Brexit Is Coming (Probably)
BRG Managing Director Colm Gibson, who is part of the firm’s European Economic Regulation practice, joins host Eddie Newland to discuss the victory of Boris Johnson’s Conservative Party in the UK’s general election on December 12. Colm talks about what is ahead for the UK and what the vote means for business leaders, and provides his take on potential immediate and long-term ramifications.
TRANSCRIPT
S1 00:00 Welcome to BRG's ThinkSet podcast. I'm your host, Eddie Newland. BSG is a global consulting firm that helps leading organizations advance in three key areas, disputes and investigations, corporate finance, and strategy and operations. Headquartered in California with offices around the world we are an integrated group of experts, industry leaders, academics, data scientists, and professionals working beyond borders and disciplines. We harness our collective expertise to deliver the inspired insights and practical strategies our clients need to stay ahead of what's next. For more information, please visit ThinkBRG.com.
On today's episode of the ThinkSet podcast, we'll speak with BMG Managing Director Colm Gibson. Colm is part of BRG's European Economic Regulation practice with over thirty years of experience in energy and other regulated industries. Colm is an expert on regulation and competition matters in the United Kingdom and Europe. The future of those two entities will be the focus of our conversation.
We spoke with Colm in the immediate aftermath of the UK's general election on December the twelfth. With Boris Johnson's Conservative Party getting a big victory, we asked Colm what's ahead for the UK, what the vote means for business leaders, and the immediate and long-term ramifications. And with that let's get started.
Colm, thanks so much for joining us today on the ThinkSet podcast. How are you?
S2 01:32 I'm great, thanks. How are you?
S1 01:34 I'm doing all right. I imagine it's a new day for you all in London today.
S2 01:38 Well, it's evening time here in fact. It's been quite a long day with lots of news.
S1 01:43 Sitting here in the US, I was actually struck at this the first time I realized that you guys don't have immediate exit reporting as the day was going on, so I knew that the vote was happening and was surprised to learn that I actually couldn't track exit polls or opinion polls. I imagine that's something that you're used to, but is unique for us sitting on the other side of the pond trying to see what was going to happen.
S2 02:03 That's exactly right. So ten o'clock in the evening, after the polls close, is when the press is first allowed to report the exit polls, so that's when you got the first indication of what's happened. And typically that's pretty accurate.
S1 02:19 Yeah. So let's start then right there. What's your reaction at ten o'clock when the first exit polls come out and what we find is a pretty resounding victory for the Conservative Party and for Boris Johnson?
S2 02:30 So, if you'd asked me a month ago, I would have been quite unsure who is going to win and how it's going to turn out. But the press coverage and the things that happened in the last week, I think, cemented it fairly clearly in my mind that there was going to be a significant Tory majority.
S1 02:50 What was it in the last couple of weeks that you think really changed the tide? I know the Tories and Boris Johnson really had a focused message of get Brexit done, but was there anything else around the messaging coming from the Labour Party and from other groups that you think really helped turn the tide?
S2 03:05 Well, it may be that the tide didn't actually turn, because the party started off with a significant Tory lead. And the question was really whether Labour could close that, and it turned out they couldn't. And there's one metric that has been a very reliable predictor of who's going to win, and that is who is the most popular party leader of the major parties, and that was not Mr. Corbyn. And that again has come through as being a good predictor of who's going to win. And it was clear, I think from about a week ago, that Mr. Corbyn's personal popularity was not going to be sufficient to close that gap.
S1 03:40 Now that we do have a conservative Tory victory, get Brexit done has presumably won the day, is it really that simple?
S2 03:48 Well, that's an interesting question, and it might just be worth unpacking it a little bit. Certainly the Tories mantra was Get Brexit Done, and whatever question they were asked in the election campaign the answer seemed to be, "Well, we need to get Brexit done." The actual report in the news reporting we had of what people were talking about on doorsteps often wasn't Brexit; it was often other issues, and that's why there was some uncertainty I think for the first few weeks of the campaign as to whether they would close the gap.
The other half of your question is now that Johnson has a very substantial majority, has he got control of the mechanics that would allow him to deliver Brexit? And my personal view is very firmly yes, I think he has more than enough control to do that. And that would mean the UK is very likely to leave the EU officially on the thirty-first of January.
S1 04:37 So the thirty-first of January is the date that the UK is set to leave, and then the next step comes, once you've cleared that hurdle, negotiating a trade deal with the EU. And as I understand it right now, the goal is to have that trade deal in place by the end of 2020. How complicated will those negotiations be? You have a history of working in negotiations both in the UK and Europe in the energy sectors. You're pretty familiar with highly regulated industries and how complex deals can be just in that space, but for an entire economy, I mean, I can only imagine the scope that needs to go into these things.
