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Refuse to compromise over Brexit? Then you’ll just prove those pessimistic experts right

There is no magic, self-regenerating cake. 

The UK economy expanded at a healthy speed of 1.8 per cent last year according to official data. The economy performed better than most pre-EU referendum forecasts, encouraging some to argue that the forecasting community was too pessimistic about Brexit. That is false.

To start with, UK growth plateaued last year just when global growth and in particular Euro Area growth accelerated. Without the Brexit shock, the UK would have participated more fully in that recovery and economic growth may well have been much higher. On our calculations, the surprising strength in global growth added something like 0.5 percentage points to UK GDP growth in 2017.

Next, the Bank of England had to step in with additional stimulus measures that included a rate cut, more quantitative easing and also support for banks. All that helped restore confidence and lift economic growth.

The National Institute of Economic and Social Research published a number of studies before the referendum with estimates of the economic costs of Brexit. The broad conclusion was that the overall cost over the long run will be around 8 per cent of GDP. In this context, the results from the recently leaked study by the Department for Exiting the European Union (DExEU), that GDP would decline by between 2 and 8 per cent depending on the type of exit, seem entirely realistic. Extracting itself from a deeply integrated market like the EU has a real economic cost. The UK is starting to bear that cost, even before it formally leaves the Union.

We have re-iterated that view in our latest forecast. Under our central forecast, real GDP grows at around 2 per cent this year and next, but this forecast assumes a “soft” Brexit where the UK maintains close to full access to the EU market.

Of course, talks could fail and the UK could find itself out of the EU and without a trade agreement. In this scenario, we believe that the UK would experience a recession in 2019 and deep long-term wounds. The immediate introduction of tariffs and other barriers to trade would hurt both exports to and imports from the EU. Sterling would depreciate further leading to higher consumer prices and over time the UK would suffer a loss in productivity. Over the next 10 years, under this scenario, annual GDP per capita would be reduced by up to 6 per cent, or £2,000 in today’s money. These estimates are very similar to our earlier studies.

As it happens, we believe that an ambitious deal is possible, but it will require concessions from the UK. The Prime Minister stated that she wants to achieve the “freest and most frictionless” trade possible between the UK and the EU, while putting an end to both the freedom of movement of labour between the UK and the EU and the jurisdiction of the Court of Justice of the European Union (CJEU) in the UK. She also wants to stop financial contributions to the EU budget. Unfortunately, we think that the UK won’t be able “to have its cake and eat it”.

The figure below is a visual representation of the trade-off that the UK faces. The vertices of the triangle correspond to full market access, complete freedom of movement of people and size of the financial contribution (as a percentage of Gross National Income). Norway had to agree to significant financial contributions (“Norway Grants”) to have close to full access to the single market. Switzerland, which enjoys less market access that Norway, allows close to complete freedom of movement of labour. As the triangle shows, its budgetary contribution is relatively small. Finally, the trade deal with Canada (CETA) is less extensive that Switzerland and is essentially restricted to just goods. Canada does not make a budgetary contribution.

 

The EU has many other trade deals with countries both in and outside Europe and each of these can be represented in this figure, but all of them without exception include a heavy dose of concessions. Choosing what to compromise on – financial contribution, or some degree of freedom of movement of persons – is a difficult political decision, but it is key to giving businesses the clarity and confidence they need.

The longer the negotiation, the more damage will be inflicted to both economies, with a disproportionately large effect on the UK. There is no magic, self-regenerating cake. The PM needs to finally acknowledge that and spell out to the British people what the available choices are.

By Amit Kara (UK Head of Macroeconomic Forecasting) and Cyrille Lenoel (Senior Economist), National Institute of Economic and Social Research.

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Labour’s renationalisation plans look nothing like the 1970s

The Corbynistas are examining models such as Robin Hood Energy in Nottingham, Oldham credit union and John Lewis. 

A community energy company in Nottingham, a credit union in Oldham and, yes, Britain's most popular purveyor of wine coolers. No, this is not another diatribe about about consumer rip-offs. Quite the opposite – this esoteric range of innovative companies represent just a few of those which have come to the attention of the Labour leadership as they plot how to turn the abstract of one of their most popular ideas into a living, neo-liberal-shattering reality.

