Appendix 1

London Assembly Economy Committee – Tuesday 10 July 2018

Transcript of Item 6 – Preparing London for EU Exit

Susan Hall AM (Chairman): Today’s main discussion item is preparing London for the United Kingdom’s (UK) exit from the European Union (EU). I welcome our guests. We have Ben Gardiner, Director of Cambridge Econometrics, and Roger Bootle, Chairman of Capital Economics. Lord Andrew Adonis is going to be late, I am afraid, but hopefully not too late. Dr Graham Gudgin is an Economist at the Centre for Business Research, Judge Business School, University of Cambridge. Welcome, gentlemen.

If we can come to our first questions and if I can start with you, Ben, given what we know about the Government’s plan for leaving the EU, which scenario in Cambridge Econometrics’ study aligns the closest to the deal the Prime Minister is hoping to secure with the EU?

Ben Gardiner (Director, Cambridge Econometrics): Yes. I have had a look at the three pages that have been released thus far and, without a proper [Brexit] White Paper, it is difficult to say conclusively too much about it.

If I just draw your attention to the slide on the scenarios, which is part of the pack, we did five scenarios, as explained, one of which is a business-as-usual type of thing if the referendum had not happened and things had continued more or less along the trends of what they were following pre-2016. Then we did two - what you might call - ‘soft Brexit’ options, looking at either the Single Market membership continuing or Customs Union membership continuing without the Single Market, and then the World Trade Organisation (WTO) rules, commonly known as the ‘hard Brexit’.

Given that even in the three pages of the Government’s summary position they are still talking about restricting movement of labour, this would tend to lead you down the line of saying that they are not going to continue membership of the Single Market because that violates one of the four fundamental freedoms, the freedom of movement of people. If you are ruling that out, then you are really looking at scenario three, which is the Customs Union membership without the Single Market, which gives you free trade more or less with EU members on manufactured goods. It does not cover agriculture; it does not cover services. Those are subject to secondary agreements, which we do not know much about.

This is why when people sometimes comment on our study they say, “Why have you not pursued the Government’s option?” One reason is because it was still very uncertain what the Government’s real option was and what its strategy was. The other one I will not go into now but it was largely because of the speed with which we had to produce the study and having to rely on previous assumptions for trade barriers and non-trade barriers. We basically took what was there in the literature and in previous studies already and put those into our model. Those studies did not consider the Government’s option, the Canada deal or anything like that, and so we could not, in the time available, model anything like that.

Anyway, to answer your question, I would say the closest one is probably scenario three, which is more like the Turkey model, if you like, not turkeys for Christmas but Turkey the country.

Roger Bootle (Chairman, Capital Economics): It is very difficult to know where we are, is it not? I feel like I am commenting in a vacuum, really, about something that we do not even know exists. What appears to be the Government’s plan emerging from the Chequers agreement - if that is what it was - is about the worst of all possible Brexits, amounting virtually to a ‘non-Brexit’. We can of course analyse it in some detail and think through what the implications would be for London.

I have to say I do not think it is going to happen. We are in a situation where the politics is changing almost by the hour --

Leonie Cooper AM: Excuse me. Sorry. I do not normally sit on this Committee. I do not understand why you say that that is a ‘non-Brexit’ if we are leaving the Single Market. I am sorry. I do not quite understand why you have said that. Sorry to interrupt.

Roger Bootle (Chairman, Capital Economics): All right. Thank you for interrupting me. If you look at what those people who were arguing for Brexit were asking for and then examine this proposal, it does not really stack up very closely if we are leaving the Single Market. Are we leaving the Single Market? We do not properly know. At the moment of course, we have not seen the detailed [Brexit] White Paper. This is one of the problems with this. We do not know the precise proposal. We do not know what the arrangements are going to be with regard to freedom of movement. There are questions to be raised about the jurisdiction of the European Court of Justice. There are issues about how able we would be to form free-trade agreements (FTAs) with other countries around the world.

This goes right to the nub of the case for Brexit. Ask any economist supporting Brexit - and there were some, but a lot more opposing it - what is the nub of the argument for? Obviously, there are arguments for and against and we know what the arguments are against. If any economist were arguing for Brexit, what would they be saying was the nub of the argument for Brexit? They would mention two things: firstly, freedom over trade policy and therefore the ability to set our own tariffs and to negotiate FTAs around the world - how well would we be able to negotiate FTAs around the world? Probably not very - and, secondly, the freedom to diverge with regard to our regulations. Those are the nub, those two things, and that also is compromised by our accepting the Single Market Customs Union rules with regard to manufacturing and agriculture. Those are the reasons.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): I very much echo what Roger Bootle just said. The agreement as far as we understand it - and as Roger said, we have not seen the [Brexit] White Paper yet - is a long way from leaving the Single Market and the Customs Union.

The Single Market is really two things. It is regulatory alignment. You have a common set of regulations for producers and consumers, but the EU insists all the time that a number of freedoms go with that free capital movement and, of course, the important thing is freedom of movement.

What the Chequers agreement seems to be asking for is that we would have what they call a common regulatory framework or regulatory environment. They seem to be hoping that we will get away without having to sign up to free movement, but of course the EU has insisted at every stage in its famous ‘no cherry-picking’ phraseology that you cannot have that. You cannot have the advantage of a Single Market without the freedom of movement. There has been plenty of speculation in the press that the Government will soften its stance on that, perhaps with some form of words that says that EU migrants will not be able to come into this country unless they already have a job. A huge majority of migrants who come in already have a job and so that would be no restriction at all. There is certainly a concern among a number of Brexiteer Members

of Parliament (MPs) that that is the direction of travel. If that is the direction of travel, then of course we would still be in the Single Market in all but name.

