John McDonnell MP
Brexit and what the economic implications mean for our country.
As today is the centenary of the battle of the Somme I would like to start by paying tribute to all those who lost their lives. Both my grandfathers served in the 1st World War. They as many survived but nobody ever lived through unscathed. We remember and honour the sacrifice made on all sides and are reminded of the importance of peaceful, constructive international relationships.
This has been quite a week in politics. Whatever our internal party activities, in both parties, we must recognise our responsibilities to fulfil our role to protect community interest.
Last Thursday’s vote to Leave the European Union has opened a period of intense political and economic uncertainty.
The UK’s triple-A credit rating has been lost.
Sterling markets have been in turmoil, as have stock markets here and abroad.
The FTSE100 index registered a bigger single-day fall than after the bankruptcy of Lehman Bros in 2008.
Some employers, most notably in financial services, are already looking to relocate jobs.
A quarter of those employers say they will introduce a hiring freeze.
Shares in UK banks have fallen most dramatically.
Looking ahead, most major forecasters have revised their expectations of future growth sharply downwards. A major loss of capacity, with the potential for permanent damage to the UK’s growth prospects, cannot be ruled out. The challenges ahead are immense.
I want today to look beyond the immediate economic situation, and towards a possible future for the UK and its relationship to the EU.
The people have spoken, and their decision must be respected.
We know that the population has voted to leave the European Union, we must respect that decision, but we now need to do more work to find out which elements of our European relationship our people want to preserve, and which must be changed.
This task is all the more important, given some of the frankly false information which was given out by the Leave campaigners in advance of the referendum, and the total absence of planning on their behalf for afterwards.
As I, Jeremy, and the Labour team argued during the referendum campaign, the EU has been on balance good for workers here, boosting employment and providing protections at work.
As guidelines for future negotiations or dialogue, protecting jobs and rights at work must be the starting point.
With those two aims, I believe, the following should act to outline an initial path through negotiations.
First, our aim must be to ensure freedom of trade for UK businesses in the EU, and freedom of trade for EU businesses in the UK.
Second, no EU citizen currently living or working in the UK will have their residency rights affected. No UK citizen currently living or working in the EU will have their rights affected.
Third, existing protections at work provided by the EU must be maintained.
Fourth, the UK’s role in the European Investment Bank should be maintained.
And fifth, the rights of UK financial services companies to win business across the EU must be maintained.
Any path through the negotiations that does not respect these guidelines will be liable to have severe consequences for jobs and protections at work.
Freedom of trade for UK businesses in the EU. Freedom of trade for EU businesses in the UK.
Labour does not believe that the people of Britain want to see tariffs erected around this country.
Over the years, thousands of British businesses have benefited from the freedom to do business throughout Europe, and British people have benefited from being able to buy tariff-free from European companies.
Whatever emerges from negotiations, when the final proposals for Brexit are decided, we do not want to lose the benefits that membership of the European Union has brought.
The damage that would be done to our economy by pulling out of the single market at this time could be substantial.
No EU citizen currently living or working in the UK will have their rights affected. No UK citizen currently living or working in the EU will have their rights affected.
Perhaps the most shocking and disappointing trend since last week’s vote has been the increase in racially motivated incidents.
Heartbreakingly, we have even heard reports of children asking their parents whether they will have to leave Britain because of the vote for Brexit.
Let me say to those children, and their parents, now:
Labour will always stand in solidarity with anybody who is abused because of their background.
And Labour will never vote for any kind of EU exit deal which reduces the rights to live and work of either British citizens abroad, or EU of citizens who are living here at the time of exit.
We are not that kind of people. And I don’t believe the British people, however they voted last week, are.
We have a proud history of welcoming migrants to this country.
I take heart at the number of people who have spoken out against the wave of racist attacks in the past week, and I know how many people have been shocked by them.
