After the Rose Garden - 2 - Reliability
No-one knows where Trump’s on-again-off again tariffs are going to end up. The only certain thing is that the rest of the world is in for an overdose of once-bitten-twice-shy, scrabbling for new supply-chains and trade relations amid a general atmosphere of increased distrust. This post addresses the UK’s course in cultivating a reputation for reliability with a view to opting for one of the courses set out in our introductory post: Liberal leadership or Singapore on Thames, specifically as it
cultivates trade partners, either nation by nation or en bloc;
attracts business streams, in particular in the financial, legal and other professional services in which the UK excels, with local courts promoted as the most reliable jurisdiction for issuers;
attracts investment by companies in new plants and businesses;
attracts portfolio investment, not so much in UK securities, as global assets traded in London;
attracts flight capital, moving on from the recent mainstay of oligarchs fleeing Putin, to US persons or entities seeking a more reliable or otherwise friendly environment; and
attracts skilled immigrants, in principle from all over the world, but largely disaffected American scientists and academics, trying to avoid importing the toxic politics sometimes professed by the latter.
The first four objectives sit well with the Liberal leadership which is one of the two strategies we are considering; all six are consistent with the more hermetic alternative of Singapore on Thames. We now turn to the various elements which establish reliability.
Compliance with international obligations. Trade partners wish us to honour our obligations to them. Save for the EU, which is faddy on the topic, they are capable of distinguishing between political and economic matters; and between mutual commitments between trading nations and submission to third-party jurisdiction. Those responsible for the business streams, corporate and portfolio investment we seek are most concerned with the enforcement of domestic law - see regulation below. Those undertaking capital flight or immigration are less interested in the topic, possibly preferring an independent stance on (eg) tax treaties.
It would be mistaken for the UK to confine itself to whistling our post-WW2 signature tune: we are jolly good chaps who won’t act in a disruptive way, sticking to diplomacy, rolling the pitch ahead of changes, doing what we say and generally not rocking the boat. Instead, we need to go beyond our national comfort-zone and raise our game, for example on inflation and tax - see confiscation etc, below. Being the good sports we like to paint ourselves isn’t enough - indeed it isn’t even how we are seen by those in the know - once again, see confiscation etc, below.
For all that international treaties and suchlike have been a post WW2 watchword of UK policy, there is a gathering sense that it’s time to get over our crush: that we need to retreat from hostages to fortune which risk our interests. Britain’s position on this topic will be tolerated by its partners if it seeks Liberal leadership, save for the EU’s foibles on extra-national jurisdiction; it will have to raise its game in this and other areas if opting for Singapore on Thames, courting local blow-back throughout.
Confiscation. This also embraces sovereign default, the general concept of “sound money” (conversely currency depreciation) and fair taxation. The trade partners we seek will not tolerate default and will expect high standards of property protection but will be realistic about currency depreciation and the local tax regime. The professional business streams in which we specialise are transactional, so will be indifferent to the topic. Portfolio investors will take a similar view, pricing the risk. Those conducting capital flight or immigration will take outright confiscation seriously but will eat the other risks. By contrast, corporate investors are in for the long term and will take every aspect of the matter seriously .
Outright confiscation and default are not serious risks. On the other hand, loudly proclaiming Britain’s commitment to the rule of law recalls the alcoholic who strenuously claims to be clean on the basis of drinking nothing but the best quality London gin. This is because the UK is the OECD’s most notorious defector from that most central element of the rule of law: paying our debts. This is not so much the interwar default, which affected all the Europeans; it’s more the country’s baked-in policy of currency depreciation. The Bank of England’s policy target of 2% inflation means that over the 30-year lifetime of a long gilt, it loses just under half its value -45% for pedants. In reality, the Bank misses its target, with the inflation rate over the last thirty years running at 2.38%, fully halving the value of money. This also accommodates the ambitions of Britain’s perennially fractious unions, these days largely confined to the public sector but still beyond control. These days, no-one these days prizes the “sound money” which smacks of JP Morgan’s top hat and was overtaken ninety years ago by Keynes’ whizzy deficit financing. Nonetheless, currency depreciation has a price: the UK pays more for its borrowing than its peers, reflected in the spread (extra interest) of Gilts over Bunds and Treasuries. Best to accept this as baked into British politics.
Britain’s taxation is problematic: high, poorly constructed and arbitrary. The country’s level of taxation is intrinsic to its longstanding priorities and accumulated debt; it is unlikely to change. National Insurance is a tax on employment which has defeated any attempt to reform; stamp duties are opportunistic and could be reversed, together with other concessions on financial transaction, including tax free wrappers for collective funds managed for small overseas savers.
Here too, Britain’s mixed position on this topic will be tolerated by its partners if seeks Liberal leadership. It less well with the rational policies called for by Singapore on Thames, which would call for hard to sell reform.
Regulation. The objective is always the Goldilocks balance of light-touch consistent with risk management, plus consistency and fair enforcement. This is desirable, if not essential for the business streams, corporate and portfolio investment in the nation’s sights. Potential trade partners will feel differently, valuing reliability over the weight of regulation as this may throw up arbitration opportunities. The topic matters little to those undertaking capital flight or immigration
In the nature of things, much of the regulatory regime is subject to fine-tuning to reflect changes in local and international conditions. The UK is currently moving away from the conspicuously risk-averse approach it erected after the ’08 financial crisis; with luck, GDPRS is also for the bin. This development barely affects the option of Liberal leadership, but sits well with Singapore on Thames, unless the UK wishes to set out its store as low risk.
Turmoil, domestic order. This is desirable, if not essential, for every objective. A desk audit is encouraging. The nation’s streets are no more given to disorder than our neighbours; the administration of government is honest by the standards of our peers, with corruption no more than intermittent and outright breakdown confined to rare local failures. The poison which Brexit introduced into public life persists and occasionally flares up: the tenacity of Leavers and Remainers will be treated by future historians as latter-day Dreyfusards and anti-Dreyfusards. The advent of Reform is of a piece with populism elsewhere. Immigration raises the customary tensions, most recently manifested as complaints about two-tier justice, while DIE campaigns still bedevil the public sector. Nothing, however, stops an official circular smacking down waywardness in the administration of justice, plus a determined reversion to recruitment and promotion on merit. In short, domestic order can be pretty much taken for granted, and such issues as arise are readily addressed, with Britain’s position sitting equally well with Liberal leadership or Singapore on Thames
Ease of doing business. This is essential to new corporate investment and desirable to trade partners and business streams. It matters less to portfolio investors or those conducting capital flight or immigration. Britian’s position is good, with a position in the top ten of the World Bank’s index throughout the fifteen years of its publication. There is however always more to be done. The World Bank’s methodology is in the public domain and the Department for Business, Energy & Industrial Strategy should be learning from the best performing countries: New Zealand, Singapore, Hong Kong and Denmark. And before we lapse into complacency, let’s remind ourselves of our record in building airports, houses, power stations, railways and roads. Even so, Britain’s strong position on the topic sits well with the options of Liberal leadership or Singapore on Thames
Conclusion: The discussion above shows that the principal problem facing the option of Liberal leadership is the obstinacy of the EU. Conversely the principal problem for Singapore of Thames is domestic policy, with it particularly unclear that the Chancellor understands the dysfunction of her tax regime. This discussion has neglected the extra-territorial claims of US (and Chinese) authorities, for example anti-laundering rules, tax treaties and suchlike. We will defer this to our post on foreign policy.
Miles Saltiel