Blame who you like

Aug 12, 2019

Sunday Business Post, 11 August 2019
The single biggest contribution of Boris Johnson's premiership to date has been to hammer home the realisation that the British departure from the European Union has real consequences for everyone. 

It's ironic that all of those who are in favour of the British backstop (notably the Irish government) and all those who want to see it removed (notably the British government) are in complete agreement on one aspect.  The backstop only exists because of a shared doubt that an agreement can be reached by the end of December 2020 to manage trade on the island of Ireland without a hard border.  Given that, in the heat of the blame game, there are four other certainties which are evaporating from the public debate.  We know they will happen for sure on a hard Brexit because they are independent of the bluster of the politicians.

Brexit under the May government had become something of a phoney war.  There was plenty of speculation about the consequences of a break with the EU.  But not enough politicians recognised the full extent of the impact on ordinary people of Brexit – that there would be a widespread loss of job security and an inevitable loss of jobs.  That products would disappear from shelves.  That people, including UK citizens, would be unable to enter the UK as easily as before.  That there would be shifts in pricing and currency valuations because Brexit had not been priced in sufficiently by the markets.  Nobody is buying the “it’ll be alright on the night” story any more, not least the British Chancellor of the Exchequer who is throwing an additional £2bn or so at the problems. 

Tax is the glue that holds the commercial arrangements at the heart of the European Union together.  We share a common VAT system (even if we don't share common VAT rates) because of a consensus that consumers of goods and services within the EU should contribute to their nation's coffers.  We share a common customs system to ensure preferential trading arrangements between all the countries in the European Union club, and also to apply penalties on goods from countries which do not belong to the club. 

Less talked about is that the British will want to impose their own customs controls between the UK and the EU.  This is because one of the much promoted advantages of Brexit for the UK is the capacity to strike new trade deals independently from the EU.  The existence of secure trade borders is fundamental to the success of any trade deal between individual countries.  This week US secretary of state Mike Pompeo promised a US/UK free trade agreement as soon as possible after Brexit.  But the British will not be able to strike new trade deals with any country worth having a deal with, unless they can demonstrate that their own trade borders are secure and that tariff free goods won’t leak into or out of third countries.  No one should believe that, post Brexit, customs controls will be mandated solely by Brussels.  The British need them as well.

So here is the first certainty.  Customs controls post Brexit are absolutely inevitable.  Where those controls are to be carried out is still a matter of conjecture, but they must take place somewhere.

The second certainty of Brexit is that some sectors will be worse affected than others.  Customs tariffs hurt.  If you don't believe that, just ask President Trump, whose policy towards China (and earlier towards Canada and Mexico) is predicated on the imposition of tariffs on goods to secure economic superiority.  Obviously goods which attract the highest customs tariffs when exported outside of the European Union will be worst hit so sectors involved in food production are going to suffer most.  Judging by this week’s protests outside the marts, Irish beef farmers have already grasped this fact and they are right to be concerned.

The third certainty is that the more regulated the industry, the better its chances post Brexit.  The EU treaties are all about permissions – permissions to sell goods and services anywhere within the EU provided they are appropriately regulated and licensed.  Irish businesses in highly regulated sectors such as financial services and pharmaceuticals will be in a better position post Brexit than their British competitors. 

The last certainty to mention is that post Brexit, workers will pay more income tax.  When there are job losses, there are significant consequences for the Irish economy.  Income tax is the single most important element of the overall Irish tax take.  Every time an Irish worker loses his or her job, the cost to the Irish Exchequer, between tax foregone and additional welfare benefits to be paid, is in the order of €20,000 or more.  Our Central Bank is now predicting in excess of 100,000 job losses post Brexit.  Job losses on that scale are a social tragedy.  They will also cost the Exchequer €2 billion.  That shortfall will have to be made up somewhere.

So forget about the blame game if only for a moment.  There will be customs controls on the island of Ireland because both the UK and the EU need them.  Though some sectors will benefit, there will be job losses.  Those who keep their jobs will pay more income tax. 

Those are your certainties.  Now, go ahead and blame who you like.

Dr Brian Keegan is Director, Public Affairs at Chartered Accountants Ireland