S2 05:14 Well, yes, that's exactly right. It is complicated. Leaving the EU doesn't necessarily mean it will look and feel like leaving the EU, because there are transition arrangements in place for pretty much the whole of next year, which means that we will continue to comply with the relevant EU rules and continue to have access to EU markets and things like that. And that is intended to give the parties enough time and space to negotiate whatever the subsequent trading arrangements are going to be.
Exactly as you say, that will be quite tight for two companies, two major companies, negotiating a major trade deal between them, and I think that's quite ambitious for a comprehensive trade deal between the UK and the EU, although we are starting from a position where the rules and that type of thing are fully harmonized, so they wouldn't need to be transitioned to make rules harmonize because they start in that position. But I think it is going to be quite a long haul. I'd be very surprised if there was a full, permanent, long-lasting deal negotiated by the end of 2020.
S1 06:21 And that's an interesting point to make about rules harmonizing. Right now the EU and the UK work off of the same rulebook being part of the EU, but going forward many that have argued in favor of the UK leaving the EU is that there are certain rules that they can change in favor of the UK to put them on a different trajectory than the EU being held back by the EU preventing them from doing that. There is no longer a promise as had been earlier from previous prime ministers. Theresa May said that she would keep a level playing field.
Where you're sitting now, are there particular parts of the economy that you think the UK will try and push forward different than the EU that might be sticking points in those negotiations?
S2 07:06 It's not clear to me that there are any material areas, and it's also not entirely clear to me which EU rules are the ones that are sort of holding us back, because there are many EU members—Germany, for example—that managed quite happily within those rules. Before the Brexit vote, the UK was the fastest-growing economy in the EU and in the G7 and in the G20. So it's not entirely clear to me which rules will diverge. I think it's more a matter of principle.
I think that the thing that a lot of people didn't like was that, although we had a say in the rules, those rules were imposed upon us, and we didn't have any choice about whether or not to comply with them, and under the new arrangements we would have a completely free choice. We can still choose to apply those rules, but we wouldn't be obliged to apply those rules.
S1 07:55 The way you just described that, it speaks a lot to the messaging. Do you think that this might be part of the big Conservative victory is how well they were able to message the fact that the UK right now, though they had a part of making the decisions, didn't have autonomy to go the direction that they've always felt was in the best interests in themselves, and that that might have hurt Labour because, obviously, that was in the message that they were bringing to the table?
S2 08:20 I think that's probably some of that, though I suspect it is more an indictment of the other parties rather than any particular brilliance in terms of the Tory messaging around Brexit. The Labour's position on Brexit was not widely understood. It wasn't sufficiently clear that it wanted to remain to encourage anyone that wanted to remain to vote for them; it wasn't sufficiently clear that it was going to definitely leave to encourage anyone that wanted to leave to vote for them. And so they didn't really get many Brexit votes on either side. I think they were aiming for a sort of constructive ambiguity so that everyone could vote for them, but that really didn't seem to work for them.
S1 08:51 So in their big messaging too was promises about nationalizing parts of the economy. You were talking earlier about the doorstep polls, people being asked what it was that were the biggest issues. What were your takeaways within the UK? What other factors do you think led to such a resounding victory?
S2 09:13 Well, I think the popular policies Labour had were in relation to nationalization. A large proportion of the voting public thought and still thinks that some of the utility sector would be better if it were held by the nation rather than held by private shareholders. And they also had a relatively positive message on the health service and the need for more investment in the health service.
But that just wasn't sufficient with an unpopular leader and ongoing accusations of anti-Semitism and various other things in the party, which made headlines in the press. And I think it meant that a number of people simply found it a difficult choice to make, and that they weren't comfortable voting for a party that was quite far to the left and promising quite a lot of stuff, quite a lot of investment, but without necessarily being able to convince the public that that investment was fully affordable.
S1 10:15 And you make a good point too that you had spoken about earlier, that a key indicator of what might happen in a particular election is the favorability viewed of the party leaders. And in this case, you, like we had here in the US in 2016, didn't have two leaders that were viewed upon particularly favorable by the general public, so some might argue that it was kind of a choice between the lesser of two bad options, though that didn't seem to have hurt the Conservatives and the Tories as much as some people might have anticipated.
S2 10:46 I think there's something to be said for that. Boris is sometimes described as a lovable rogue. He has a bubbly personality that seems to go down well with many members of the public, even though they don't necessarily agree with all the policies and things that are in the manifestos, and he's quite an interesting character. He's the first British prime minister that's—well, he's born in the US, born in New York, so he's the first non-British British prime minister, and he's an interesting character. His first name's not Boris, for example.
