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The Brexit squeeze means the average household is likely to be £500 worse off in 2017 compared to 2016

May 2, 2017 6:46 PM
I got to know Theresa May reasonably well in government, former Deputy Prime Mimnister Nick Clegg said today. We sat next to each other around the cabinet table for half a decade. I witnessed her strengths - methodical, thorough - and her weaknesses too - technocratic, inflexible. But generally I found she was someone who would stick to what she had said.
So I was surprised when she went back on her word by calling an early election - and did so with such specious excuses.
Clearly the temptation of taking advantage of Jeremy Corbyn's poor public standing - and getting her excuses in early before the Brexit bad news hits - was too great. Far from putting the country first, her decision was an old fashioned wheeze to secure narrow party political advantage.
But what it shows above all is a growing, swaggering complacency on the part of the Conservatives.
They expect a coronation, not a contest.
They expect voters will give them a majority with the minimum explanation as to why.
They assume they can pull the wool over people's eyes about the damage Brexit will wreak, and get away with it.
They claim it will "strengthen their hand" in securing good terms with the EU when it will do no such thing - if anything, a bigger majority will harden positions on both sides.
They say in public that the race is tight - then boast to Jean Claude Juncker in private that a Conservative victory is in the bag. Judging by the reports of last week's dinner between Juncker and the Prime Minister, the Conservatives are proving to be as incompetent in doing the right thing for the country as they are ruthless in chasing votes.
In short, this election shows the Conservatives reaching new heights of complacency: taking the support of voters for granted; assuming they have a right to govern without opposition; pulling the wool over the eyes of the people who will suffer most from a hard Brexit.
So today I want to focus on something Theresa May doesn't want you to think about too much: the hard Brexit squeeze on your income, your taxes, and on your schools and hospitals.
And then I want to set out the Liberal Democrat position on Brexit going into this general election.
My argument today is simple: Our country cannot thrive without a strong economy. Yet we can't have a strong economy and a hard Brexit.
Theresa May alone is responsible for pursuing this course. It is already hurting the very people who need most help in society. So the question in this election is this: who will hold Theresa May accountable for the economic harm she will inflict on Britain?
Now the Conservatives and their cheerleaders in the Brexit press would have you believe that all the projections about the impact of Brexit on the economy were wrong, and have been disproven by events.
This is nonsense. First, Brexit hasn't happened yet. The long-term impacts won't start to be felt until 2019 at the earliest.
Second, while some of the predictions from the Bank of England and others of an immediate slump in the wake of the referendum vote have been shown to be inaccurate, in one important respect they were right.
Since the summer of 2015, when the prospect of the referendum became apparent, the pound has been falling. Today, despite a recent limited recovery, sterling is around 17% lower against the Euro than it was then, with much of the fall occurring in the immediate aftermath of the referendum.
By contrast, the devaluation of sterling by 14.3% in 1967 was seen as a humiliating defeat for the Wilson government, from which it never recovered. When Wilson said that "the Pound in your pocket is still worth a Pound" he was held up to ridicule, as it was palpably untrue.
Anyone who claims that you will not be worse off after this recent devaluation isn't being straight with you.
Devaluation means higher inflation. Before the vote, inflation was around zero. Now it is 2.3%, and set to rise further as the impact of devaluation works its way through into higher prices at the checkout.
With average earnings growth set to stall later this year, consumers are inevitably going to feel the Brexit squeeze.
Take food for example. Around half of all the food we eat is imported, which means the prices on the supermarket shelves are going up. The IFS thinks they will rise by 3% as a direct result of devaluation.
Price rises have also hit energy bills and petrol (oil and gas is bought on the international market in dollars), as well as clothes, wine, electronics and even tea.
If you're spending money abroad, the impact of devaluation will be unmissable. If you're going on holiday to Spain this summer, everything you pay for in euros, from accommodation to ice cream, will be 17% more expensive than it was 2 years ago. If you're going to Florida this summer, it'll feel like a 23% hike.
When prices go up and wages do not, that can only mean one thing: millions of people are going to be poorer. Our standard of living will be lower.
Putting all of this together, the Brexit squeeze means the average household is likely to be £500 worse off in 2017 compared to 2016 - and that's even before the Brexit negotiations have started in earnest.
More worryingly still, the impact of the referendum on public services can already be seen in the independent economic forecasts which underpin the government's own spending plans.
Even according to the cautious estimates from the OBR, a triple whammy of higher inflation, lower business investment and lower net migration means that GDP is likely to be 2.4% lower in 2021 than it would have been without the referendum.
Having forsaken that potential growth, we have to accept that fewer taxes will be collected, widening the gap between government revenues and government expenditure.
The Chancellor revealed in November that he will have to borrow around £15bn a year more than he expected, starting next year, just to fill the gap specifically caused by Brexit. He was also forced to abandon his target of balancing the budget by the end of this parliament.
