CMEC Exclusive: Mark Littlewood on Britain after Brexit
Analysis 13 Oct 2016

CMEC Exclusive: Mark Littlewood on Britain after Brexit

Mark Littlewood

Let us imagine for a moment, a nation on the brink of an economic catastrophe. The economy, desperately over-leveraged on one industry, is seeing the crash in that industry drive the rest of the economy to recession and near crisis. The government fiscal position collapses as the underlying deficit from vast government spending is laid bare by an external shock. But a young and dynamic new leader takes the reins and leads a major diversification of the economy. Where one might see the United Kingdom in 2008-12, others may see Saudi Arabia since 2014. The economies of the UK and Middle East suffer from a number of the same problems – an overlarge welfare state, over-regulation and an unwillingness to let businesses get on with the job of doing business, rather than serving a ‘social’ or ‘state’ need. Happily, the UK has not yet reached the stage where street vendors set themselves ablaze fighting for the right to own and operate a business.

But the immolation of Mohamed Bouazizi did show that the peoples of the Middle East yearn for economic freedom as much as we do in Britain. While Britain must encourage our friends and allies in the Middle East to take on more of the open economic policies that have done so much to bring health, wealth and happiness to tens of millions around the world, we must also make sure we do not backslide and give up the hard-won benefits ourselves.

As we have heard repeatedly since the referendum just over 100 days ago, Brexit is a chance to redefine our relationships. But this debate must be about more than technical issues, such as what sort of access we have to the European Single Market. Instead, as well as the relationship between Britain and the outside world, Brexit must fundamentally be an opportunity to radically redefine the relationship between the state and the individual. For the UK to succeed we cannot simply have a good working relationship with the rest of the world, we must also ensure that the UK is an attractive place to do business.

In many ways (with the exception of the Commonwealth), a closer economic relationship with the Middle East makes the most sense for a free and open post-Brexit Britain. Not only does the Greater Arab Free Trade Area cover an economic area worth over US$6 trillion (a third the size of the European Union), the Islamic world has much natural affinity for the benefits of trade and capitalism. While Jesus Christ argued that it was ‘easier for a camel to pass through the eye of a needle than a rich man enter the kingdom of God’, the Prophet Mohammed argued that ‘nine-tenths of all provision comes from trading’. Many of the hadiths of the Prophet speak of the value of trade and commerce – while some speak of British liberals having a ‘religion of free trade’, the Islamic world was there centuries earlier!

But the importance of the Middle East – particularly the nations around the Gulf – for Britain’s trade goes beyond bilateral trading relationships. The hub effect of countries such as the United Arab Emirates provides billions more in exports for the UK economy, as it is estimated by the International Trade Department that more than half of the UK’s exports to the UAE are on sold to further points in the Middle East and North Africa.

There is also clearly an appetite for free trade across the Gulf States, as both their successful free trade negotiations with the European Free Trade Area and their ongoing negotiations with the European Union will attest, and an active and vibrant free trade agenda by the new Department for International Trade should make this a priority.

For the Middle East, this welcome view of free trade should be matched with liberalising reforms. While those nations that are not reliant on oil have already done much to reform and others (such as Saudi Arabia) have been compelled by oil prices to begin the change, much more must be done, specifically ending the pretence that ‘crony capitalism’ is somehow free market reform. In a number of countries, these reforms have meant that assets, wealth and power have simply been transferred from the state to the already rich and powerful elites, protecting privilege rather than encouraging entrepreneurial drive. Considering that, according to the ‘Economic Freedom in the Arab World’ report, the most economically free countries in the Middle East have a per capita income more than five times greater than that of the least free, the benefits of more countries making similar reforms to the UAE, Saudi Arabia and Oman could be widely felt and significant.

However, despite the best intentions of both parties, the future of the UK’s relationship with the Middle Eastern nations will depend greatly on what sort of Brexit we can expect. The Prime Minister has so far been unwilling to give a lot of specifics, but we can view two likely post-Brexit futures.

