James Arnell is a partner at Charterhouse. He writes in a personal capacity.
It looked as though we were finally getting through: the government was at last listening to all those contributors to ConservativeHome who have urged proper and visible preparations for the “no deal” scenario.
And then Philip Hammond threw another spanner in the works this morning, by insisting that no money would be allocated to “no deal” Brexit planning in the budget.
So have all our pleas been in vain?
I don’t think so.
There is undoubtedly a growing realisation in government that we need to be ready for the failure of the Brussels talks. The Treasury continues to resist spending real money on preparation but, if we are fair, most of us would urge caution on Government spending in general and I can understand that the Chancellor wants to be careful about waste here as well.
In my view, however, the Treasury is wrong to hold back spending in this case for several reasons.
First, time is short. The time to start work on the no deal scenario was in fact the day after the referendum result (or, arguably, before it). The issues are undeniably complex, and solutions will require consultation, IT systems implementation and some “hard infrastructure” investments (for example, customs check facilities along the routes to major ports, border monitoring systems for Ireland, and so on). We really do need to get on with it if we are to be ready in time.
Second, visible preparations enhance our negotiating leverage. The EU needs to see that we are getting ready for a failure of the talks. They will find it harder to respond to failure than we will. Reducing the EU budget to reflect a “no deal” (and therefore no Brexit bill, one hopes) scenario will be fraught with difficulty. Whose pet projects get cancelled? And increasing contributions to compensate for the UK’s departure will also be contentious. Who pays in more? The member states of the EU, faced with these choices, will pull in different directions. At least some, and possibly most, will start to urge the EU to become more accommodating to the UK. And the sooner that happens, the better for negotiations.
Third, much of the money spent on preparations for a no deal scenario will be needed anyway, even if a deal is eventually reached.
Fourth, the current approach of publishing occasional white papers, which are strong on rhetoric but weak on details and implementation plans, will not sway our friends across the Channel. Quite the opposite. They make us look weak and ill-prepared because they lack substance and do not address practicalities convincingly.
The cabinet should tell the Treasury to open the purse strings now, not in the New Year. But if the Chancellor holds firm, then there is a sensible compromise. This is not a binary issue.
Preparations could simply be prioritised as follows:
1. Preparations which cost little but have a high psychological impact. For example, publishing our proposed WTO schedules. These can happen immediately.
2. Preparations which will be needed whatever the outcome of the talks, but which will be needed earlier if there is no deal and therefore no transition period. For example, immigration systems investments. Again, these can start immediately.
3. Preparations which may prove to have been unnecessary if a deal is reached, but which maximise pressure on the EU by creating a very visible readiness for the no deal scenario. For example, hard infra and IT investment to deal with increased customs checks for imports and and exports. These can be planned in detail now and the button pressed on spending when we reach the (in my view) inevitable impasse at the end of this year.
The truth is that any money spent now will return multiples of cost in a reduced price for a deal with the EU. But, to make the decision a bit less painful for the Chancellor and his Treasury team, we can follow the prioritisation suggested above to substantially reduce the risk of that investment becoming “stranded cost” if a deal is eventually reached.
So, Mr Hammond, please stop procrastinating: get behind preparations for no deal now. It’s the best way to secure a deal. The impact on the EU of the Chancellor getting behind the contingency planning process would be huge. He and his civil servants are perceived as the most committed to a transition period, at any cost.
If he announced serious preparation for the no deal scenario, with substantial investment to follow in due course, the EU would be alarmed and would be much more likely to moderate their demands in the negotiations.
And the Treasury can achieve this without splurging fortunes on unnecessary investment. Spend what you will have to spend in any case: that’ll do for now.
But come December, the real spending will have to start and we will have to move close to a war footing to get the work done. If we are not ready in March 2019, voters will blame the Chancellor in particular and the Conservatives in general. Letting Labour in to waste hundreds of billions on a rerun of failed political experiments of the past would be unforgivable. This will be the final overwhelming argument: we simply have to be ready or the voters will punish the Tories and in doing so, ruin our economy after the next election.
So, Spreadsheet Phil, I commend your caution on unnecessary spending, but let’s be sensible: you need to stop pleading for a transition period (because pleading just reduces the likelihood of getting one) and we need to start preparing in earnest in those areas where there is no fear of wasted spend, and, come the year end, if the EU is still in punishment mode, you will have to hit F9 and let the real preparations begin!