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England Prepares Its £40 Billion Divorce Settlement

Dec 4, 2017

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With the British people finally united over Brexit, one profession has argued otherwise. The discrepancy could cause Prime Minister Theresa May's downfall. But it also reveals two ways to profit. One for a 20% return per year.

Sorry to be so cryptic. It's all quite simple, really.

Just 11% of Britons polled think the floating £40 billion bill for leaving the EU is acceptable. That's an impressive level of unity against the prime minister's position.

But economists see it differently:

  • The size of Britain's Brexit bill will not make a significant difference to the public finances, leading economists said on Wednesday.

    Most of the bill was money the UK would be paying in if it had stayed in the EU, Paul Johnson, director of the Institute for Fiscal Studies told a panel of MPs.

There you have it, £40 billion doesn't matter according to economists.

It's a classic case of thinking like an economist. If you have to make a decision, you need to compare the alternatives. Most people simply think about the outcome of the decision itself.

For example, if you want to analyse whether leaving the EU is a good decision, you have to compare it to what will happen if we remain. Sure, £40 billion is an enormous upfront payment. But how much would we pay into the EU if we remained?

Paul Johnson from the Institute of Fiscal Studies did the maths:

  • "If leaving the EU had no economic impact and we were paying £8bn in, then paying £40bn upfront would be a win," Mr Johnson said, as after the fifth year of no longer having to pay, the UK would then be saving money.

A break-even point of five years isn't so bad. Putting £40 billion down for an £8 billion return per year is a deal property investors can only dream of. And at global interest rates near 0%, it's a great return on investment if you borrow the money.

So perhaps the divorce bill offers an extraordinary trading opportunity. Not for you, for our nation. But there's another way for the prime minister to profit.

My advice to her is simple. Delay the payment as long as possible. And request a series of instalments for years to come.

Chances are, an economic crisis will happen in Europe in coming years, sinking the euro. Meanwhile, our prime minister could make Brexit an economic success by pursuing good local policy, making the pound surge.

Put the two together and the cost of leaving the EU could tumble in terms of pounds.

The thrifty politician?

Anyway, the divorce bill will pay for itself in time thanks to the savings of leaving the EU.

Except the Office of Budget Responsibility says otherwise. It assumes that the money we would've sent to the EU will simply be spent by the UK government instead. There is no thrifty politician, so there is no saving from leaving the EU.

The trouble with thinking like an economist is that you have to deal with uncertainty. Will the UK government spend that £8 billion a year, or not? It seems the cost/benefit outcome of Brexit for the UK budget is entirely in political hands.

But it's not just the government budget you have to worry about. As Johnson went on to explain to MPs, the real question is what impact leaving the EU has on our economy.

The damage to trade could be terrible. Trade barriers will automatically apply. But trade barriers usually raise government revenue...

Of course, there are benefits to leaving the EU too. Not many mention those. Governor of the Bank of England Mark Carney, of all people, has revealed some. Surprisingly, our finance sector is set to boom in the wake of Brexit.

Yes, I know this is the opposite of what you hear everywhere else. But you'd think the governor knows what he's on about when it comes to the city.

According to the Financial Times, "Mr Carney suggested the UK might expand its financial services sector from 10 times its GDP to between 15 and 20 times during the next few decades."

Quite a boom!

But it's a double-edged sword. I'm not sure having an oversized financial sector is terribly healthy for the rest of the UK economy. But if it's the result of being an international hub, it's probably a good thing.

One of the reasons Carney expects a boom is that the UK will be a wiser regulator of the financial industry than the EU was. First up on the chopping block after we leave the EU is the limit on bankers' bonuses.

All those bankers forced to move to the EU won't be terribly happy about that one.

In fact, I'm not sure what the EU will think of Carney's comments generally. While EU politicians and major bank CEOs comment on how the city is doomed after Brexit, the governor of the Bank of England is predicting a boom and deregulation.

I certainly never expected these initiatives to come from the Bank of England.

Brexit is a boon... for the media

It seems anyone can reach any conclusion about any Brexit topic they like, these days.

Depending on who you ask, the city will boom or bust. Trade will boom or bust thanks to easy or impossible trade agreements. Border crossings in Northern Ireland won't be noticeable, or they'll resemble the demilitarised zone in Korea.

Anything goes if you want to talk about Brexit. The only person on the right side of all this seems to be the media. Readership must be doing well with all this popular but worthless commentary.

The divergence of opinions reminds me of an interview I watched back in 2016. A pro-Brexit campaigner was pitted against a Remainer. Total confusion ensued as both used the same logic and reasons to come to the opposite conclusion. Nothing has changed.

I've always said that the key to Brexit is domestic policy, not Brexit itself. The UK can choose to become an even larger financial hub than it is now. Or it could nationalise industries and provide welfare for everyone, as Jeremy Corbyn proposes. It could create new trading booms, or allow the EU to crush global ambitions by remaining tied at the hip.

That's why the truest lines of the week came from coverage of Morgan Stanley's careful analysis of UK politics: "Jeremy Corbyn is 'worse threat to British business than Brexit', Morgan Stanley claims", wrote the Independent.

With the future in our own voting hands, who knows what will happen...

Please note: This article was first published in Capital & Conflict on 30th November 2017.

Having seen the true nature of the investment banking business in 2008 from inside Wall Street's most notorious bank, Nick decided to find somewhere he could give honest, hard-hitting and profitable investment advice in an ethical way instead. Nick has worked in financial publishing since 2010 as the editor of the Daily Reckoning Australia, the retirement themed Money for Life Letter, and Strategic Investment Australia. He joined Southbank Investment Research in 2015 as editor of Exponential Investor. Nick holds degrees in Finance, Economics and Law from the prestigious Bond University, is a qualified Financial Advisor in Australia.

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