Philip Hammond risks making David Davis’s job harder in the Brexit negotiations

Philip Hammond risks making David Davis’s job harder in the Brexit negotiations

Above all other politicians, Chancellors of the Exchequer must take care to calibrate their words carefully. Any lapse into hyperbole can set off speculative reactions that destabilise the economy. They must aim to appear serene on the surface even when their legs are paddling like crazy below the waterline.

So what on earth was Philip Hammond up to when he went on The Andrew Marr Show earlier this month and declared that leaving the EU without a formal deal would be a “very, very bad result for Britain”?

By using such a phrase, Mr Hammond made matters much more difficult for his Cabinet colleague David Davis, whose job it is to actually reach agreement with Brussels on the terms of our departure. Mr Hammond in effect sought to turn Mr Davis into that salesman’s dream: a customer who has advertised at the outset that he cannot leave the showroom without making a purchase.

Were Britain to leave the EU without a deal now and move to WTO terms for trade, Mr Hammond’s description would be hung around the necks of Theresa May, David Davis and the entire Government: “Very, very bad for Britain.”

It is difficult to credit that this is the same Philip Hammond who four years ago, in May 2013, was content to be seen as one of the Cabinet’s most hardline Eurosceptics when he publicly stated (on the radio programme Pienaar’s Politics) that he would vote to leave the EU on the then terms of membership. If you think as little of David Cameron’s “renegotiation” as most people do, you will be moved to wonder why Mr Hammond did not in the end back the Leave cause.

Of course, he made his Eurosceptic noises at a time when most people thought Cameron was on his way to defeat at the next general election and therefore that a Tory leadership contest would take place in the summer of 2015 in which Europe would be a very major issue.

But back to Chancellors and hyperbole: “A very, very bad result for Britain.” I have considered that terminology against what trading with the EU on WTO terms would mean and I simply cannot reconcile the two.

Certainly leaving without a deal and moving to WTO terms would not be the best possible outcome. One would expect a politician like Spreadsheet Phil to reach for a term such as “sub-optimal” or “a matter for some regret” or even “far from ideal”. But “very, very bad”? Hardly.

Let’s have a look at the basic shape of such a possible happening. Exports into the EU constitute about 12% of UK economic activity as opposed to about 13% accounted for by exports elsewhere and 75% of activity by the domestic market (a Commons Library report from June 2016 gives the UK/EU trade figures as at 2015 as exports £223bn, imports £291bn).

Now average tariffs imposed by the EU on non-members on WTO terms are estimated at approximately 4% of sale price (though of course that varies across classes of goods with, for example, tariffs on the auto sector running at close to 10 per cent).

Under WTO terms, European importers of UK goods and services would have to pay this surcharge and presumably seek to pass it on to their customers. And yet such a relatively small cost component would be dwarfed by other economic variables such as, for example, currency movements which have already made British goods around 10% cheaper in the eurozone.

Then we must consider the customs checks applied to non-members of the single market exporting into it. Although these are not as seamless as for full single market members, exporters from other countries large and small manage them perfectly well, with most form-filling done online and checks at ports typically lasting just a few minutes. (And remember, the vast majority of them are not countries offering nearly £300bn worth of business each year to EU exporters, as Britain does).

So let us concede that for 12% of the British economy, a move to WTO terms with the EU would clearly be an irritation. Let us even suppose that the extra bureaucracy involved could lead to a reduction in our volume of EU exports as companies for whom EU exports are a marginal benefit decide it is no longer worth the hassle. Let us be heroically pessimistic about this and postulate a ten per cent decline in exports (from £223bn to £201bn). That would equate to a loss of a little over one per cent of UK economic output. Now that is, as John Major might have put it, a not insignificant sum.

But even that figure is based on the ridiculous idea that all the resources no longer being used to export to the EU would instead do nothing. In a primarily free market economy this is nonsense. In fact, the majority of the productive resources would be swiftly redeployed to the next most productive activity; goods would be sold into the next most lucrative market instead; and labour would redeploy to other jobs. So the loss would be far smaller.

