This article appeared in The Evening Standard on Monday 16th January, 2016 the evening before the Prime Minister's Brexit speech. The views expressed here are the personal views of Gerard and do not necessarily reflect the views of Netwealth Investments.
This will be an important week for UK economic policy, providing greater clarity about the Government's Brexit strategy.
However, comments by the Chancellor Philip Hammond were interpreted controversially. During an interview in Germany, he implied that if the UK was given a bad deal by the rest of the EU we would change our domestic economic model, effectively becoming a corporate tax haven, even changing our social policy.
Whatever politicians on the Continent may say or do, I see no reason at all why our domestic economic strategy should change. The Treasury needs to stop thinking Brexit is about making the best of a bad job - after all, their pre-referendum forecasts were very pessimistic. That might help to explain his comments.
The Chancellor is right in observing that the UK's Brexit strategy needs to complement the Government's domestic economic and industrial thinking. The two should go hand in hand and reinforce each other. And they can, in a positive way.
The focus should be on investment, infrastructure spending and increased innovation. The EU is not only a slow growth region in the world economy, but its rules and regulations ensure it is a low innovation one too. All the more reason to be set apart from it.
We need to compete, whatever type of deal we do with the EU. And the last thing we want is a change to our social model and a race to the bottom on workers’ rights.
Outside the EU they would no longer be determined in Brussels but instead by MPs here, in response to what the British people want. Taxes can still head lower, but that would depend upon how our economy performs.
All this has to be seen in the context of our overall approach to Brexit. There is much talk of ‘Hard Brexit’ versus ‘Soft Brexit’. These labels add little value - and are actually misleading. The terms ‘Clean Brexit’ and ‘Messy Brexit’ are more accurate.
A Clean Brexit means a clean break, under our complete control, with the UK leaving both the single market and the customs union. It would allow the UK to return sovereignty to Parliament and to have a sensible migration policy, controlling our laws and our borders. Also, it would allow us to position ourselves to succeed in a changing and growing global economy.
In contrast, we should make clear that the UK does not want a tumultuous and potentially explosive Messy Brexit negotiation with the EU over freedom of movement and membership of the single market. A Messy Brexit would give the UK government no control over the central aspects of Brexit.
It would also maximise business uncertainty, seriously damage UK-EU relations and could even end in a disastrous stalemate. Even though we are leaving the EU we are still in Europe, sharing common agendas in areas such as defence and anti-terrorism.
The Government has much to gain from opting for a Clean Brexit. The leading economic commentator Liam Halligan and I have co-authored a report, released this week by the Policy Exchange think tank, called 'Clean Brexit'. In it we outline the approach we believe the Government should take.
We need to rule out remaining in the EU’s single market. Its economic benefits are exaggerated and it does little to help our service sector, which accounts for four-fifths of our economy and which is dominant in London. Inside this market, we remain liable for multi-billion pound annual payments to the EU and remain under the jurisdiction of the European Court of Justice.
We couldn't control our laws or our borders. About 8% of UK firms export to the EU, but because of our membership all firms - even only those many small firms that sell only here at home - have to abide by its rules and regulations. We can distance ourselves too from the EU's ‘precautionary principle’, often seen as holding back innovation.
There is a big difference between being a member of the single market and having access to it. The UK will still have access to the single market. We also have to remember that it is firms and people that trade, not bureaucrats and politicians, and whichever economy we export to, it is necessary to abide by that country's rules and regulations.
Outside the single market we can set a migration policy to suit domestic needs.
Of course we still need migration; it helps economically and culturally, but it needs to be part of a sensible overall strategy. We need higher wages and more spending on training our domestic workers, not unlimited migration.
Then we need to leave the customs union too. Once the UK leaves, around 85% of the world economy will be outside the EU. Inside the customs union, we remain unable to cut our own UK-focused trade agreements with nations across the world.
Leaving it opens up future freedoms and opportunities and allows the UK to think globally too, with a focus on free trade. Central to that will be the ability to reduce non-tariff barriers that often hold back trade in services.
We will also need to focus on preparing to retake our seat at the World Trade Organisation (WTO). Already we conduct around half of all our trade under WTO rules with the rest of the world. Both the US and China trade heavily with the EU, under WTO rules and we can do the same. But already, our WTO-rules trade is not only the biggest part of our trade, it is also fast-growing and registers a surplus.
We need to position the UK for future free trade agreements. Even the European Commission acknowledges that 90% of global growth is set to come from outside the EU in coming decades. Such global deals are a great opportunity.
In addition, and as the Chancellor has touched, there is the scope for a bespoke or sector-specific trade agreement with the EU too. This makes economic sense, for autos and the City. And in time, as part of our free trade focus we will have the ability to cut tariffs as part of our future trade deals.
This week, at Lancaster House in London, the Prime Minister will outline her thinking on Brexit and on the direction of travel of Government policy. The message should be ‘Global Britain’ and it is one that she should then take to Davos and the annual gathering of the World Economic Forum later this week.
There she will explain how Britain intends to seize the opportunity offered by Brexit, positioning ourselves to be both attractive as an economy to invest in and successful as a place from which to do business from. This will be a positive message for London and for the whole country.