When the far right shouts on the streets of Britain that people who have lived, worked and raised families here for many years should be “sent back”, it is imperative that decent politicians stand with the victims and say: “we will never send you anywhere”.
It is also imperative that those politicians who knowingly helped to create the climate for such horrific incidents, in some cases seemingly to further their own careers, take responsibility for the consequences of their actions.
Guarantee of employment rights
The EU at present acts as an extra guarantee of rights for those in work.
These include maternal and paternal rights, and rights against forms of discrimination.
We will oppose any negotiations that include a reneging of those rights, and will fight any attempts to renege on existing rights in the UK.
This means that, before any withdrawal from the UK, the Government must guarantee that all the rights we have in UK thanks to our EU membership are to be preserved and not diminished on exit from the EU.
European Investment Bank
In addition to employment rights, the UK infrastructure projects often benefit from European Investment Bank funding.
The UK currently holds a 16% stake in the EIB, which last year disbursed a record £6bn in investment for the UK.
This includes £1bn for social housing.
Following the vote to Leave, there is already a threat to those projects that were seeking funding.
The EIB has a different governance structure to other EU institutions.
There is a lack of clarity about the UK’s status within it.
We should insist, given the benefits the UK enjoys and the stake we hold, that our position is maintained.
Bank passports and finance
Britain’s financial services industry employs over one million people, with another million employed in related professional services.
These aren’t just concentrated in London. Over half are outside London and the south-east.
Financial services as a whole account for nearly 10% of Britain’s GDP.
That is a similar size to our manufacturing industry.
London itself is the leading global centre for finance. It hosts the world’s largest foreign exchange market, turning over nearly $2 trillion a day. That status is directly threatened by Brexit.
There is enormous concern in the City, and amongst those major financial institutions with international interests. Those concerns centre on the potential loss of EU passporting rights.
This provides the rights for banks based in the UK to access EU financial markets. The loss of these rights, now threatened by Brexit, would be a huge blow. Financial institutions would be cut off at a stroke from those markets.
Already, there are contingency plans in place to relocate staff and, further down the line, headquarters. Research before the vote suggested that potentially 100,000 jobs in finance could be at risk. The threat is very real.
In addition, Lord Hill, the UK’s appointment as financial services Commissioner, has resigned. Britain now no longer has any representative at the most senior level inside the EU to argue for the interests of British finance.
There is little prospect, without a clear negotiating line, of regaining that influence. Political uncertainty is feeding directly in to wider market volatility. The situation, particularly as it impacts on jobs, is untenable.
Let me be clear about this. I am a long-standing critic of the Britain’s financial institutions. From top to bottom, they have failed to live up to their obligations to society.
The focus of investment is too short-term and the rewards are, too often, excessive. As Lord Turner has said, much of the activities the City undertakes are “socially useless”.
Rewards for a very few at the top of our major financial institutions have been obscene and, quite rightly, attracted public opprobrium. Excessive rewards in financial services have contributed directly to widening inequality in this country.
The senior city figures who took part in yesterday’s Financial Times debate clearly recognised that this inequality contributed directly the vote to Leave.
Above it all, the catastrophic failure of 2008 has cast a long shadow. We are still living with its consequences now. Nonetheless, whilst the need for a fundamental reform of the City remains, we should not simply allow it to sink beneath the waves.
Our current economic model depends on financial services, including £66bn in taxes. With job losses and relocations threatened, it won’t just be a few fat cats who suffer. Over time, we know we have to change our national economic model.
The shock of the Leave vote should at least show us that we need to become a country that builds more on its strengths in science, technology, and the creative industries.
We need to show how all of our country can create and share in prosperity, rather than piling up the wealth in one corner for a few to enjoy.
We need to think how we can make finance the servant of the economy, rather than its master. But we won’t achieve this by ripping up existing, longstanding agreements in a way that threatens jobs. We’ll achieve it by working constructively with those in the financial services industry who want to reform.
