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Investment, Brexit & A Progressive Alternative

As Britain goes into a General Election to break the Brexit impasse, the economic effects of Brexit uncertainty have already taken its toll on private investment. Business investment is 1.2% below the level of three years ago as of the third quarter of 2019. Business investment fell 0.6 per cent over the past year and has been declining or stagnant for six of the past seven quarters. According to the Bank of England’s latest monetary policy report, business investment is around 11% lower than it would have been if it were not for the uncertainty created by Brexit. Firms have been postponing their investment ahead of the UK’s departure from the EU. 

We have now also the first signs of a decline in employment, particularly of part-time jobs held by women during the third quarter of 2019. The growth of wages is also likely to slow down soon, although they are still lower than their peak before the crisis in 2008. 

Johnson’s Brexit deal will do little to improve the situation. According to the National Institute of Economic and Social Research, Johnson’s Brexit deal could lead to £70bn lower national income over the next 10 years compared to the remain option, and add to that the uncertainty during years of negotiation for the future trade relationship based on a Canada+ style free trade agreement, investment is unlikely to recover in the coming years.

An alternative Brexit deal negotiated by a future Labour government based on maintaining access to the single market and membership of a Customs Union is likely to have a smaller negative impact on private investment. A final Brexit deal that minimizes damage for investment, public services, jobs and working people would require minimum distortion to the relationship with Europe. This requires negotiating membership to a customs union as well as access to the single market via the European Economic Area (EEA). This is a similar position to Norway who has access to the single market as an EEA member; however, Norway is not a member of a customs union. This option would involve the UK to comply with the Single Market regulations, and implementing new ones, despite being unable to influence their content, free movement of people and continue to make some contributions to the European Union budget. However, the main disadvantage of this option is that the UK loses its chance to affect the policies of the single market. This raises the point that if Norway plus type of deal is the best option for jobs, then remaining a member of the EU is even a better option, as it gives the UK a say around the table. This, in turn, makes a final public vote with remain on the ballot paper essential.  

But a final vote is not sufficient in itself, we need to see a comprehensive industrial policy aiming at decent jobs with decent incomes, fairness, and tackling climate change. We need to see a substantial public investment programme linked to industrial policy targets to ensure adequate provision of health, education, childcare, social care, housing, public transport and renewable energy. Lastly, we must have labour market regulation with new legislation to strengthen the trade unions and achieve full collective bargaining coverage including also those with non-standard working times. We must ensure equal rights for all workers, including migrants. This includes ending zero-hours contracts must end - making sure that all employees, migrant or native, have contracts with guaranteed minimum hours- and ending practices of employing dependent employees as self-employed.

Finally, remaining in the EU without a fundamental change in the economic policy stance would do little to respond to the root causes of the Brexit vote. Real change requires a package of new domestic policies, prioritizing the needs of the people, combining industrial policy, fiscal policy, labour market policy and international trade policy. 

By Özlem Onaran, Professor of Economics and Co-Director of the Institute of Political Economy, Governance, Finance and Accountability at the University of Greenwich.