BRITAIN: ECONOMIC

A NO DEAL BREXIT would be an economic shock on the scale of quitting the gold standard for a second time in 1931, the 1967 devaluation of the pound and being ousted from the exchange rate mechanism (ERM) in September 1992.

But such shocks, if they trigger the right policy response, don’t necessarily have to be negative.

That is why it is fascinating that the Cabinet Office is now contemplating about what “Project After” Brexit actions should be.

It should come as no surprise, then, that both the Bank of England and the Treasury have similar thoughts.

In the immediate aftermath of the 2016 referendum to leave the EU, Mark Carney played a central role in shaping fiscal policy. Interest rates were cut by a quarter of a percentage point, a £60bn round of quantitative easing (QE) was launched and an emergency £100bn line of credit for the banking system was created.

In the event of a No Deal Brexit the Bank should be able to do more. Threadneedle Street is known to believe, however, that monetary easing becomes less effective with each successive episode.

Brexit poses more of a shock to the supply-side of the economy. That means fiscal and trade actions could be more effective.

The Government – and the Chancellor Philip Hammond – is in the fortunate position of having the fiscal space to act. The budget deficit has been dramatically reduced, but debt at 81.5pc of output, and falling, remains high. Compared to Italy, Japan and the US, it is far less threatening.

Post the financial crisis, markets are much more tolerant of debt, and low interest rates mean that it is more easily serviced.

What should the Treasury do? The case for speeding up infrastructure spending, particularly in the North, with HS3 across the Pennines a priority, is indisputable, as is the need for better and improved commuter routes into Manchester, Leeds and other northerly centres.

The most direct and easiest way of shoring up confidence would be to cut taxes. Corporation tax has already been reduced quite sharply to 19pc and is due to fall to 17pc in 2020. The reduction to 17pc could be made with immediate effect and it may be the opportunity to go even further, if not down to Ireland’s 12.5pc. Gaining a competitive edge is going to become increasingly prescient.

The best way of putting cash directly into the pockets of all consumers would be to lower VAT from the current 20pc back to 17.5pc, or even 15pc, on at least a temporary basis.

Most of the doomster predictions about Britain’s prospects post Brexit have related to international trade and shortages of vital imports such as pharmaceuticals.

 

DREDGING Ramsgate harbour might help. But within international commerce, money speaks the loudest. If Britain were to cut all tariff barriers and import duties to the bone, global enterprises would rapidly deploy their best logistical skills to make sure the shelves in NHS hospitals, pharmacies and supermarkets are fully stocked.

Such policies might seem extreme. One of the biggest concerns is that with parts of the economy already operating at near-to-full capacity, too much fiscal and monetary easing might unleash an inflationary bubble which would be difficult to burst.

Renewing and creating new infrastructure is the number one priority with new runways at not just Heathrow, but Gatwick, part of that.

But when, as Remain supporters like to say, the country is on a cliff-edge and social cohesion is threatened, it is important to think outside the box.