The country now needs the whole system to gear itself towards delivering the long-term, patient investment this country needs. So we must ensure that any future deal with the European Union includes a banking passport and full access to European markets.
We will not be supporting any exit deal that cannot guarantee those rights.
Let me now looking ahead
To move forward, we have to be honest in our assessment of the current situation if we are to ensure the correct remedies are agreed upon for the future.
The Chancellor’s assessment of the broader economic picture.
His claim that the “roof was fixed” whilst the sun was shining belies the reality.
The Leave vote is having a greater impact because the roof has not been fixed.
We saw this in the Office for Budget Responsibility’s assessment of the UK’s fiscal position, published alongside the Budget this year. At the centre of the OBR’s pessimistic assessment was the stagnation in UK productivity. Between 2007 and 2014, on the latest available data, productivity in the UK has not grown. This is the worst erformance of any G7 economy.
It means that, today and on average, every hour worked in the UK is one-third less productive than the average hour’s work in the US, Germany, or France.
Sources of growth
Growth over the last few years has relied too much on two things.
First, the economy has produced large numbers of poorly-paid, insecure jobs.
Second, growth is becoming more and more dependent on a return to household borrowing.
We have not hit the levels of 2008 yet. However, the Office for Budget Responsibility forecasts expect an unprecedented five year period of continual household deficits.
At the same time, our deficit with the rest of the world, the current account deficit, widened in the last year to the highest level since records began in 1772.
Currently over 6% of GDP, the UK’s has the largest current account deficit of any major developed economy.
To finance this gap, borrowing from the rest of the world and sales of UK assets have reached record levels, alongside asset sales to the rest of the world.
We have been able to finance this current account deficit, despite weak productivity growth, because of what Governor Mark Carney has called the “kindness of strangers”.
Investors in the rest of the world have been willing to overlook the fundamentals of this economy in the belief that it is politically stable, has secure banks, and has a booming property market.
The Leave vote has meant that this kindness of strangers is now in short supply.
With political instability and uncertainty over the UK’s relationship with the rest of the world, the confidence of international investors in the UK’s position has been undermined.
We need an industrial strategy to develop and support key industries. The government must now bring forward a comprehensive strategy to support key industries and lay a path for future growth.
The simplest explanation for these decisive economic weaknesses is the poor state of investment in the UK. Ahead of the referendum, business investment was already in decline. It is undoubtedly now falling still further. The ongoing uncertainty alone is enough, as the press reports, to deter investment.
Investment means that businesses can have access to new machinery, technology and ideas that will help drive productivity increases. Without sufficient investment, productivity growth is difficult to achieve. But this fall in investment by businesses is being worsened by the governments’ plans to cut its own investment spending.
Government investment on current projections is set to fall by the end of the decade. Without sustained investment, we will not be able to address the economic decline that has blighted too much of our country.
Economic decline, regional inequality, and the deep-rooted alienation and despair it has produced contributed to so many voting Leave. Some are concerned that a shock to business investment spending would help push the entire economy into a recession.
Labour has called for a programme of government investment, bringing forward shovel-ready projects particularly in those areas hardest hit by long-term economic decline.
We will get through this period of uncertainty, as Britain has done many times in the past. There are real strengths in our economy, not least our talented and dedicated workforce.
Nonetheless, volatility continues and there remain grave uncertainties about the UK’s future relationship with our European partners and the wider world. The future direction of the government itself is not yet determined.
Labour is prepared, in the national interest, to work with whoever necessary to ensure that the best interests of British working people are secured.
Jeremy Corbyn has established since he became leader 9 months ago, excellent working relationships with the leaders of socialist and social democratic partners and progressive movements across Europe.
Over the coming period we will be seeking to meet them to enlist their aid in securing the best deal we can for Britain in a new relationship with Europe.
Politicians in all political parties have an immense responsibility on their shoulders. We need to concentrate fully now on the country’s and our peoples interests.