The Labour case for Brexit

You would be hard pressed to deduce this from the current political mood music but, like the Conservatives, the Labour Party has always had a pretty ambivalent attitude to the EU. That much is at least self evident if one looks back at the history of the party and how it split over the 1975 EEC referendum. The main difference though between the two parties is that the things Labour likes about the EU (the Social Chapter, protection of human rights etc.) tend to be the things the Tories hate, and vice versa. What is therefore surprising is that there is not the same debate about the EU in the Labour Party this time around as there was in 1975. My view is that there should be because the potential threats posed to our democracy and to the viability and effectiveness of any future Labour government by the EU (at least in its current form and with its current direction of travel) are now much greater than they have ever been.

These threats I believe are two-fold. The first is economic, the second democratic. The economic threat comes from the increasingly unviable state of national finances and taxation frameworks and the negative impact on both of these posed by the single market. For a government to function effectively it needs to be able to borrow what it needs when it needs, and it needs to be able to tax who and what it needs in a similar vein. This is because taxation is not just a means of raising revenue to fund services: it is also a macroeconomic tool that should be used in conjunction with borrowing to correct imbalances within the economy and thereby promote economic stability. Yet even outside the euro this will become increasingly hard as the EU becomes more integrated and the single market becomes all-powerful and all-consuming.

This is because at the heart of the new EU is the single market. The single market is everything. The single market is sacrosanct. Nothing will be allowed to interfere with the single market. That means all government policies will be tested against this question: do they distort the single market? If so then they will be deemed to be illegal. We have already seen the start of this trend with the decision of the European Court of Justice (ECJ) to vote against minimum pricing of alcohol in Scotland. Next it will be differences in excise duty that come under the spotlight, then VAT. After that it will be corporation tax on companies, and possibly even income tax. But you don't need the single market or the ECJ to bring about harmonisation of tax rates: that will happen automatically if we continue to allow the freedom of movement of people.

The freedom of movement of people or workers is one of the four pillars of the single market, the other three being the freedom of movement of capital, goods and services. Implicit in these is a fifth freedom, the freedom of movement of jobs. Most criticism of the first of these, the freedom of movement of people, has concentrated on its effect of immigration. However, there is a secondary impact. If you allow people to move country then you effectively allow them to choose which taxation regime they wish to work under. In other words they are able to exercise consumer choice to choose their tax rate by selecting a country of residence with as low a tax rate as possible.

We have already seen the effect of this when President Hollande raised the top rate of income tax in France to 75%. Many of the wealthy moved to London or across the border into Belgium, Luxembourg, Germany or Switzerland, and then commuted back to France for their work if they needed to. Of course if your income tax was dictated by your nationality and not your country of residence (as is the case for US citizens) such movements would not be financially beneficial, but of course EU rules and the single market prevent this.

The impact of all this will be two-fold. Firstly it will undermine democracy because it will effectively allow some voters to circumvent the democratic outcome of national elections. If you don't like the result then you can just move somewhere else. If your fellow countrymen vote for a socialist government with better public services and higher taxes on the wealthy, then the wealthy can just move to a country with lower taxes. The rich get to have their cake and eat it.

The second impact is a direct consequence of the first. If the voters can move from country to country in search of the best tax deal, then countries will be forced to compete for income. This competition will force them to outbid each other in terms of tax cuts. The net result will be an inevitable race to the bottom in terms of tax rates. As a consequence the tax gap that governments currently suffer from will widen, revenues will fall, spending will decline, and services will worsen, whether these are in social security, healthcare or education.

The one great virtue of the EU in the eyes of Labour voters and trades unionists has always been the Social Chapter of the Maastricht Treaty. This encapsulated the core ideal that the EU should be for the benefit of workers, and not the owners of capital, by setting common standards for working rights and conditions that multinational corporations in particular operating in the EU would have to abide by. The rationale was that individual member states were too small and powerless to implement these standards unilaterally because multinationals could effectively force nations to compete against each other for the jobs those multinationals could provide. The irony now is that it is competition within the single market that is the great threat, not to wages but to government finances. Once you allow freedom of movement of labour then you undermine the fiscal sovereignty of individual states. Eventually they become financially non-viable with only the EU itself being able to levy income tax across the EU and across national borders. The result will be a push towards introducing a federal income tax and a federal budget with more loss of sovereignty and democracy at national level.

