Paul Sweeney: Brexit is a slow train crash. Most damage will be done to Britain, but some damage will be done to the European project and to the other European 27 members. And the consensus that Ireland will suffer more than others states is probably correct. But the British exit may have a wee silver lining.
Teresa May, UK Prime Minister.
If she is not successful in achieving most of what she wants, and this appears likely, then it appears that she intends to turn Britain into an offshore, casino economy. There will be reduced regulation on workers rights and on banks and there will be a drive to low taxes, of perhaps around 10% nominal rate, maximum, on corporations, to attract foreign direct investment (FDI) from other EU states, including Ireland.If she is successful in cutting taxes and regulation, will it work in making Britain prosperous?
The view that cutting taxes on corporations immediately attracts vast sums of foreign direct investment is the dominant view on enterprise policy in Ireland. Indeed there has been no critical comments of the reduction in corporation tax rates in Northern Ireland, except from the Irish Congress of Trade Unions. Yet the effectiveness of low corporation tax in attracting investments has been limited and is far less so today.Ireland has a led the race towards the bottom in cutting its corporation tax from 35% in the mid-90s to a maximum rate of 12.5% since 2001. (Of course it is finally now known that the effective rate of tax - the actual rate paid - is in some cases as low as 0.1%).
As Ireland cut its Corporation Tax rates, other countries followed. The average nominal Corporation Rate in Europe has fallen from 35% in the mid-90s to 24% a few years ago. It is probably less than this today. So as more and more countries cut their nominal (top) tax rate, this bargaining chip is diminished in attracting FDI. Another point is that corporation tax is only one of the many attractions which countries like Ireland offer. We have a well-educated and flexible workforce, Good institutions the rule of law, political certainty, little (!) corruption tolerable infrastructure and an effective public service. A further point is that Ireland has been offering low taxes for many decades with little effect for many years. The low tax regime which was 0% tax rate (on exports) simply did not work much.
In fact I would argue that the low tax rate only became effective when the Single Market was established in 1992 and it was only one item on the menu for FDIers. The real Celtic Tiger take-off began in 1994, just two years after the Single Market was established. It was the easy access to the Single Market which led to the Celtic Tiger economy. The taxes may have helped but it was access to the vast Single Market of 500 million consumers which lifted Ireland from a poor to rich country.
Britain is leaving this Single Market. This is the greatest folly of Brexit. Even a zero tax on foreign direct investment will not compensate very much, if at all, for the loss of easy access to so many consumers and companies.
Will cutting wages and workers’ protection make Britain more competitive? In Ireland it is long established in that lower wages and low workers’ protection is not a panacea for competitiveness. Competitiveness for a country is much more complex then just movements in wages. If Britain is successful in reducing workers’ wages and protection, it will lead to much lower investment (workers are then cheaper than capital), lower innovation and lower aggregate demand. None of these will generate prosperity, at least for the vast majority.
It is long recognised that the Crash of 2008 was generated by the financialisation all the world’s economies. Finance simply got too big. Finance ceased to oil the wheels of industry. Finance was not contributing to the economy. Finance was a great vampire squid sucking value from the rest of main street. So to plan to engorge it again is folly.
Since the crash, banking and finance has asserted itself. In fact Finance has grown again with bankers paying themselves too much and again stealing from their customers and the public. Look at the vulture funds in Ireland! Look at the huge fines on banks internationally! Theresa May wants to make bankers, vulture funds and so-called “professional services” even fatter. They will again eat up main street.
If she strengthens the already great power of the City of London - the already inflated financial sector - and reduces workers’ rights and other regulations, then prosperity will not touch many in Britain. It may work for a while as the City sucks money from the rest of Europe, but it will soon be cut off by the Union.
Britain will be even more divided and unequal than it presently is. This of course, is welcome for the hardliners of the nationalist Right who built and drove the Brexit train.
So if Teresa May is not successful in getting most of what she wants from the EU, will she be able make Britain prosperous by cutting taxes on corporations and cutting regulations, especially on finance and on workers rights? I don’t think so. In fact, I think such actions will make Britain poorer and more divided.
The wee silver lining may be that Europe will become “more continental” and less free-market and thus put Social Europe back on the stage. The British were anti-progressive on many issues in Europe.
Paul Sweeney is Chair of TASC’s Economist Network and wrote several books on the Celtic Tiger.