I am talking about nationalisation – or, more broadly, public ownership, which was the subject of a special conference this month staged by a Labour Party which has pledged to take back control of energy, water, rail and mail.

The form of nationalisation being talked about today at the top of the Labour Party looks very different to the model of state-owned and state-run services that existed in the 1970s, and the accompanying memories of delayed trains, leaves on the line and British rail fruitcake that was as hard as stone.

In John McDonnell and Jeremy Corbyn’s conference on "alternative models of ownership", the three firms mentioned were Robin Hood Energy in Nottingham, Oldham credit union and, of course, John Lewis. Each represents a different model of public ownership – as, of course, does the straightforward takeover of the East Coast rail line by the Labour government when National Express handed back the franchise in 2009.

Robin Hood is the first not-for-profit energy company set up a by a local authority in 70 years. It was created by Nottingham city council and counts Corbyn himself among its customers. It embodies the "municipal socialism" which innovative local politicians are delivering in an age of austerity and its tariffs delivers annual bills of £1,000 or slightly less for a typical household.

Credit unions share many of the values of community companies, even though they operate in a different manner, and are owned entirely by their customers, who are all members. The credit union model has been championed by Labour MPs for decades. 

Since the financial crisis, credit unions have worked with local authorities, and their supporters see them as ethical alternatives to the scourge of payday loans. The Oldham credit union, highlighted by McDonnell in a speech to councillors in 2016, offers loans from £50 upwards, no set-up costs and typically charges interest of around £75 on a £250 loan repaid over 18 months.

Credit unions have been transformed from what was once seen as a "poor man's bank" to serious and tech-savvy lenders where profits are still returned to customers as dividends.

Then there is John Lewis. The "never-knowingly undersold" department store is owned by its 84,000 staff, or "partners". The Tories have long cooed over its pledge to be a "successful business powered by its people and principles" while Labour approves of its policy of doling out bonuses to ordinary staff, rather than just those at the top. Last year John Lewis awarded a partnership bonus of £89.4m to its staff, which trade website Employee Benefits judged as worth more than three weeks' pay per person (although still less than previous top-ups).

To those of us on the left, it is a painful irony that when John Lewis finally made an entry into politics himself – in the shape of former managing director Andy Street – it was to seize the Birmingham mayoralty ahead of Labour's Sion Simon last year. (John Lewis the company remains apolitical.)

Another model attracting interest is Transport for London, currently controlled by Labour mayor Sadiq Khan. TfL may be a unique structure, but nevertheless trains feature heavily in the thinking of shadow ministers, whether Corbynista or soft left. They know that rail represents their best chance of quick nationalisation with public support, and have begun to spell out how it could be delivered.

Yes, the rhetoric is blunt, promising to take back control of our lines, but the plan is far more gradual. Rather than risk the cost and litigation of passing a law to cancel existing franchises, Labour would ask the Department for Transport to simply bring routes back in-house as each of the private sector deals expires over the next decade.

If Corbyn were to be a single-term prime minister, then a public-owned rail system would be one of the legacies he craves.

His scathing verdict on the health of privatised industries is well known but this month he put the case for the opposite when he addressed the Conference on Alternative Models of Ownership. Profits extracted from public services have been used to "line the pockets of shareholders" he declared. Services are better run when they are controlled by customers and workers, he added. "It is those people not share price speculators who are the real experts."

It is telling, however, that Labour's radical election manifesto did not mention nationalisation once. The phrase "public ownership" is used 10 times though. Perhaps it is a sign that while the leadership may have dumped New Labour "spin", it is not averse to softening its rhetoric when necessary.

So don't look to the past when considering what nationalisation and taking back control of public services might mean if Corbyn made it to Downing Street. The economic models of the 1970s are no more likely to make a comeback then the culinary trends for Blue Nun and creme brûlée.

Instead, if you want to know what public ownership might look like, then cast your gaze to Nottingham, Oldham and dozens more community companies around our country.

Peter Edwards was press secretary to a shadow chancellor, editor of LabourList and a parliamentary candidate in 2015 and 2017.