The result of all this is that it will become virtually impossible to elect a left wing government because a left wing government by definition is one that will always want to intervene in the market, either to prevent economic crisis or to stabilise an economy that is already in crisis, or to reduce the impact of inequality. All these interventions will necessarily result in a distortion of the market, and even though the market is imperfect and may be in crisis, this will be deemed to be against the rules of the single market. So while you may still be able to vote for a left wing government, that government will not be allowed to implement anything that resembles a socialist platform. It will be like voting for a Labour local council but finding that they still have to implement the same austerity-driven cuts as would have happened under a Tory administration. And of course the Greeks have already discovered this. They elected Syriza (twice) and still ended up with their economy being run by Dr. Strangelove in Berlin.

To put this into perspective imagine some of the policies that a future Labour government might wish to implement to raise extra taxes and tackle wealth inequality: the mansion tax; a citizen's income, support of key industries (e.g. steel) in times of external shocks; taxes and controls on intellectual property. All of these could be at risk from EU rules and regulation. The citizen's income (or basic universal income) in particular is one idea that is gaining support across the continent. The Swiss are currently voting in a referendum on this issue, but one concern is that the freedom of movement of people would make it unworkable whereas if eligibility were based on nationality then immigration would have little or no negative impact. But under EU rules countries are not allowed to "discriminate" on grounds of nationality.

The worrying thing is that the current Labour hierarchy seem oblivious to most of these potential pitfalls of EU membership. Moreover, by hitching his wagon (and by association most of the Labour Party) to the Remain campaign, Jeremy Corbyn has made a massive tactical miscalculation. If the electorate votes to leave them he will have made Labour unelectable for a generation as no-one will trust the party in government to keep the UK out of the EU. After all who is going to vote for a pro-EU party and prime minister if the country is negotiating to leave the EU? At least if a significant number of senior Labour figures (other than the commendable Frank Field and Gisela Stewart) had signed up to the Leave campaign then there would be sufficient alternative leadership candidates, or cabinet members who could be entrusted to lead future negotiations. And even if the public votes to stay in the EU the Labour party will likely lose significant votes to UKIP in future elections as a result. It is an outcome Frank Field has warned about but no-one seems to be listening.

Time to auction work permits?

Once again the government is getting itself in a muddle over work permits and immigration. This week the Work and Pensions Secretary, Iain Duncan Smith, has been urging UK businesses to employ young Britons, rather than relying on foreign workers. This comes after a recent article by Frank Field MP for the Daily Telegraph highlighted that the majority of new jobs created in the UK both in the last year, and also over the last ten years, have gone to overseas workers. Yet such pleas from government ministers calling on business leaders to act are hardly likely to make much difference unless they are backed by legislation. After all, why should any business act against its own perceived interests in this way.

The usual response of employers to the immigration issue is that British workers 'lack skills' and have a 'poor work ethic'. They also claim that they are only employing foreign workers because they are looking to employ the very best international talent. The problem is that none of this is really true. It is difficult to argue that this country suffers from a shortage of talent when it has at least three of the top ten science-based universities in the world within its borders. It is also difficult to argue that there is a shortage of technical talent when the relative size of the industrial base in this country is so small compared to other top OECD countries. As for the question of work ethic, there is more than a suggestion that this is shorthand for people in this country being asked to work long hours for low pay. If this country needs to import talent, then surely it should be in the form of people with skills that are comparable to the best this country has to offer. Yet even in our universities you will struggle to find foreign academics from the best overseas universities such as Stanford, MIT, Caltech and the Ivy League. So we may be importing talent, but it is not generally world-class talent.

The problem with the current system is with the rules and how they are implemented. So if a government doesn't like the result that ensues then it should change the rules. Those rules were based on a points system linked to workers' skills. Now the government wants to cap numbers. Unfortunately both systems are flawed because neither is sufficiently based on quality, and neither places any incentive on the employer not to demand foreign workers over British ones. Nowhere is this more prevalent than in our university sector where there is an abundance of overseas graduates, but very few from the top ten research institutions in the world. However the same is true for much of industry. As there was no premium for a degree from a truly world-class institution under the points system, there was no incentive to import talent from those institutions in order to raise the average quality of talent in this country. As a result in many cases overseas graduates acquired a kudos that was undeserved and was used to displace domestic graduates from the UK jobs market.

