George Osborne and the impact of economic uncertainty
David Green, 18 April 2016
The Treasury’s reactionary pessimism about our economic prospects outside the EU relies heavily on the assumption that leaving will cause uncertainty, which will result in lower business investment.
Let’s agree that if we vote for independence we will not initially know what the EU will agree to, which means there could be 10% tariffs on cars and even higher tariffs on some processed foods. We could take one of two approaches. First, we could assume that the EU will act according to its own self-interest and accept a trade agreement. Or second, we could assume that in the short term it will act contrary to its own interests, in which case we will need a contingency plan.
Trade is usually mutually beneficial and EU member states stand to lose more than we do if they can’t sell us their cars, wine, cheese and much more. But it’s not just that their exports to the UK could suffer, it is easy to overlook the fact that some of our most successful exporters are European-owned companies that stand to lose if exports to the EU are disrupted. The German company BMW, for example, makes minis in Oxford and most are exported. After independence, BMW executives will be knocking on Mrs Merkel’s door urging her to sign a deal. Likewise Nissan in Sunderland is part-owned by the French company Renault and will not want to see sales to Europe disrupted.
But what if Germany and France act against their own economic interests in the short run? It’s not really enough to say that their electorates will force their leaders to come to their senses eventually. What kind of contingency plan should we have up our sleeves?
We could declare the whole country an enterprise zone, which would mean lower business rates and strong encouragement of capital investment. We could cut corporation tax to 10%, currently only applied to products that fall with the ‘patent box’ rules. That alone would have international companies queuing up to operate in the UK. And we could increase state funding of the British Business Bank. It already operates successfully in supporting small and medium-sized enterprises and its remit could easily be widened to encourage investment in larger companies. If business investment tailed off because of George Osborne’s efforts to talk down his country, there would be many commercially justified loans for the British Business Bank to make. In a few years taxpayers will be reaping the reward.