The Customs Union, again, there is an attempt here -- one of the things that has been driving the Prime Minister’s desires on this is the need of particularly car and aircraft manufacturers not to have anything held up at the ports. They want their lorries to be able to come straight through. In the great majority of ports, there is no problem at all, but we are probably only really talking about Dover. I personally cannot see why this cannot be arranged without this huge transfer of policy sovereignty to the EU.

The problem from many people’s point of view - and I apologise if I am straying into future questions - is that the UK is proposing to hand over to Brussels quite a significant proportion of its trade policy, its production regulations, its competition policy. One thing that has hardly been commented on but, to me, as somebody who has worked in more disadvantaged regions for much of my career in the UK, state aid policies mean that Brussels will continue to tell the British Government what is the most money it can spend on helping disadvantaged regions like the North East or Wales or Northern Ireland. It is really very hard to see why on earth we would hand over all of that policy and what is the gain.

To come back to your question, which of the scenarios is closest, I guess it is some amalgam of three and four.

By the way, I perhaps should have said right at the beginning that I congratulate you on commissioning Cambridge Econometrics to do this. This is an excellent report and a very sensible model on which it is based. We can see from the results that the impact of Brexit does not vary that much between scenarios. Perhaps an amalgamation between three and four might be it and we might take an average of the two, but the two are not very far apart anyway and so I am not sure it matters. We are certainly not talking about no deal or anything like that.

Susan Hall AM (Chairman): Given that we do not have the [Brexit] White Paper, given that things are up in the air a little bit, the one thing we do have is Ben’s original report. There are varying views on your thoughts in the report that show the varying arguments from various sides. If we stick in this section to comments on your report and then we have two specific economic arguments for and against. At least that is something we can look at because who knows what is going to happen going forward and so at least we have a report in in front of us and we have things that we can comment on.

If I ask you first, Ben, and then ask the other gentlemen to comment, what does the report assume about the kinds of revised trade deals the UK will hope to secure with third countries once we are outside of the Customs Union with the EU?

Ben Gardiner (Director, Cambridge Econometrics): The short answer is that it does not assume anything for the reason that there were not any free trade deals that were being -- it is all too uncertain to put in assumptions about making a trade deal with China, making a trade deal with the US and all these kinds of aspects. You could build them in, but how would you make your decisions about the assumptions you put into the model to make those changes for the trade deals with the UK? We were very clear in our proposal for the work we did, which was to model the different options of Brexit in terms of the scenarios that I have outlined.

The only real free trade deals I suppose that could have been assumed would have been in scenarios four and five where you would have left fully in the sense of a harder Brexit and then we could have said, “Let us add in a free trade deal with China. Let us add in a free trade deal with such-and-such a country”, and so on. This may have had a beneficial effect in the scenarios but, really, there still is nothing really concrete being put

forward that would give any certainty about the assumptions built in. Graham, in your work, you did not make any assumptions about free trade deals, either.

You go with what you know as much as you can, which are the price effects, the trade barriers, the tariff and non-tariff barriers, although the latter are incredibly difficult to deal with, how you deal with regulations and services and how those will impact on the economy. Given they are the largest part of London’s economy, it is slightly worrying. Anyway, you deal with what you can, which are those trade assumptions, and you make judgements about investment, foreign direct investment (FDI) and also migration, which we did as well, which was an advance on some of the models that had been previously out there on Brexit effects.

However, on the flipside, there are opportunities for sure, from Brexit in terms of freeing up new trade deals. As Roger said, do we think that the UK stands a better chance of negotiating better deals with third countries than it would do separately as opposed to being part of the EU? That is my judgement: I do not think it will. I do not think it can negotiate individually better than it can do as part of a massive trading bloc. Other people take different views. There is an objective side of things and then you diverge into the subjective of ‘what if’ and whether we could do better in this scenario than in that scenario. In the time available and with the boundaries put on the project, we did not explore third-country wish lists, as it were.

Susan Hall AM (Chairman): I asked about assumptions because there are so many assumptions on so many other subjects.

Ben Gardiner (Director, Cambridge Econometrics): Yes.

Susan Hall AM (Chairman): I wondered why on this particular subject. We can all make assumptions on something to prove the point that we want to make.

Ben Gardiner (Director, Cambridge Econometrics): Some people do, yes.

Susan Hall AM (Chairman): Yes, that is right, and yet on this particular issue there were not assumptions in that, in my view, just to balance it. Can I ask, gentlemen, what you think?

Roger Bootle (Chairman, Capital Economics): If I could start, it was not clear to me what some of the assumptions actually are. Under the WTO rules scenario, what are you assuming about the tariff rate that we are imposing on the rest of the world? Do we simply impose the current European common external tariffs?

Ben Gardiner (Director, Cambridge Econometrics): Yes, we do.

Roger Bootle (Chairman, Capital Economics): All right. And with regards to --

Ben Gardiner (Director, Cambridge Econometrics): Sorry to interrupt. There is no change in treatment of other countries once they are outside the EU.

Roger Bootle (Chairman, Capital Economics): No, there cannot be any discrimination between countries but, you see, by making that assumption, you have immediately ruled out a key issue, which is what tariff policy we pursue, because it does not have to have the current tariff rates on the rest of the world. If I also may ask, it is probably more profitable if I ask than --

Susan Hall AM (Chairman): No, please do. It is interesting for us to listen to the specialists.

Roger Bootle (Chairman, Capital Economics): Then there is the question of regulation. What are you assuming about the UK Government’s regulatory policy once it has regulatory freedom, if indeed it does?

