In her Brexit speech on 17 January, Theresa May claimed she was prepared to walk away from negotiations if she doesn’t get what she wants. “No deal … is better than a bad deal,” she insisted, adding, “we would be free to change the basis of Britain’s economic model,” if the UK isn’t satisfied. May’s spin doctors briefed that this meant a move to a Singapore-style tax haven. Chancellor Philip Hammond had confirmed that Britain would become the “tax haven of Europe” if it failed to get its way.
What does this mean in practice? Whilst May’s government has dropped some of former Chancellor George Osborne’s savings targets, she remains committed to austerity with current spending plans, telling Jeremy Corbyn, “you talk about austerity. I call it living within our means.” The impact on Britain’s public finances of dropping corporation tax to 12.5% (to qualify as a tax haven) would be significant. The Office for Budget Responsibility (OBR) estimate that this would reduce UK government revenues by a further £63 billion over five years. One wonders how this would play on the side of a bus: “we could give the NHS £242 million a week. But let’s fund multinational corporations instead.”
Tax havens struggle to make the sums add up. Across the Caribbean, where tax havens are the norm, governments have been desperately restructuring their debts with IMF assistance. An FT report on the region’s economic challenges described “decades of stubbornly high budget and trade deficits, financed by borrowing” (sound familiar?). The impact on individuals is immediately obvious: for example, in Guernsey, you pay to visit the GP, with the average consultation costing around £54. This may work in a small island with low taxation and high incomes (although studies show that these charges discourage the neediest from treatment) but it is hard to see it working in the UK.
For all the austerity of recent years, the UK has considerable welfare and pension liabilities with its large population. The money for these has to come from somewhere. And the vote for Brexit was not evidently a vote for more austerity. The politics of the populist age are firmly against the UK turning itself into a hub for offshore finance.
So it seems that the big threat was merely a bluff. It may be that Theresa May has been taking lessons from her new friend Donald Trump’s book The Art of the Deal: “truthful hyperbole” is Trump’s euphemism for the lies told to get the deal. But Trump has another piece of advice that might be important: “the worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead.” If you bluff, you can’t make it obvious. Britain obviously cannot become a European tax haven, both for political and economic reasons. We must assume EU negotiators know this: if we bluff and bluster, they will smell blood.
Arthur Snell served in the Foreign Office from 1998 – 2014, including in the Caribbean region. He is writing in a personal capacity.
The headline was amended shortly after publication to add the word “risky”
Edited by Hugo Dixon
Does anyone, I wonder, in Europe or anywhere else, take May seriously any more. She is rapidly showing herself to be ill-equipped to do the job she fought for, and most definitely promoted well beyond her capabilities.