Moreover the points system itself was deeply flawed. Not only did most university degrees from most countries carry more or less the same intrinsic points value, but additional points were added for existing earnings rather than for any future earnings from the intended UK-based job. For example, a Ph.D. graduate (worth 50 points under the points-based scheme) who was under 30 years of age (worth another 20 points) would only have to be currently earning over £25k under the old system to acquire the necessary 75 points for a Tier 1 visa. If they had a batchelor's degree (worth 30 points) and had previous UK experience (5 points) then they would need previous annual earnings of over £35k to qualify. Yet even this amount could be exaggerated by the 'uplift calculator' which artificially raised the earnings of applicants from low GDP per capita countries. The result of all this is that virtually any graduate qualified.

Nor is the capping system much better. Such a cap would also fail to distinguish between workers of different skill levels and quality. It would probably be implemented on a first-come-frst-served basis that would do little to improve the technical excellence of the UK. As a result places would end up going to hairdressers instead of nuclear physicists.

What is needed instead is a market system that is biased in favour of high quality talent over lower quality talent. One that forces employers to balance the cost of employing a foreign worker with the cost of not doing so. It also needs to be a system where the cost increases with demand in order to limit demand to the most valuable workers with the most valuable skills. The obvious solution is therefore one based on an auction mechanism where the quantity of work permits is constrained, but excess demand forces up the price so that they are only economically viable for the highest paid jobs. The question then is, who should pay? The worker or the employer?

In a recent article on the Institute of Economic Affairs (IEA) blog, Eamonn Butler of the Adam Smith Institute (ASI) suggested that work permits should be auctioned to the highest bidder. For once I agree with him. He also suggested that the immigrant employee should pay as they were the ones who were in line to benefit. That though is where he and I part company. The problem I have with many proposals that come out of both the IEA and the ASI is that they tend to place higher costs on the ordinary worker or citizen, while seeking to exempt the owners of business from similar costs.

The problem with asking the employee to pay for the work permit is two-fold. Firstly, in any free market the best workers will always migrate to countries with the highest incomes and the lowest cost of entry. If a country wishes to avail itself of the best talented labour from abroad, large immigration fees applied to those migrant workers would be self-defeating. They would drive the best talent elsewhere. After all, why would an immigrant worker be prepared to pay £30k or more to work in the UK, when they could get visas or work permits for similar jobs elsewhere in the EU and the USA for free?

The second problem with forcing the immigrant employee to pay is that it will not reduce immigration levels. If the price of the visa or work permit goes up then migration from richer countries will indeed go down. However it will almost certainly be replaced by migration from poorer countries (or less talented individuals from richer countries) where the wage differential with the UK is greater. Thus net migration will be unchanged, but the quality will be reduced.

Fundamentally though, this policy should be about internalising externalities. In this case the externalities are the adverse social costs that are currently passed on to the taxpayer and the State as a result of immigration. These can include higher unemployment, additional costs on public services (such as education and health), the lowering of domestic wage rates, and a reduction in workplace training.

The impact on workplace training is of particular importance. In this regard the UK’s record is lamentable, and immigration makes it even worse. It allows bad employers to undercut good employers by utilising low cost foreign labour instead of improving the skills of their existing employees. This lack of workplace training is not a new phenomenon in the UK. As Will Hutton pointed out in his book "The State We're In" back in 1994 (see p187), British employers in 1988 only invested about 0.15% of their turnover in training. Companies in Japan, France and Germany invested about ten times that amount. That was the main source of the UK skills shortage then, and it probably still is now.

The solution, therefore, should be to make employers pay more for immigrant labour than they would have to for retraining their existing UK workers. It is employers who should bid for these work permits in monthly auctions not the migrant workers. Perhaps then employers would be incentivised more to invest in their workforce instead of continually carping to government ministers about the supposed skills shortage in this country. To put it in simple terms, if migrant workers are really that essential to the well-being of the UK economy, then employers should be prepared to pay a premium for their services.

No doubt many employers will complain vigorously about this and claim it will make the UK uncompetitive. This is a poor argument, not least because most of the UK economy is based on services, and service industries in the UK cannot in general compete for custom against similar companies overseas. Their market is internal, and so their only competitors are internal. If higher wage costs push up their service costs then they are free to pass them on. Far from damaging the UK economy, such actions would increase GDP by increasing the spending power of the low paid, much as the minimum wage has done. Britain's future prosperity lies in being a high wage economy, not a low wage one. As for manufacturing, higher wage costs would be offset by a higher quality of employee and therefore a higher level of innovation and international competitiveness.