Ben Gardiner (Director, Cambridge Econometrics): This, again, is a major issue when you come to economics. The macro models can get away with it to some extent because they do not need to consider all the different sectors and the implications for them. This is where we relied on the previous study, which was done by a Dutch consultancy, Ecorys, and they had previously constructed a set of tariff and non-tariff barriers in terms of increases in costs to trade that would occur through the different Brexit options, mainly WTO and the softer version. The way they do this is they convert non-tariff barriers, which are inherently non-price and do not have a price attached to them, into price effects. That is contentious, but it is the standard way of doing this in the models that we use. It is the same approach that the London School of Economics paper did, on which we have built our methodology as well. We used the same methodology because, in the time available -- again, I have to stress that this was a three-month study, we did not have any other options to hand to do this. It is a blunt instrument with which to assess the regulations on services, absolutely. I fully accept that.

Roger Bootle (Chairman, Capital Economics): You see, the reason I ask about these two things is that, as I said, these go right to the nub of the case for leaving. If you make assumptions that amount to the status quo, you have immediately cut off at the legs the alternative view. I understand that lots of other studies have done this - you are quite right - but this is piling Pelion upon Ossa. The fact that umpteen people have made inappropriate assumptions and come up with bonkers conclusions does not mean to say that one should follow the same approach.

With regard to tariffs, there is the key question - just to emphasise this - as to what the UK’s tariff policy would be. Just saying we are operating under WTO rules does not tell you what tariffs we choose. We could choose to impose no tariffs at all. Things would have to be consistent under WTO rules. This, it seems to me, would be the logical policy to follow.

You are then into questions about all the gains that flow from tariff-free trade. Under this scenario, we could, for instance, declare zero tariffs on imports from everyone, the EU included. That is it, finish. Alternatively, we could get to a similar result by a process of negotiating FTAs both with the EU and with the non-EU world, and it is a matter of tactics as to which way is best to try to get to that result, but the end result could be one in which the tariff rates in this world are lower than they are at the present.

Maybe what you do is you assume we will leave the EU and we do not have an agreement with the EU and we do not have FTAs in the rest of the world. Frankly, you do not need a very well researched and extremely impressive big document to tell you that the UK is going to be worse off. I could tell you that straight away because what have you done? You have increased tariffs between the UK and the EU without any corresponding reductions elsewhere and there are no deregulations, either, you assume, and so you are in exactly the same position as now apart from the really big deterioration of your tariff regime plus various questions about freedom of movement.

There are big questions, actually, about the assumptions made in this report. I accept the limitations of time and it is certainly in common with a lot of other studies that have done the same sort of thing, including the UK [HM] Treasury.

On the subject of regulations, this is a horrendously difficult area because there are a number of things. First of all - and perhaps ‘re-regulations’ is a better word than ‘deregulations’ - what sort of re-regulations would be

politically possible? We do not know. That is one thing. What are you going to plausibly assume about what we do? We are still going to have regulations in all sorts of areas, just not necessarily the same as the EU ones.

Then there is the question of how you evaluate what their effect is. Frankly, in the literature, there is a vast discrepancy. Some people think that the cost of the existing regulatory regime is very small, but you have other people at the other end of the spectrum who think they are absolutely enormous. My own guess is actually somewhere in between those two extremes.

To emphasise my point, this is a legitimate way of proceeding, but in the process some assumptions have been made which cut off at the knees the essence of the argument in the other direction and therefore - I do not know whether we are going to get to that point - there is, in other words, a perfectly plausible scenario which ought to have been regarded and taken account of under which tariffs on the rest of the world are lower.

Briefly, just to finish, on your point about FTAs and what the chances are of Britain negotiating FTAs outside the EU better than we would have inside the EU, the conventional wisdom about this is that the EU is big and has clout and so what chance would poor little Blighty have in negotiating free trade deals having managed to crawl out from underneath the EU’s skirt? That is the conventional wisdom. Of course, as so often with the conventional wisdom, that happens to be complete and utter nonsense.

Someone who has done a lot of detailed work on this - although it is not in your list of references - is Michael Burridge [EU analyst]. I do not know if you have seen his stuff. He has analysed in detail the FTAs that the EU has managed to conclude around the world and the answer is very interesting. The EU has been a very bad negotiator of FTAs around the world. It does not have many. The ones it has tend to be with really rather insignificant countries including many of the EU’s member countries’ former colonies and tend not to include services. There were plenty of examples around the world of small countries, including Singapore and Switzerland, which have negotiated far more and better FTAs.

Why could this be, given the undoubted size and clout of the EU? There is one very simple explanation, which is of course that although the EU is big and has clout, it also consists of 28-member countries and it is very difficult to get agreement between those 28-member countries. It should not be altogether surprising that a country like Singapore or Switzerland is better than negotiating FTAs than the EU is.

My conclusion is that the UK would be more likely to conclude more and better FTAs outside the EU.

Susan Hall AM (Chairman): Do you have anything to add to that, Graham? I will ask you to keep it in as simplistic terms as you can because, while you completely understand what you are talking about, we are talking to an audience - hopefully - out there that might not understand FTAs, etc. If you can, just try to keep the language as simple as possible. That would be great.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Sorry, economists are terrible at those.

We all think that ordinary people talk about nothing else over breakfast but gross domestic product (GDP). Anyway, one of the great strengths of the Cambridge Econometrics model and its approach is that the relationships built into the model are very largely built on past data. They are anchored in reality. Strangely, that is not the case in many other models. It is not what the [HM] Treasury now does. It is not what the Bank of England has ever done. They are more theoretical. I applaud this, but obviously that sort of approach does not help very much when we have a unique event like Brexit and we do not have any data. No one has ever left the EU before and we do not really know what will happen with FTAs.

Roger [Bootle] is right that we should make some allowance for FTAs even if we do not know what they are. In my own modelling at Cambridge, we did try to do this. What we did was we assumed that the loss of trade with the EU on leaving, even with an FTA, might be somewhere between 10% and 20% of exports and that what would happen was that the UK would regain those exports in non-EU markets over a period of, say, about 20 years as a slow recovery. Roger may argue and I know some of his colleagues argue that we should quickly get rid of all tariffs and perhaps get a much sooner recovery than that. Anyway, if you do what we did, the results through the 2020s up to 2030 are not very different from those of the Cambridge Econometrics study. It is really after that that the gains tend to come in, but very few studies have looked beyond 2030. We would all agree that an awful lot will have happened by then. In fact, an awful lot will have happened by tomorrow.

