Friday, 1 March 2024

Paying the price of Brexit

When big companies merge or acquire new businesses, one of the underlying benefits often cited to justify it is the cost savings of using so-called ‘back office functions’ more efficiently. By back office the sorts of things they usually mean are human resources, accounting, legal services, research and development, marketing and advertising, and so on. Stuff that isn't production or front-line sales. It means providing these related services centrally and avoiding duplication. Whether it works well in practice or not is sometimes debatable but the simple economics are pretty clear.

You never hear of global businesses splitting up or duplicating these back-office functions because it almost always results in increased overheads. And not to put too fine a point on it, as an MD I used to work for would often say: “Overheads walk in on two legs.”

The point of all this stems from an article in The Telegraph: Britain is doomed to forever be America’s sick relation.

The Brexit-backing economist Catherine McBride tweeted about a part of the article setting out how the number of civil servants and in the public sector as a whole has increased by half a million since Brexit:

This statistic is quoted as if it’s a surprise both to the author of the article, Douglas McWilliams and Ms McBride herself.  It shouldn’t be. If you decide for example to create a customs and regulatory border between yourself and your largest export market it needs to be properly staffed with more border force officials.

To have different regulations to the ones you used to write together with your neighbours, you need to recruit regulators and experts in every one of the disciplines or sectors that you want to regulate. In the modern world, there is an expectation that things we consume and use are safe, both for us and the environment. Detailed regulations need to be researched, produced, legislated for, implemented and enforced. It all adds up to staff and money.

If the 27 nations of the EU with 450 million citizens share one banking regulator it must be obvious that adding a 28th nation isn’t going to add very much in the way of extra back-office cost at the European Banking Authority. Likewise the medicines regulator.

But if you plan to do it all yourself then the costs involved aren’t going to be very much less than the EU's if every sort of financial business from banking to insurance and forex trading to investment fund management is to be covered. 

Brexiteers seemed to think all of the new post-Brexit legislation would be conjured by magic out of thin air and administered by unpaid volunteers working from home. We read constantly about all the extra costs imposed on businesses that trade with the EU but very little about what those costs are needed to pay for and what additional burdens are placed on government, regulators, and local authorities.

And don’t imagine for a moment that the new ‘sovereign’ rules are always better than the old EU rules. The points-based immigration system has increased the number of people coming here as Theresa May always said it would. Officials are constantly rewriting the rules to mitigate the problems. The latest of course is stopping overseas students bringing dependents with them.

This is reducing the numbers of foreign students, the ones that the university sector now relies on to keep it afloat. No doubt another tweak will come soon to mitigate the mitigation.

The inspector of borders and immigration was sacked recently by Home Secretary James Cleverly and it has been revealed his department had been sitting on 13 damning reports which were published yesterday. They are a catalogue of failure, including the fact that staff at Stansted have complained their workload has increased 400% since Brexit. I assume elsewhere too.

The inspector, David Neal, said protection of the border was “neither effective nor efficient” due to “distractions, ineffective and inconsistent deployment of resources, lack of communications equipment, poorly configured arrival halls, and poor data” at passport e-gates which could be exploited.

In every sector, the government boasts of creating a ‘world-leading’ whatever but they don’t want to employ the staff or provide adequate resources to achieve it.

On 16 November 2016 the former permanent secretary at the Foreign Office, Sir Simon Fraser, gave evidence to the Exiting the EU Select Committee. He was questioned by Dominic Raab who 

Raab said: "I was caught by your suggestion that civil service headcount or the numbers have to stay in place after we leave the EU.  I was rather jarred by that because presumably there is a significant countervailing reduction in bureaucracy and regulation as a result of leaving the EU."

In his answer, Sir Simon patiently explained that more civil servants would be needed depending on what sort of Brexit we negotiated. This is him:

"If, for example, we were to decide to leave the customs union, I assume that one corollary of that would be there would need to be new regulatory arrangements put in place, and checks, for example, on goods crossing the border, and in a sense potentially a heavier bureaucratic burden on goods crossing the border."

And later:

"At the moment we participate in a trade anti‑dumping regime that is administered in Brussels.  If we want—and we may not want—to exercise those sorts of functions in trade defence nationally we will have to create the capacity to do it, so there will be some transfer presumably of functions out of the European Union that we will want to preserve there."

"If we are not exercising those functions here at the moment we will have to create the capacity to do it.  It is not simply a linear reduction in bureaucracy and indeed red tape, it seems to me."

As it happens we negotiated the hardest possible Brexit short of WTO rules, exiting both the customs union and the single market. Raab and his ilk were right behind it and continued to press for maximum regulatory sovereignty. 

What did they think would happen?

If Raab was told this in public by a former Mandarin, you can be sure ministers were being told the same in private all through 2017 and right to the end of the trade negotiations in December 2020. It is inconceivable that they weren't aware of the direct costs that the Brexit they were negotiating would impose on the British taxpayer and British industry, to say nothing of the much larger indirect costs in foregone trade.

Moreover, if civil servants cost £35,000 on average, an extra 500,000 is going to add about £17.5 bn per year, plus office and other related costs. It would be stupid to claim this is all down to Brexit but I would be willing to bet a significant majority of it is.

When people ask where all the money has gone, tell them this is the price of sovereignty.

The funding we used to pay the EU increasingly looks like a bargain doesn't it?

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