Cumulatively, this means that Brexit will have dented the public finances by £59bn over a 5-year period.
Let's be very clear: this has serious consequences for the NHS, social care, and schools. At a time when vital public services are desperately in need of additional funding, the Conservatives are pouring billions into the Brexit black hole.
Money that could have been used to cut waiting times in A&E, keep beds open, and pay for vital medicines.
Money that could have been used to ease the intense pressure on local care services for our ageing population.
Money that could have been used to stop the shameful cuts to school budgets.
To put this in context, the NHS needs to find at least £22bn a year by 2020 to meet the shortfall that has been identified by the head of NHS England, Simon Stevens.
The social care system requires an extra £2.6bn - far more than local authorities can afford.
And our schools need an extra £3bn by 2020. A recent survey found that three quarters of headteachers believe that school budgets will be unsustainable in two years' time.
In other words, the money that is being lost to Brexit could have been used to plug around half of the gap in our core public services over the next 5 years.
Couldn't the Chancellor simply borrow more, you might ask? Well, according to his own fiscal targets, the Brexit bill has left him with a little headroom to borrow more - £26bn to be precise. But it seems that that money isn't available for public services: Government briefings around the time of the Autumn Statement made it clear that this borrowing margin will be allocated to a 'war chest' in the event that the Brexit negotiations run into difficulties.
So even if the Chancellor were to draw on the small contingency he has allowed himself, it would be immediately swallowed up by the fiscal black hole caused by Brexit.
The government has effectively maxed out its credit card on Brexit. This means, in turn, that any additional money for schools and hospitals cannot come from borrowing - it will have to come from further cuts to public services, or from higher taxes.
In other words, the cost of Brexit will be borne by you.
This is why the Conservatives look like they are going to have to scrap commitments on tax and National Insurance, and end the triple lock on pensioners.
Brexit is very likely to spell tax rises and less money for pensioners - rolling the clock back on two of the big Liberal Democrat achievements in government.
Of course, this is not just about money. The government has to keep the country running, and that means being able to devote time and attention to other problems as they arise.
The next government will have to deal with multiple crises, from schools and hospitals to prisons and housing. Brexit means they won't have the time and energy to deal with all of these things simultaneously, so the danger to public services comes not only from budget pressures but also from a vacuum of leadership and focus in Whitehall.
For businesses, the Brexit squeeze is already being felt through higher import prices, a shortage of EU workers, and reduced investment.
Some companies that rely on imported ingredients are already trying to disguise the impact of devaluation on their prices through creative repackaging, as we have seen with reduced chocolate in Toblerone.
Others are struggling to find staff. The food and drink industry in particular is more reliant on EU workers than any other sector of the UK economy. Around 29 per cent of the UK's food and drink manufacturing workforce are EU nationals.
The fall in the value of the pound is already causing some EU workers to consider leaving the UK, as their wages are now worth significantly less back home.
If the government continues to fail to provide answers about the post-Brexit immigration rules, that could trigger a rapid decline in EU workers. With the UK workforce unable to fill those jobs in the short term, this would cause major disruption to the food and drink sector over the coming months.
In some cases jobs have already been lost. The announcement last week that Nestle will be moving the production of Blue Riband biscuits to Poland, with the loss of 300 jobs in Newcastle and York, is a clear warning sign.
Most economists think that business investment will slow down this year, as investors wait and see what kind of deal may emerge from the talks. Investment decisions will stall, investment opportunities will be foregone. Huge uncertainty in particular now hangs over jobs in car manufacturing and financial services.
Of course, the fall in sterling has benefited some exporters who are in a position to capitalise on it - but this has done little to mitigate the overall situation.
So the short-term impacts of the referendum vote are deeper and more worrying than the Conservatives want you to think. Consumers, public services and businesses are all facing the Brexit squeeze.
So far I have focused on the short-term impacts of the referendum. Things could get much worse in the longer term once we have actually left the EU.
The nature of the deal which the government secures - if indeed they manage to secure one - will have major implications for the British economy, for the Union, and for our standing in the world. It will shape our future as a nation.
Theresa May is very attached to the idea of "strong leadership in the national interest", which is why it is all the more baffling that she has chosen to pursue the most extreme and damaging form of Brexit.
She could have chosen to be in the Single Market. Brexiteers like to pretend that this is not possible, but three non-EU countries have done so: Norway, Iceland and Liechtenstein.
She could have chosen to be in the Customs Union. One non-EU country, Turkey, has done so.
She could have tried to persuade the EU to reform the free movement rules to re-focus them on work, instead of giving up without a fight.
Instead, she shunned the Single Market and the Customs Union, elevating immigration and a set of arcane arguments about the role of the European Court of Justice over the needs of the economy and the needs of millions of hard pressed families.
This can only be understood as a political decision based on the pressures from her party's right wing and the Brexit press. It is the latest in a litany of self-absorbed decisions taken by the Conservatives, for the Conservatives, rather than for the country at large.