Susan Hall AM (Chairman): That is the problem that we have at the moment, is it not? Thank you.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): I just want to echo because it was a very important point that Roger just made and really just to agree with Ben [Gardiner] rather on this. People are always emphasising the size of the EU in getting FTAs, but Roger is quite right that the complexity of the EU makes it very difficult.

The EU - and therefore the UK at present - has an 11% tariff on most clothing. Why do we want to have a tariff on clothing? I forget what the tariff is on oranges. Perhaps it is about 20% or something. Why on earth do we want to charge consumers in the UK an extra 20% for oranges? Is it to protect the orange producers of Sunderland or something? You can see what is happening here. The clothing tariffs are there essentially to protect small Italian producers of clothing. The orange tariffs are there to protect the Spanish and the Italians. If we try to negotiate our own FTA, we can go to India and Bangladesh and Sri Lanka and say, “We will take all the tariffs off your clothing”, and at the same time we would say to India, “Would you mind reducing your 150% tariff on Scotch whisky? That is not helping Scotland very much”. We would have much more flexible bargaining powers.

We would have FTAs. It may take some time to negotiate these, which is why we built in a 20-year slow slide. Roger may be right that there may be quicker ways of doing it than that. We should probably do something, but over the time horizon we are talking about here I am not sure it makes a huge difference to the forecasts and so I would not worry about it too much.

Leonie Cooper AM: I just want to be absolutely clear on the difference between an FTA, which would be when both sides agreed not to have tariffs, and deciding to say that we are going to go tariff-free. That would be a unilateral declaration that, “We are not going to have tariffs ourselves and so you can sell your things to us”. We could end up in that situation where we said no tariffs for anything coming into our country but we would still have those tariffs externally applied.

One question I have is: is that not why, then, people go into the negotiations even if it takes a bit longer so that both sides agree to drop their tariffs at the same time?

Secondly, this is all in the context of someone coming here on Friday who seems to be rather keen to massively increase tariffs. One of the things that a lot of people are talking about with some enthusiasm since the referendum in 2016 is the idea that we might be able to enter into some very advantageous free trade deals or no-tariff deals with the United States of America (USA). That does not seem to be the mood music emanating from President Trump [Donald Trump, US President] and so I just wondered. Does that actually seem likely or

do you think it is better for us to look elsewhere around the world? Graham mentioned India and we were talking about China.

Finally, on the other point about the number of members of the EU, it has not always been 28. Was there a time when it was smaller when more FTAs were being negotiated? Is it something that has tailed off the larger and more unwieldy it has become?

Roger Bootle (Chairman, Capital Economics): Yes, you are quite right about unilateral free trade. These are tricky issues. I will try to keep it simple. I would not advocate unilateral free trade as the first best solution; that is to say where we just drop our tariffs regardless of what other countries are going to do.

Leonie Cooper AM: That was my misunderstanding because I thought you were.

Roger Bootle (Chairman, Capital Economics): No, that would not be my first best policy. Might it be the right policy under certain circumstances? The answer is yes. If I concluded that we were going to get nowhere with our free trade negotiations or get nowhere at least for a very long time --

[19-second break in audio]

Roger Bootle (Chairman, Capital Economics): -- the answer is. For instance, we could decide as and when we leave the EU properly to drop these tariffs on oranges as long as we do not have any tariffs on oranges anywhere in the world, which are there, of course, to answer Graham’s question, to protect Spanish orange producers. That is what I would do. We would do better, probably, to proceed by trying to negotiate FTAs with countries around the world rather than dropping our tariffs unilaterally on everything, although there might be particular tariffs we should drop pretty quickly, oranges being an example.

On [Donald] Trump, heaven knows what he wants, intends or will do. The mood music - it is very difficult to read this - is that he is being very aggressive towards China and has made some pretty aggressive remarks about trade with the EU, Germany in particular. At the same time, there have been a number of noises emanating from the White House suggesting at various points that a US-UK free trade deal would be on the cards. I cannot really judge whether that corresponds to President Trump’s current mindset. I do not know.

There are bigger things at stake here than just the trade relations. There are security and defence relations here as well and he is entering a spat as well over the North Atlantic Treaty Organisation (NATO) defence spending. These are very dangerous waters and they are also complicated to analyse.

I suspect that if we had not signed up to the agreement at Chequers, an agreement with the US would probably be forthcoming fairly quickly and we would then probably fairly quickly get agreements with other countries in what we might term the ‘Anglosphere’, Canada, Australia and New Zealand. Agreements with the likes of India and China I suspect would be a lot further down the road. That is my guess. Japan might come relatively soon as well, partly for geopolitical reasons.

On your third question about numbers of countries in the EU, I do not know the answer to your question. If you did a historical study, would you find that the difficulties got a lot greater as the numbers went up? My suspicion is that 28 is not much different from 22, quite frankly. Actually, the original six is difficult enough because you have particular interest groups - small Italian businesses and manufacturing particularly with regard to textiles, for instance, French farming, German manufacturing - and there is enough there to cause a difference of interest. I suspect it was a big enough problem right at the beginning and, as you get bigger,

yes, it gets a bit more complicated but 28 would not particularly be, as I say, that much more difficult than 21 or 22.

Susan Hall AM (Chairman): Before I say anything else, welcome, [The Rt Hon the] Lord Adonis. Thank you very much. I am sorry you have missed the beginning but we are --

The Rt Hon the Lord Andrew Adonis: Can I apologise for being late, Chairman? I have been speaking to London Councils about Brexit. I told them I was due to appear before you and so I left early, but I am afraid I could not get away soon enough.