And that is before we even consider the positive advantages that would accrue to the UK of having left the EU on WTO terms. For a start, the Treasury would find itself in receipt of around £11bn of tariff revenue from imported EU goods and services. In the long-term such tariffs, even levied at a low rate, are not desirable because they tend to distort resource allocation away from the ideal based on comparative advantage between jurisdictions. But in the short-term it is all gravy.

The UK would also be able to get rid of disproportionate and harmful EU regulations that presently apply to the 88 per cent of its economy that has nothing to do with exporting to the EU. Economists such as Professor Tim Congdon have estimated this could be worth huge sums to the UK economy.

By leaving on WTO terms, the UK would also be able to avoid paying the so-called “divorce bill” that Brussels is after, saving a one-off sum of perhaps £40bn. Thereafter we would be saving £10bn net, per annum, through having no membership fees to pay.

More importantly still, dear old Liam Fox would be able to crack on with signing free trade agreements with non-EU countries in the sunrise, high-growth parts of the world economy. If he pulled one off with the USA then this, alone, could be worth an extra £10bn a year to the UK economy (that figure was touted by the Cameron regime during talks with President Obama in 2013).

So I can’t for the life of me see how the impairment of UK trade under even an ill-tempered shift to WTO terms with the EU could knock more than 0.5 per cent off the size of our economy. And that is if things go really awry – which depends on the likes of Germany being willing to cause real aggravation with a huge and lucrative export market with which it is currently in massive trade surplus.

Of course, losing 0.5 per cent of the economy would be most unwelcome (equating to about four months’ worth of growth by recent standards). But for comparison, the financial crash lost us nearly seven per cent and there was no restoration of democracy to sugar the pill, just an ongoing obligation on taxpayers to bail out rich and irresponsible bankers.

So this so-called “cliff edge” departure from the EU must even in the most difficult form be much smaller than a standard UK recession.

Perhaps, then, Mr Hammond is making some heroically pessimistic assumptions about future inward investment for many years ahead if the UK left the EU in such a fashion? But we have already seen how the Treasury-authored Project Fear apocalypse has been found to be bunkum. And we have seen how predictions of big chunks of our financial services industry relocating out of the UK have also been shown to be unfounded.

GDP growth could also, of course, be constricted by some actual migration control, cutting severely the supply of EU labour into low-skilled and unskilled work in the UK. Perhaps this is what Mr Hammond and the really Treasury fear – the Government having no excuse for failing to implement its stated immigration policy because it would not be bound by any future migration obligations with the EU. But ending the mass import of labour for unskilled work will hardly change GDP per head at all and will not hurt the public finances either because low-paid workers typically consume more in public services than they pay in tax.

So leaving the EU without a deal will not be “very, very bad”. At worst, it could amount to the “bump in the road” that Michael Gove spoke of during the referendum campaign.

In fact, it is Mr Hammond’s remark itself that could be very, very bad for Britain. It is feeding a media narrative – particularly among broadcasters already immersed in anti-Brexit bias – that suggests Brussels has Britain over a barrel in these negotiations. This simply isn’t true, but the danger is that if the rest of the EU starts believing that it is, it will lead to them offering us much worse terms in any leaving agreement than they would otherwise have done.

It is this that I think Andrea Leadsom was getting at with her call for broadcasters to be a bit more “patriotic” in their coverage of Brexit. The other danger, of course, is that the Hammond narrative may take root on the British side, leading to a further loss of confidence from an already weakened Prime Minister and a readiness to sign up to unnecessarily poor terms of departure.

This is where I give thanks for the chief UK negotiator being the dogged David Davis who, in his own appearance on Marr last weekend, very deftly deflated the Chancellor’s doom-mongering.

Now, I quite understand why Mr Hammond has been feeling ill-used by the May regime – by all accounts he has been on the end of some rough treatment in recent months. So perhaps he can be forgiven one return volley of fire.

But to have a Chancellor of the Exchequer busily engaged in talking down Britain’s prospects and weakening its negotiating hand on the basis of scaremongering that bears little relation to the fundamentals is unacceptable.

Mr Hammond would do well to bear in mind that it is very much better for Chancellors to challenge those who talk down the British economy rather than to do it themselves.