And look at what's at stake.
The much-maligned Treasury analysis published prior to the referendum, which I note the government has not formally repudiated, suggests that leaving the Single Market and signing an inferior trade deal with the EU would reduce public sector receipts by £36bn.
The IFS took a similar view, that depending on the details of the future trading relationship, Brexit would damage the public finances to the tune of £20-£40bn per year, equivalent to about a third of the NHS budget for England, and about half of the schools budget.
This isn't some kind of fantasy. Whatever the debates about the precise figure, the brutal reality is that tearing up the level playing field of the Single Market MUST increase trade costs with our largest export market, and that MUST lead in turn to lower living standards and lower public receipts.
That means a material hit on people's livelihoods and public services, with poorer households suffering more from higher prices since more of their spending is on traded goods. Businesses will have to come to terms with tariffs and other barriers to trade, customs checks, red tape, new regulators and quangos.
It is increasingly clear that this decision is Theresa May's personal responsibility.
This Brexit squeeze won't be felt by the Prime Minister and her supporters in the right-wing media; it will be paid for by ordinary people out of their wages, by sick people needing treatment on the NHS, by elderly people needing care, and by children who won't receive the education they deserve.
And in the event that there is no deal at all in 2019, and Theresa May triggers her threat to turn the UK into a low-tax, low-regulation off-shore economy, then we can wave goodbye to public services as we know them.
At this election, the Liberal Democrats are the only major national party that is sounding the alarm against hard Brexit.
It is the fault of the Labour Party that the Conservatives now have a clear run at their extreme version of Brexit. An official opposition that has forgotten how to do the most basic job of holding the government to account does not deserve to be the official opposition.
For our part, we will include two commitments in our manifesto.
First, to hold the Conservatives' feet to the fire and fight to the very end to secure terms which retain as many of the benefits of EU membership as possible.
Second, to secure a referendum on the final agreement, so that the people can judge for themselves whether it is right future for the country. That referendum will offer two choices; accept the deal, or remain in the EU. Liberal Democrats will campaign for a remain vote.
If David Davis's promise to deliver the "exact same benefits" that we currently enjoy within the Single Market turns out not to be true, and the cost of that broken promise falls on the heads of the British people, then the public should have the chance to say they won't accept it.
It is peculiar that Theresa May argues that supporting a referendum on the outcome of the Brexit talks is tantamount to thwarting the will of the people - it does the opposite, by entrenching the supremacy of the people - especially since it is a case made so forcefully in the past by ardent Brexiteers from John Redwood to David Davis.
If Brexit is going to be as popular as they argue it will be, they should surely be enthusiasts for a referendum on the final deal? It is becoming increasingly obvious that their refusal to countenance another referendum is because they fear they would lose it, not least since voters will be much more alert to the lies and fabrications so effectively deployed the first time round. It is the same reason that they brought the date of this general election forward: they know that come 2019, the prospect of Brexit might be far less appealing to many people than it appears today.
Many voters had a lot of sympathy with Theresa May when she first came to power. They knew she didn't personally support Brexit in the referendum, but they admired what they considered to be her dutiful attempt to deliver the referendum outcome handed to her. She was merely doing the job foisted upon her by events beyond her control.
That has changed utterly now. She has called an election for nakedly party political purposes and she has chosen to pursue a hard Brexit to satisfy her party, not heal the divisions in a divided country. She and she alone is responsible for all that comes next.
The economic damage is already being felt by the people who the Conservatives have always cared about least: the poor, the insecure and the vulnerable. By the young voters who overwhelmingly voted for a different future who are now having their dreams and aspirations loftily swept under the carpet by the Government.
If Theresa May really cared about the next generation, or the Just About Managing, the very last thing she would do is impose hard Brexit on them.
From now on, she does not deserve sympathy for her predicament - just remorseless, unforgiving scrutiny for the decisions she is seeking to impose upon the country.
So the Prime Minister has seized this opportunity, in part, because things are already deteriorating and are going to get a lot worse. Don't fall for it.
It's the latest in a series of con tricks. They were tricking you when they said there would be £350m a week for the NHS. They're tricking you by pretending there's no Brexit squeeze. And they're tricking you when they claim they can secure a deal with the exact same benefits as EU membership.
Far from 'taking back control', they have left our country - and especially future generations - dangerously exposed.
By allowing the Brexit hardliners in their party to call the shots, the Conservatives have thrown away our place in Europe and inflicted a needlessly harmful cost on the country.
By choosing a hard Brexit, the Conservatives have multiplied that cost. It will fall on the heads of ordinary people, not on the wealthy elites that have driven us down this path.
By choosing to be careless with your future and carefree in their approach to such a huge task, the Conservatives have placed party before country, themselves before all else, politics before the nation.
Don't let them get away with it. They don't deserve to rule our country unopposed.
Britain needs an effective opposition to hard Brexit. That is why I urge you to vote for a real opposition - the Liberal Democrats.

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