Andrew Dismore AM (Deputy Chair): You are in the zone, then.

The Rt Hon the Lord Andrew Adonis: I should report to you that I did not meet a single one who is in favour of Brexit, by the way.

Susan Hall AM (Chairman): Everyone was?

The Rt Hon the Lord Andrew Adonis: I did not meet a single Leader of a London council who is in favour of it, not a single one.

Susan Hall AM (Chairman): Really? There is the next leader.

Leonie Cooper AM: You should come to Wandsworth. [Councillor] Ravi Govindia CBE [Leader, Wandsworth Council] is in favour. There you are.

Susan Hall AM (Chairman): There you go. Anyway, can I just remind you all? We are trying to look more at the effects of whatever we come to on London and so if we try to keep it slightly less broad because we could speak about this for a week and still not finish a conversation.

Caroline Russell AM: That is exactly where I was heading. Roger, you mentioned the idea of having completely tariff-free trade and I wanted to understand from you and from Ben [Gardiner] what the impact on London business people, London traders and Londoners would be of going to a tariff-free trade situation. Roger, if you would like to briefly comment?

Roger Bootle (Chairman, Capital Economics): I have not looked at the London-specific part of the modelling and I am no modeller and so Ben may be able to tell us more about what the model spews out about that. I am guessing, as it were, on the basis of first principles. I would not myself think that the impact of the tariff regime would be especially big on London. I would be interested to hear what Ben has to say about it. That would be my supposition. For London, the bigger issues, I would suspect, would be the service centre in general and financial services in particular and, in relation to that of course, the freedom of movement and the access to skilled labour are the really critical issues for London specifically.

Ben Gardiner (Director, Cambridge Econometrics): Yes, I will echo some of those comments. Just coming back briefly to what we might call a ‘pure’ free-trade model where we just agree no tariffs on anything, these have usually been assessed in overall what we call ‘macro’ models, which are whole-economy models, and so they do not necessarily consider the effects on particular sectors, as Graham [Gudgin] was rightly pointing out. Tariffs on textiles are to some extent there because of small Italian producers, but yet, if you look at the sectors in this country, we still employ over 100,000 people in the textiles industry. If you go to them and say, “We are going to abolish your tariffs on cheap imports and it will make it completely free”, see

what happens to your industry. This is the criticism. It is not all roses in the garden in terms of complete free trade and the Singapore or Hong Kong type of model. You will severely damage some industries, notably the manufacturing ones that have to compete with much cheaper imports. You could argue that it will make them more competitive and this is the counterargument, but that is a matter of debate and a matter of opinion as to where you put the weight in the argument on that one.

Coming back to your point about free trade and specifically the effect on London, yes, we know that in the UK most of the economy is now services dominated and in London there is an even more amplified or magnified effect of specialisation in financial services, ancillary services and so on. These are largely unaffected by the FTAs. It is the non-tariff barriers that matter and the regulatory issues and not so much tariff barriers. These will affect Londoners in terms of the prices they pay for goods that are imported either from the EU or elsewhere and there have been recent studies showing that London will do better than the rest of the UK because of the types of goods that are produced and the types of goods that are purchased. There have been a couple of recent studies.

There are two things there. One is the sectoral mix in London, which is much more towards services and so you will get less of an immediate effect from tariffs and it will be more from non-tariff barriers, which, as has been discussed already, we do not know much about because there has not been much talk about these agreements, which I find incredibly surprising given it is so important to the London economy.

Secondly - and this has been emphasised by specific studies by Philip McCann [Professor of Urban and Regional Economics, University of Sheffield] and Raquel Ortega [Argilés, Professor of Regional Economic Development] at the University of Birmingham - London has a much more global outreach compared to many other places within the UK which rely more on EU trade. This is dependent upon their models and their own calculations and so on, but it is fair to say that London is much more of an outward-looking global centre than anywhere else in the UK. If things go wrong with relationships with the EU, who is going to suffer most? It is not going to be London so much because of the links it has elsewhere on the globe.

Caroline Russell AM: Can I just pick up on one thing that you said, just going back to this no-tariff thing that Roger was talking about? You said it might make manufacturing more competitive. Do you think that there is a negative impact risk there for the workers working in manufacturing? Might that competition lead to worse pay?

Ben Gardiner (Director, Cambridge Econometrics): Completely, yes. There are loads of arguments. This is the whole thing about economics. You always have debates on one side and the other. You can argue that if the manufacturers that remain are not decimated from complete free trade, the workers who are still employed in those sectors will be paid more because the companies become more productive because of the trade and the extra competition that they have through access and exposure to more worldwide companies. Again, Graham [Gudgin] disputes those competitive trade effects but, again, they are different debates. However, there will be lower employment or the assumption in these other models is that this employment will go elsewhere. It will be transferred to other areas of the economy and so maybe you will get an overall beneficial effect. There is no right or wrong in the debate.

Andrew Dismore AM (Deputy Chair): Can I just come back on the example you gave of textiles? There is both a historic and a recent geographical example. In South Africa recently, the textile industry was effectively destroyed by China being able to import into South Africa with either very low or no tariff regime. That wiped out pretty well the textile industry in South Africa.

Historically - I am sure you have all seen them - I recall films of Gandhi visiting the North-West cotton mills and arguing about the need for a fairer price for cotton brought in from India. The net result of that was pretty well to decimate the North-West cotton trade. These things have precedence, as we can see and talk about.

I was going to ask you to talk about the point about services that has come up because 90% of London’s economy is services and you have indicated to us some of the consequences of that. One of the concerns that I have about that is the loss of passporting rights into the EU because, if the net result is that each of our financial services or financial tech business or whatever it happens to be has to set up headquarters throughout the EU, that makes them far less competitive and there would be far more bureaucracy and rules and regulations.

