Singapore-on-Thames isn't going to happen: Therese Raphael
By Therese Raphael
(Bloomberg Opinion) -- British Conservatives, from the time of Margaret Thatcher, have long admired Singapore’s economic success. Low tax rates, minimal regulation and hyper-modern infrastructure are a magnet for foreign direct investment and keep government coffers overflowing. Could that be Britain after Brexit?
The idea titillates Tories and terrifies European Union leaders. But such fears say more about the EU’s own vulnerabilities than they do about the U.K.’s desire — or capacity — to transform itself in that direction.
“With the departure of Great Britain, a potential competitor will of course emerge for us,” German Chancellor Angela Merkel said at the weekend. “That is to say, in addition to China and the United States of America, there will be Great Britain as well.”
It’s not the first time Merkel has voiced such concerns, which chime with those of French president Emmanuel Macron. Back in 2017, Phillip Hammond, then Chancellor of the Exchequer, had to give an interview to Le Monde to reassure the French that Britain’s economy would remain “reasonably European” after Brexit.
Prime Minister Boris Johnson’s indication that the U.K. would not maintain a “level playing field” with the EU in certain areas, as his predecessor Theresa May promised, has revived those worries. Even if EU leaders agree a Brexit deal this month, the Singapore bogeyman will be at the center of any negotiations on a future trade relationship.
Merkel and Macron should relax a little. While the Brits can learn something from Singapore — particularly in education and infrastructure — the U.K. is nothing like a one-party city state of 6.5 million people. Indeed, Britain’s two main political parties are moving in the opposite direction to Singapore-style capitalism.
The Conservatives were traditionally the party of fiscal prudence and a smaller state, but Boris Johnson’s economic policies emphasize large increases in state spending, expanded public services and a higher minimum wage. Those policies are essential to coaxing new voters, including working class Brexit voters, to bolster the Tories’ aging ranks.
Most studies show strong public appetite for what the Institute for Public Policy Reform, a think tank, calls the “investment state.” In a Deloitte survey, 62% of U.K. respondents said government services should be extended, even if it meant tax increases. Polls show that the opposition Labour Party’s policy of re-nationalizing utilities has widespread approval.
Even if the government wanted to shrink the state and cut the tax burden, it would have to kill a sacred cow to do so. Commitment to the state-run National Health Service is a given for any party in Britain. The NHS is massive and its demand for public resources are insatiable. It’s also hugely popular. It does a lot with a comparatively modest share of national income, but there’s no way to cut the size of the state without impinging on the service.
It’s notable too that while the Queen’s Speech setting out Johnson’s governing agenda on Monday said nothing about tax cuts, there was a commitment to improving care for the elderly. That’s going to be expensive.
Of course, the EU should expect a post-Brexit U.K. to try to make itself more attractive for foreign direct investment. But that doesn’t amount to economic warfare. Britain’s corporate tax rate is already relatively low and due to drop to 17% in 2020, so there’s not much room for cutting deeper. Its tax-take as a percentage of GDP is lower than most of its EU partners, according to figures from the Organisation for Economic Cooperation and Development.
Corporate tax might edge a bit lower to attract new investment, but talk of mirroring Ireland’s 12.5% seems overblown. Tax avoidance is an easy way to whip up voter anger, and there’s not much political appetite for letting companies further off the hook.
Likewise, the idea that the U.K. will simply slash its regulations is fanciful. The public is attached to workers’ rights and policies such as joint maternity-paternity leave, which are more liberal than those in the U.S. Fairness is an ingrained British value and any government that seeks to strip away existing rights will find itself in trouble.
The real fear underpinning the Singapore trope runs deeper than losing some jobs and investment over the English Channel: Berlin and Paris worry that a resurgent U.K., whose economy thrives on a different model to Europe’s social democracies, will be a reminder that life outside the EU isn’t just possible, but attractive.
The logic of EU expansion and integration is that countries in close geographic proximity, particularly those with an unstable history and with giant competitors such as the U.S. and China, are stronger together. That is largely true, so long as the EU acts as an economic force multiplier for member states and not as a break on growth or innovation.
Brexit’s costs will take time for the U.K. to absorb; far more than the blithe statements of Brexiters suggest. And Britain, for all its clout, will never compare to China or the U.S. Still, a U.K. that thrives eventually outside the EU tent is a net benefit for Europe, its largest trading partner, too.
Of course, that might encourage others to go it alone (if the initial British separation is not too painful). Certainly, it would provide ammunition for populist parties. But if the EU can’t earn its keep by delivering real, tangible benefit for its members, it can hardly complain if they re-evaluate that membership.
© 2019 Bloomberg L.P.