The first is if the UK retreats into protectionism and big government interventionism. The signs on this are worrying. The Prime Minister has spoken of introducing an industrial policy, likely to be made up of policies that will be unlikely to endear the UK to foreign companies seeking a new headquarters or investment opportunities.

Ironically, the risk is the UK will jettison the positive policies of the European Union (such as bans on state aid and forcing competition on unwilling sectors), and absorb many of the statist and over-regulatory policies that eventually led to Europe being the slowest growing continent on Planet Earth.

The other option is if the UK takes a liberal, outward, free trading view of Brexit. The United Kingdom has the chance to, almost at a stroke, remove many of the most suffocating and egregious regulations that choke our economy – originating both from Brussels and Westminster. We must be truly open for business – not as a slogan, but as a reality.

This means liberalising the suffocating planning laws that hold up major infrastructure developments for three decades (and counting). This means running a fine-tooth comb through the regulations we inherited from the European Union and deciding which should be repealed or replaced. This means avoiding the pitfall of radically tightened immigration rules that will starve parts of the country of the trained workforce required. And this means a tax system that is fit for purpose in a globalised world, rather than a throwback to the 1960’s.

The elephant in the room around the Brexit debate is the future of the UK’s immigration policy. It is estimated that more than 300,000 Middle East immigrants live in the UK presently, and as Britain opens itself to the world seeking trade and inward investment it is imperative that we do not put a policy in place which will restrict both foreign workers and foreign investors coming to the country.

As to how they will get here, the government has promised a decision on airport expansion – as has every government since DOS was still the main computing system. The expansion of any London airport (whether Gatwick, Stansted, Heathrow, City or some combination of the above) has been repeatedly kicked into the long grass, thanks to the objection of those who would be the worst affected by the change, but who see vanishingly few of the benefits that accrue to the national economy. The same is true of housing. Conservative estimates show that UK housing supply is falling approximately 200,000 houses behind demand a year, meaning we have the lowest rate of housebuilding in Europe.

The government should return major infrastructure decisions to local communities, as well as ensuring both the benefits of economic growth and the costs of blocking development are borne by the communities who make the decisions. There is currently more land put aside for golf courses in Surrey than there is for housing. This might be a decision for the local communities wish to make, but they should then pay the costs of higher housing benefit bills due to a lack of new houses. Alternatively, if the residents of Hounslow and Hillingdon Councils decide to support Heathrow expansion, the increases in business taxes and other benefits from the increase in economic activity should go to the councils to either cut taxes or improve other services.

Leaving the European Union is a chance to sweep away many of the worst rules and regulations that cost British businesses up to £33bn a year. However, the Prime Minister’s announcement that all EU regulation will be simply transposed into UK law is risking the inertia of the bureaucracy preventing serious deregulation. Instead, Parliament should sunset all EU regulations in the Great Repeal Bill over the course of (say) ten years, giving both businesses short-term regulatory certainty and requiring every regulation to be scrutinised and considered, rather than just nodded through.

Finally, we should take a look at the tax system from top to bottom. If the ongoing arguments about the tax liabilities of Facebook, Google, Apple or other companies has shown us anything, it is that the tax code is far too complicated. Instead of trying to fight ‘tax avoidance’ through publicly shaming companies, doing deals with specific companies deciding how much tax they ‘should’ pay, or draconian legislation, the government should get rid of corporation tax altogether. Instead of a tax regime that harkens back to the economy of the 1960’s, the UK should be looking to lead the way on a new regime.

The UK and the Middle East have had a good working and economic relationship in the past. There is no reason to doubt this will continue. But Brexit gives us a once in a lifetime chance to radically liberalise markets. Maybe if the UK can become the shining city on the hill of free and open trade, these policies can spread ever wider. Liberalising markets and freeing trade has, in the past fifty years, brought about the greatest flowering of human prosperity in the history of the world. But there is more to do, both in Britain, and in the Middle East.