The Rt Hon the Lord Andrew Adonis: I agree with everything you have just said. I have come into this late, but all the benefits are theoretical and speculative, whereas the risks of the status quo are huge in all of these respects.

Mr Bootle was just saying that he thought that President Trump might be keen to sign an FTA with us. That is hugely speculative. All we know is what he has said and done, and what has he done so far? He has slapped a 25% tariff on UK steel and a 10% tariff on aluminium. He has said that his intention is to dismantle the North American Free Trade Agreement in its current form. He has said that ‘America first’ is his policy. He has taken exactly the same approach to other nations, irrespective of whether they are allies or non-allies of the US. The list goes on and on of his actions in limiting free trade and seeking to put America first. I did not see any evidence whatsoever that he would adopt that approach.

I do not know if you saw, Chairman, the US Ambassador to Britain’s comments on the Chequers agreement last week. Far from what Mr Bootle is saying, that it will be straightforward, he said that because of the close alignment which we are now proposing to engage in in terms of goods and all the standards that go with it, he thought it was now - I think his words were - “up in the air” whether or not the US would be interested in pursuing with any rapidity a trade agreement with Britain. The idea that we should come out of our current arrangements on the speculative gains of a trade agreement with President Trump -- and by the way, of course, President Trump may not even have control of Congress after November [2018]. There are elections coming up and, for anyone who knows FTAs, the interval between Presidents agreeing FTAs and Congress approving them is huge.

These are hugely speculative issues. The only thing we can be sure about is the potential losses if we get this wrong from departing from current arrangements. The Prime Minister appears to realise that because what the Prime Minister is doing step by step is seeking to entrench current arrangements in her negotiating position with the European Commission.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Lord Adonis did not hear the previous discussion and, anyway, I think everyone on the panel agreed that the Chequers agreement would inhibit FTAs and that is one of the reasons why we think it is a very damaging agreement.

Actually, you can turn that argument on its head that Lord Adonis has just made and say that, until the last few weeks, an FTA with the US did not actually matter that much. The average tariff in the US is about 1.5%. There are regulatory things we would want to overcome, but there are regulatory things that they want to overcome that we would be less happy about giving up, particularly in the National Health Service (NHS). However, now that President Trump is starting to throw his weight around or throw the weight of the US

around in trade, it becomes rather more important. If he wants to have a trade war with the EU, it might be really quite good for the UK to stay out of that.

The Rt Hon the Lord Andrew Adonis: What evidence is there that he is going to give there a free pass? Is there any evidence? We have to deal in evidence here. There is no evidence at all that he will do so, none at all, none whatever. It is purely speculative.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): I have heard Lord Adonis talk about these things before and I think it is very hard for Lord Adonis to see a glass of water without seeing it as half-full or a quarter-full. Everything is always so difficult.

The Rt Hon the Lord Andrew Adonis: These things are difficult.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Of course, it may be true. Perhaps President Trump will not --

Andrew Dismore AM (Deputy Chair): If we are talking about the Transatlantic Trade and Investment Partnership (TTIP) agreement, that is something that was actually on the cards, albeit preceding President Trump, and that was the negotiation between the EU and the US for a major trade deal. That collapsed for a variety of reasons and, as far as the UK was concerned, you are right in saying that we were concerned about the impact of private companies on the NHS and a whole range of other things as well. If the EU was not able to negotiate a TTIP agreement and if we tried to negotiate it, presumably we are going to get even better than what was on offer under the TTIP. Presumably, also, it was going to be considerably worse because of the differential in marketing power between the EU and the US blocs, which are more or less, I suppose, equivalent players, as opposed to the UK, which is obviously still part of the EU but still much smaller.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): You cannot necessarily assume that for reasons we were talking about before with the oranges situation. All I do know is that [President] Trump’s trade secretary seems to have made positive noises and we shall see.

I just want to make one pretty important point in response to Caroline’s [Russell AM] question about free trade. One thing we have not brought out about the Cambridge Econometrics report yet is that it does say that almost under any arrangements GDP in London would be lower, but also - and this received no publicity at all and did not receive any publicity in the report - the result of the modelling was that GDP per head - ie living standards - would be higher in London under any scenario. Therefore, that would also be true if there were no tariffs.

I can see Andrew [Dismore AM] looking sceptical at that. It was not brought out --

Andrew Dismore AM (Deputy Chair): The argument is not that we leave and we would be better off or not. The outcome is that we will be less worse off.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): No, the report clearly shows that living standards would be higher. The best outcome for living standards in London would be no trade deal. This does not appear specifically in the tables. You have to compare the change in population with the change in GDP. GDP goes down but population goes down more and so GDP per head is higher. That has not been brought out anywhere and it is terribly important that we

put this on the record. The Cambridge Econometrics report says that any form of Brexit, especially no deal, would be beneficial for living standards in London. Perhaps we could ask Ben just to --

Ben Gardiner (Director, Cambridge Econometrics): Yes. What you will find is that it is the hard Brexit scenarios, four and five, where we impose a much stricter migration restriction, although, again, we can debate the ability to restrict net migration until the cows come home. There, we do restrict population and London’s population comes down more because it relies more on inward migration to support that; whereas, on the GDP side, because London has a higher proportion of productive and resilient sectors, which we would expect, what comes out of our modelling is that they bounce back more quickly from the shock. Something which really has not been explored at all in any of the studies thus far on Brexit is the resilience of places to recover from a shock such as Brexit. They are treated very much as static shocks when something happens and then it all goes downhill, but London has shown time and time again that it can rebound more quickly and can regroup itself. The GDP aspect and the productivity does bounce back but the population does suffer and so I fully admit that in the hard Brexit scenario you do get an effect on GDP per capita.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): In every scenario for London.

