With the UKs historic vote to leave the European Union and the shock election victory for Donald Trump, 2016 has been a landmark year that shook the political establishment. Further votes in France and Germany, in particular, pose more trouble should the voters in those countries also decide to put their trust in populists. Against this precarious backdrop, the UK faces the challenge of negotiating Brexit against an increasingly determined Parliamentary resistance, while also delivering a significant package of economic reforms designed dramatically to improve UK productivity and bolster economic output across the UK.
Whether the UK comes to rue or celebrate Brexit depends on how the Government responds to the challenges it faces – and the ability of private sector partners to spot the opportunity and assert their agenda.
6 months on from the UKs vote to leave the EU and the world is still trying to understand what a Britain outside the European Union will look like. Even the one thing we were told, that Article 50 will be triggered by the end of March, is now in doubt following the High Court’s ruling that it must be taken to a Parliamentary vote. The start of 2017 will see the Supreme Court’s decision on whether Theresa May must ask Parliament permission to trigger Article 50. This creates two potential pats for Brexit at the start of 2017.
Under the first – in which the Government is unsuccessful in its attempt to trigger Article 50 using the Royal Prerogative, a Parliamentary Bill will be required to authorise Article 50. This is a potentially catastrophic set-back, opening up the very real possibility of Parliament forcing positions upon the Government which may give the EU an ability to concede single market and trade access at an unendurably high price. Ultimately, if May cannot overturn this, she could be forced to call an early election.
On the other hand, if the Government wins its supreme court appeal, Theresa May will trigger article 50 on time using the Royal Prerogative. This would set the UK on course for an exit from the EU within two years – by end March 2019 at the latest – on terms that are as yet unknown and relies upon the assent of our EU partners.
The Treasury is prioritising transition arrangements ahead of a final deal on single market access. For the financial services sector, this is crucial. We know that many of the larger banks are preparing to put their relocation plans into action in the first quarter of 2017, despite which, these will not be in place by the time article 50 is served. The government therefore needs to obtain clarity on this as soon as possible – despite the likely intransigence of some negotiating partners, who hope to benefit from any relocations from the UK.
One of the challenges the UK has set itself is to build far stronger trading relationships with a range of countries beyond the EU. The Department for International Trade (DIT) under Liam Fox has been charged with delivering this. Early attempts by Fox to this end were largely met with ridicule. Although the election of Trump (who has indicated he would look favourably on a bilateral deal with the UK) might help the narrative here, DIT still faces a fundamental issue in that, while the UK remains in the customs union, it cannot agree bilateral trade deals.
For Liam Fox to deliver his remit properly, he therefore needs the UK to depart the customs union. Cutting against this are the needs of businesses such as Nissan, to which the UK had to offer assurances that no exports would be disadvantaged by Brexit. This is potentially expensive for the Treasury if the UK cannot obtain the freedom to cut trade deals without also suffering tariffs to export into the EU.
An alternative route to attracting FDI is suggested by McDonalds’ decision to relocate its international HQ to the UK from Luxembourg. UK business tax rates are at historic lows – it is quite possible the Treasury will decide to reduce corporation tax rates yet further in the coming few years, particularly if the departure negotiations do not go as hoped. This may look particularly attractive In light of the increasingly aggressive approach taken by the European Commission against the tax arrangements of, particularly, US tech firms such as Google or Apple. If the UK is seen as offering shelter against an increasingly protectionist EU, then international (particularly US) firms may yet see it as an attractive destination.
This article featured in the December 2016 issue of our quarterly newsletter. You can sign up here.