S1 11:18 What is his real first name?
S2 11:19 Alexander.
S1 11:22 So he's almost like an actor having made up an entire persona. He just so happens to have been politically savvy enough to line up with the most powerful seats in the world.
S2 11:30 He's very well educated. The people that I know that were at university with him all say that he's very, very smart, and he has been very politically savvy.
S1 11:40 That kind of leads us to where we are now. The vote has happened, Johnson has the strength in Parliament to go forward with the Brexit deal, so we can focus on what happens from here. I've read that Johnson has a vision for the UK, now that the vote has happened, of a “Singapore-on-the-Thames.” Can you explain a little bit about what that means and what likeliness you put to that being able to happen?
S2 12:03 Well, it's one of those interesting terms, like defining what Brexit actually means, where no one has absolutely pinned down the precise meaning. What I think it means is that the UK might become a sort of free trade zone where people could import and export with very little or no tariffs and taxes, and become a sort of trade hub for this part of the world in a way that it wouldn't necessarily have been allowed to if it remained within the EU.
Whether or not it can happen is an interesting question. I'm not quite sure that the EU would want a large economy where people can not pay taxes, or not pay many taxes right by their borders. I imagine that will impact their economies and their government cash flows quite significantly.
And the other thing is there were quite a lot of promises made in the election for additional investment, and that does require tax revenue to be raised in the UK to fund that investment. And if you cut taxes right back a long way, then that makes it harder to raise that revenue.
S1 13:07 Yeah, and I think your point about the import and export was familiar in reading up on what people were explaining or at least trying to explain the ideas, like you mentioned Singapore is just—ever since they became independent, have kind of grown exponentially and has become a marker for the world to look at, for not only their infrastructure but also the education system. You all have the education system in place, but really the system that you have in place, your nationalized healthcare that is really beloved by all, kind of limits what you can do when it comes to cutting back on taxes and trying to create the same sort of trade environment that exists in Southeast Asia.
S2 13:46 Yes. There's a whole bunch of things that are public funded, including the health service but also education and sort of social security type stuff that mean that a significant proportion of the GDP ends up being accrued by the government in order to fund those services, and the government will continue to need to accrue that kind of revenue in order to deliver the services that it's promised to deliver.
S1 14:12 So, as we look at this, Tories are casting possible tax increases as an increased revenue to the government to help fund these services. What do you see happening so far as taxes for business, and what are you hearing from business leaders about those issues in particular?
S2 14:27 That's a really good question, because all the parties committed to significant additional investment in public services, and that requires either tax increases, as Labour explained it, which might have sounded less popular than the Tories explaining it as increases in revenue to the government, and there are a limited number of levers that they can pull. The Tories absolutely pledge not to raise income tax, not to raise nat insurance, not to raise VAT. And there was previously going to be a cut in corporation tax, and they promised not to make that cut in corporation tax but also not to raise it.
So there aren't that many levers that they have in order to raise extra revenue. And one of them that they mentioned quite late on in the campaign is a windfall tax on some of the tech giants, and I think that's very likely to happen. But I don't think that gets them sufficient revenue, and I think they are going to be looking around for some more tax, and another place they could easily go is a windfall tax on exactly those companies that Labour said ought to be nationalized, because one of the arguments Labour's been using for nationalization is that these companies don't pay sufficient tax, and if the Tories say, "Well, actually no, we've got a windfall tax, they now pay sufficient tax," then that takes some of the wind out of Labour's sails in terms of its nationalization pitch.
So I think it is quite likely that they're going to be looking round for some more windfall taxes from companies, probably utilities, energy networks, that type of thing.
S1 16:03 And what's the quick econ 101 of what a windfall tax means versus the corporate taxes and the personal income tax and the VAT and the health? What is a windfall tax exactly, for those that aren't familiar?
S2 16:19 If you change your corporation tax and say every year corporation tax is going to be 10 percent higher, that makes all of the UK companies worth less, because the profits they were going to make, more of that goes to the government, so everyone values these things at a lower level. So one of the key differences is that for the windfall tax, it's a one off thing, and the government absolutely has to promise not to do it again in order to avoid reducing the value of all of the companies that it taxes.
S1 16:46 And in making that promise it's understood that they're promising not to do it again until they do it again, assuming this is something that's happened once or twice in the past?
S2 16:54 It has happened once or twice, but not very frequently. There might have been two goes in my lifetime, so not very frequently at all. But if it keeps happening, then that will impact on the investability of the UK, because people who invest will think, well actually that might happen again, and they'll want a slightly higher return to invest in the UK, so the cost of capital for UK businesses could go up as a result of it. It depends how it's played, but there is a risk in that.