Ben Gardiner (Director, Cambridge Econometrics): It is not something I would necessarily lead to --

Susan Hall AM (Chairman): The point being that it is a shame that the positives of Brexits have not been brought out in your report at all. It is more the negatives, which is a shame because I accept that.

Is the Government’s plan for EU exit set out in the Chequers statement a good EU deal for the UK? If not, how should it be improved? I accept unreservedly that you have only a little sample of what you think it is going to be, but if I could just ask for a few words from all of you? As Lord Adonis has not said --

The Rt Hon the Lord Andrew Adonis: It would be a terrible deal because it completely excludes services. Since services are the overwhelming mass of the London economy, it would be terrible. Also, it is not a negotiable deal because the boundary between services and goods is so complex that anything short of either a Swiss or a Norwegian arrangement - either the European Economic Area (EEA) or a very complex web of bilateral treaty arrangements which get to pretty much the same place - looks to me to be virtually impossible to negotiate. It is an opening gambit for a negotiation, which if it were going to get anywhere would actually draw the UK’s negotiators closer and closer to Norway, which looks to me like what the Prime Minister is intending to do - she is intending to get something like the Norwegian position but in stages - in order to get an agreement and that would be necessary to get one. Whether that one is better than status quo is itself a matter for debate, but the Chequers proposal itself is an opening gambit for a negotiation, which looks to me could not possibly be concluded on anything like that three-page statement.

Susan Hall AM (Chairman): Thank you.

Andrew Dismore AM (Deputy Chair): Will the EU accept the Chequers agreement?

The Rt Hon the Lord Andrew Adonis: No, of course not, and the Commission has already said that.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): I have very little to add to what Lord Adonis has just aid. It seems a strange and disastrous agreement and, because there is so little in it on services, there is very little in it for London.

Roger Bootle (Chairman, Capital Economics): For the first and possibly only time this morning I am going to agree completely with Andrew Adonis. What we have here is a deal that is concocted really for political reasons. It is all about balancing [The Rt Hon] Mrs May’s [MP, Prime Minister] political position. Very few people from either side of the debate would have wanted an outcome quite like this. As Andrew Adonis says, it excludes services, which is the bulk of the economy. For Brexiteers it is a dog’s breakfast and for the other side it is probably something very similar.

I also agree with him that the EU is not going to accept it and so this is very much the beginning of the negotiations or it may also be the end. We are probably getting to a position now where the most likely outcome is one of two extremes: that is to say we do not leave at all or we leave without a deal.

The Rt Hon the Lord Andrew Adonis: I agree with that. Can I establish points of agreement? I agree with that. Those will turn out to be the incentives.

Susan Hall AM (Chairman): I am going to go straight to Ben while we have an agreement between you, gentlemen. Quick.

Ben Gardiner (Director, Cambridge Econometrics): If I can add to the agreement, you could argue good relative to what? It is not a good agreement at all. It is the worst of all worlds, really. It does not really answer any of that camp’s particular criticisms. It will not be accepted by the EU. That is for sure. It does not cover services, as you said, and so really it is more of an academic debate or, as Andrew [Adonis] said, perhaps a starting gambit to further push the UK back towards the EU.

Susan Hall AM (Chairman): Is there anything in it, gentlemen, very quickly that made you think, “Deep joy. This is great”? Is there anything in it that you think would be a positive? All right. We will move on. Thank you.

Andrew Dismore AM (Deputy Chair): We have started on London, which most of the Assembly are looking at most intimately, but obviously it is the context of the bigger picture. I just want to look at some of the sector-specific impacts as well. As everybody has said, it is a somewhat mixed picture across the major indicators. Some of these issues were looked at, but am I right in saying that the parts of the economy could be affected, but the financial and professional services, science, technology, creative and construction are potentially the ones that are going to be affected, in particular hospitality and construction, which, as you said, is dependent on migrant workers?

Ben Gardiner (Director, Cambridge Econometrics): Yes. As we discussed at the beginning, our results are the culmination of the three main effects. One is the trade effects, the tariff and non-tariff barriers. For London we have already agreed that most of those effects are going to come through non-tariff barriers onto the service sectors, which, again, are going to be difficult to capture in their effects.

Secondly, you have investment effects, notably through uncertainty at the beginning, which we have already seen happening, and also in the longer term through FDI and making the UK a less attractive place to invest. Again, these things are already happening. They are visible in the data. You can argue on one side or the other about the causes, but the direction is fairly clear.

Also, you will get investment effects which are what we call induced by the trade. If trade causes friction in the economy, it will tend to lower output and that will lower investment as well, and so you get a double effect there.

Then you have your migration effects and migration of unskilled labour, which often goes into the hospitality and construction sectors, and also skilled labour in the services sectors, which will also affect London. Depending on the sector, you have different effects coming in. Construction and hospitality are more affected by migration of low-skilled labour, whereas some of the other sectors are high-value-added and are going to be more affected by FDI but also by non-tariff barriers and regulations and migration of skilled labour. If you look down the sectors and see the different effects, there is not one effect taking place there. It is the combination of all three interacting together and how that melts together in London.

Andrew Dismore AM (Deputy Chair): Could I pick up on one of the things that you said about effects that are starting to happen with some more general questions? Post-referendum, we have seen effects already starting to happen with EU workers coming to London or going back home. Focusing on that particular issue, we have already seen that. Is that an indicator of what is going to happen over the in the future?

Ben Gardiner (Director, Cambridge Econometrics): Yes. You could see effects already happening because of the uncertainty of the situation and it is largely the same effect that is happening for investment. Businesses do not like uncertainty and, if there is uncertainty, they do not want to invest. If people do not know the situation they are going to be in in two or three years’ time with respect to their citizen rights and whether they will have to sign visas and whether it will be more expensive for them to stay in the UK, it just creates an atmosphere where they ask, “Why stay here? Why not go somewhere else?”

