/ 2018/11/The-economic-consequences-of-Brexit.pdf. 

2. IMF World Economic Outlook Database, October 2018: https://www.imf.org/external/pubs/ft/ 2 weo/2018/02/weodata/weorept.aspx? pr.x=84&pr.y=9&sy=2017&ey=2018&scsm=1&ssd=1&sort=country&ds=.&br=1&c=112&s=NGDPD%2CPP PGDP%2CNGDPDPC%2CPPPPC&grp=0&a=

3. https://wonkhe.com/blogs/the-costs-of-labours-tuition-fee-pledge/

4. https://www.ifs.org.uk/uploads/Presentations/Carl%20Emmerson%2C%202017%20General%20Election%2C%20manifesto%20analysis.pdf

5. Table 4.5 https://www.ifs.org.uk/uploads/publications/comms/R143.pdf#page=168 5

6. IFS ibid.

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