The UK government’s crack negotiating team, after much bluster, has finally agreed to pay our EU “divorce bill”. It was never in doubt, really. The hard talk has always failed to comprehend that you can’t “just walk away” from a contract you’ve already signed.
Sums such as £50bn sound huge, but it’s always a good idea to look at big-sounding numbers in context. For a whole economy to spend as a one-off capital investment in order to preserve access to some key international institutions, it isn’t such a terrible deal. Over 10 years, that’s just 0.25% of GDP per year, which is significantly less than the potential impact a badly negotiated Brexit deal would have on the economy.
Of course, it does still leave the question of how to pay for it. The UK has four options. First, we can reduce spending in the real economy – this is what people are thinking when they describe the numbers in terms of X thousand nurses or Y million school dinners. Second, we could raise taxes, and you can imagine how a “Brexit tax” would go down. Third, we can issue debt. Lastly, an idea that is heretical, but which economics blogger Chris Dillow says is “by far the most logical”: we just print the money.
Quick GuideWhat is the EU withdrawal bill?
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What is the EU withdrawal bill?
The EU Withdrawal Bill – once known as the Great Repeal Bill – is going through the House of Commons to repeal the 1972 European Communities Act and transpose all existing EU legislation into domestic UK law, which will avoid a 'cliff-edge' change on the day after we leave the EU.
Parts of the bill have been highly controversial, and MPs have tabled hundreds of amendments to try and change its wording, including a significant number of Conservative rebels. Some of the key controversies include its use of so-called Henry VIII powers, which will give government ministers the power to tweak the wording of laws to make sure they make sense in UK legislation - but those changes could take place without having to go through parliament. MPs have called this a "power grab" by the government. The government estimates around 800 to 1,000 measures called statutory instruments will be required to make sure the bill is applied correctly.
Other concerns include the government's decision not to include the EU charter of fundamental rights in the law being transposed. Other amendments are attempts to affect the Brexit process, including legislating for a transitional period and giving MPs a binding meaningful vote on the deal secured by Theresa May, before the deal is finalised.
Not literally, of course. While talk of printing money always triggers a call for the fainting couches and smelling salts, and conjures up images of wheelbarrows full of rapidly devaluing Marks, nobody is suggesting that Boris Johnson pops over the Channel with a few suitcases stuffed with cash. What would most likely happen is that the Debt Management Office would issue a round of bonds to cover the costs, as it must under its full financing role, which the Bank of England would then purchase back, putting the debt on the government’s books as money it owes to itself. The £50bn would just be added to the existing £435bn the government already owes itself as a result of the Bank’s policy of quantitative easing.
Inflation concerns are overblown, says Dillow. Inflationary pressure comes from spending activity, and the UK government won’t be spending the money in the UK but in the foreign exchange markets – buying the euros it needs to pay the EU. True, there would be some second-order impact as the new supply of sterling devalued the currency slightly, but this is another place where contextualising big numbers is important. Around £480bn worth of sterling trades take place every day. A one-off £50bn drop is hardly likely to make much of an impact. Moreover, the price of sterling actually rose slightly on the news that the government had agreed a figure on the bill, the markets apparently feeling that the announcement signified an increased chance of a less damaging Brexit deal. Nothing can be said for certain, but overall a slight drop in sterling seems far more preferable to taking money out of the real economy.
Of course, the political problem here is that if we start talking in terms of impact and trade-offs rather than just decontextualised big numbers, it opens up questions about the government’s behaviour over the last decade. Simon Wren-Lewis, economics professor at Oxford University, says the whole thing illustrates the absurdity of the government’s “debt fetishism”.
“The great thing about QE,” Wren-Lewis says, with a heavy dose of sarcasm, “is that formally the debt is still ‘on the books’ because one day, maybe, the Bank might sell it, so the government can still say government debt is too high, and therefore we have to cut welfare.”
If we did decide to debt-finance the payment, real interest rates are negative, so the government would end up paying significantly less than £50bn in real terms. But this is also true for any other spending the government undertakes. Debt used for investment at real negative rates pays for itself, even before we have considered the stimulative impact of such spending on the economy.
Likewise, a “people’s QE” stimulus would not necessarily be inflationary either. It’s worth remembering that real wages have been either stagnant or falling since the crash. Spending that helped to raise wages at the bottom end of the market would be a good thing, not a sign of an imminent catastrophe.
Traditional economic theory suggests increased demand results in price rises, but if there is slack in the economy what usually happens is that businesses respond by increasing supply and investing. It’s only when you hit issues of real resource constraints that inflation becomes an issue. Using government spending to boost aggregate demand and stimulate the economy is an option that’s always been on the table. Wren-Lewis sums it up. “This should be now be absolutely clear: when the government wants to pay for something, it does, without any of this ‘we cannot afford it’ nonsense.”
The Brexit “divorce bill” should have been a non-issue, but this government is locked into symbolic positions over big-sounding figures because that’s all it’s got. If we talked sensibly about the Brexit bill, we might start having sensible conversations about other public spending, and that’s the last thing anyone seems to want.