And the other impact, which is unclear, and it depends on the form of the tax, is that there are often tax treaties between the UK and other countries, including the US, and one of the features of those is typically you don't get double taxation. So if a certain amount of tax is due to be paid in the US, and you pay some tax in the UK, then the tax you pay in the US tops that up to the level you would otherwise get in the US, so you don't pay that tax twice. But that no-double-taxation rules only applies to certain types of tax, and windfall tax is not on that list explicitly, so it depends on the character of the windfall tax, whether the tax would count for that no-double-taxation rule or whether would fall outside that.
And that matters a lot to companies and a lot of businesses, because if it's within a no-double-taxation rule, then actually they pay a bit more tax in one place, but a bit less tax in another place, and actually maybe they're not that impacted, whereas if it falls outside that then, it's just additional tax they have to pay, and then they take a pound for pound hit on the extra tax.
S1 18:30 So, for listeners who aren't in the UK give us a sense of perspective. Will December 12, 2019, go down as one of the biggest days in UK history, perhaps even bigger than the “leave” vote three years ago?
S2 18:41 Well, the short answer is I don't think it's going to be as big as either the “leave” vote three years ago or the thirty-first of January next year if we actually leave the EU. I think the EU leaving date is likely to be more memorable and more likely to appear in sort of the history textbooks in the years to come than December the twelfth.
S1 19:02 Though, I guess December the twelfth will probably be annotated as the day that really gave rise to the actual leave date.
S2 19:09 Maybe. We've had quite a few elections, and there's another election, and there's another bunch of MPs trying to do the same thing, but until they actually deliver something, I suspect that the history is held in abeyance. If we do leave on the thirty-first of January, I think that will be the date that goes down rather than the general election date.
S1 19:32 So, for a little bit more perspective then, based on your dealings with business leaders, how difficult and uncertain have these past three years been, and will now knowing the results of this vote make things better at least for planning purposes?
S2 19:45 That's a good question. There certainly has been a high degree of uncertainty, and in some ways the uncertainty is the worst of all possible worlds, because if you are a business that definitely wanted to invest in somewhere that was in the EU, then you'd hold off your investment, because you couldn't invest in UK because it's not definitely going to be in the EU.
Equally, if you were the sort of business that definitely didn't want to invest in the EU and wanted to invest in somewhere that wasn't in the EU, you couldn't be certain that we wouldn't be in the EU or not bound by the rules. So, again, you might well hold off your investment. So a lot of businesses have been deferring and holding off investment, whether they want to be in the EU or not.
If we leave on the thirty-first of January, then there will be certainty, and the businesses that would only want to invest in the EU will know that this is not the investment for them. And equally the businesses that want to invest in something that isn't going to be in the EU and bound by all those rules, can then decide that yeah, actually we can go ahead with our UK investments.
So I think it's the thirty-first of January that will remove the uncertainty, rather than the election, or be it that, I think there is less uncertainty around because there's such a large Tory majority that it seems unlikely that anything is going to get in the way with leaving.
S1 21:06 To end this on some predictions, and we'll make the assumption that for argument's sake the UK does leave the EU on January thirty-first, now that this election is over and that seems to be a foregone conclusion, what do you see happening over the next year, and what does that mean for business not only in the UK but also around the world?
S2 21:26 For leaving the EU to make sense, it's important that we take advantage of that newfound freedom, which means we need significant trade deals to replace any loss in trade due to increased friction or incompatibility of rules with the EU and the trade deals the EU has. The obvious place to look for that is the US. So one of the things that I am expecting is for the UK to chat seriously to the US about a trade deal. We know they're going to talk to the EU about a deal, and I'm sure there will be some sort of a deal, exactly how closely aligned to the EU market it will be, I don't know. There's a spectrum. At one end you're relatively close to the EU rules for most things, and you have relatively frictionless trade for most areas. And at the other end you could decide you want a different set of rules to facilitate a different set of deals. And so we do a trade deal with the EU and still trade with them, but actually we'd have slightly different rules or potentially significantly different rules, and we'd be trading with other parties, and I think there would have to include the US for that option to make sense.
S1 22:36 Plenty of balls still up in the air. Well, Colm, thanks so much for taking the time to join us today. I know there's a lot going on. Hopefully we'll be able to check in with you in the future.
S2 22:43 Thank you.
S1 22:46 This ThinkSet podcast is brought to you by BRG. You can subscribe to the podcast and access other content from things ThinkSet magazine by going to thinksetmag.com. Don't forget to rate and review on iTunes as well. I'm Eddie Newland, and thanks for listening.
The views and opinions expressed in this podcast are those of the participants and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group or its other employees and affiliates.