We are already seeing these effects. The people who are mobile are the ones that typically at the moment are more skilled and so you are seeing those effects coming in first, but, also, there are effects on the low-skilled labour when people are not coming to the UK. That is also caused by the fact that sterling has depreciated and so it is less beneficial for them to come to the UK. They may as well stay somewhere else or go to other countries within the euro zone. We are seeing effects already and those will continue as long as uncertainty prevails and the Government does not have a proper position on these things. That will at least end the uncertainty and reduce some of these effects. It will still create some negatives regardless of what happens as a result of any agreement, but we are seeing the effects already.

The Rt Hon the Lord Andrew Adonis: I came in at the tail end of this conversation about modelling. Modelling always has so many variables and always is of limited use, but modelling what happens if the population declines or as a result of changes to free movement as against GDP -- it may be right that the GDP will hold up even as population declines.

We have had a period of no net migration into this country or not much, which was between the Commonwealth Immigrants Act 1968 and the expansion of the EU to Central Eastern Europe in 2004. That was a terrible period for London. That was the period when I grew up in London. The London economy was sluggish. Its population was in decline. Its public services were in a deplorable state. The idea that somehow closing the borders, which we did quite effectively then - the 1968 Commonwealth Immigrants Act pretty well closed the borders to new net migration - was anything other than negative to the economy of London is for the birds.

You have to be very careful what you wish for here. Let us be clear. What has happened since 2004 has been almost unmitigated benefits to the London economy. It may be that for understandable political reasons there needs to be changes to it, but there is no evidence from what has happened since 2004 -- because London is such an extraordinary magnet as a world city to people who are ambitious, whether they have low skills or high skills, and who want to make their way, an extraordinarily successful magnet. Anything that limits there is likely to be damaging to the London economy. There may be good reasons for inflicting that damage, but from the viewpoint of London the question is how to mitigate the damage, not how to somehow reap

advantages from it, because it does not appear to me in anything other than the short term - when the economy holds up better than the declining population - that it is beneficial.

Just a final point from as a historian taking a long view of these things. Cities can rise and fall in their reputations quite quickly. London was not a great and attractive place to come to in the 1970s. A set of changes in the 1980s that created Canary Wharf, the ‘big bang’, the expansion of the EU, and Britain being a member of the EU made London very attractive. However, cities can go quite rapidly into decline. Look at the history of Montreal over the last 30 years. There is big political uncertainty. Is Canada going to break up to turn Montreal from being what was a world city into being a regional city quite rapidly? Look at the history of Paris over the last 200 years from being Europe’s capital, effectively, to being an also-ran against London.

From the viewpoint of London, which of course is what your Committee is concerned about, anything that reduces London’s international economic competitiveness, including its attractiveness to highly ambitious skilled and unskilled workers, would, on the basis of what we have seen just in the last 50 years, be very detrimental to the London economy.

Susan Hall AM (Chairman): I saw Graham first and then Roger [Bootle].

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Thank you. I love the way Lord Adonis ties the history of London to his favourite themes.

The Rt Hon the Lord Andrew Adonis: That is what you would expect of me, is it not? That is what I am here for.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Increasingly, it is what I expect of him. The big thing in the long decline of London until its recovery from the 1980s was of course regional policy. It was the policy of the UK Government to take jobs and people out of London to new towns. It is not generally remembered now, but all manufacturing firms had to get what was called an Industrial Development Certificate, which was very rarely granted in London. It was not a matter of cost or anything; you could not get Government permission to open a factory in London.

The reason for this of course was they wanted the factories to go north, to go to Northern Ireland, Wales, Scotland and the North East, which they did. The dismantling of that policy from the end of the 1970s reversed the situation. London has since done well, partly for the reasons -- migration was not a driver but the deregulation of finance obviously was. The other side of that is the disadvantaged regions have done worse over that period and so it just depends on the way you look at it.

Could you just quickly repeat your original question? There was something in that I wanted to come back on.

Andrew Dismore AM (Deputy Chair): The impact so far post-referendum and pre-Brexit on the London economy. Did we, for example, see the impact of people not coming to the UK, as Ben [Gardiner] said, the drop-in sterling and the drop in inward foreign investment?

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Yes, I did want to make a point on migration. If you look at the last 15 years, particularly since the opening up to Eastern Europe, what has happened in the UK as a whole - and very much in London - is that something like 4 million new jobs have been created.

This is often trumpeted by the Government as a great success and that UK job creation is much better than the rest of the EU, but three quarters of those jobs have been taken by people who were not born in the UK. The business model of the UK has been one of creating large numbers of jobs, the majority of them minimum wage or low-wage jobs, in the UK and bringing in millions and millions more people with all sorts of social and other consequences which are not borne by the companies that are bringing them in. We can understand why the companies want to do this. The labour force generally is very good and efficient and people work very hard. They often are rather better educated than the British equivalents and they will do jobs that the British will not do at the wages being offered now.

If this flow, particularly the flow of low-wage labour, is turned off after Brexit through immigration controls, there will be consequences. A number of activities which are currently done, particularly in food processing and agriculture which does not affect London so much but also in restaurants and catering more generally, some of that activity is going to cease to exist because the wages will go up. It will no longer be economic and the UK will start to change.

Brexiteers like me have to face up to the fact that there will be job losses, but the business model of the UK just is not sustainable. We cannot just keep bringing millions of people in from the rest of the world to do low-wage jobs in the UK.

If we talk about agriculture, my last point, why on earth do we grow leeks and need Lithuanians to come and pick them? Why not let the Lithuanians grow leeks in Lithuania and we will buy them from them? That is a much more sensible way to run an economy.

The Rt Hon the Lord Andrew Adonis: Do you think that if the Lithuanians cannot come here to pick the leeks, somehow the leeks will then all miraculously return to Lithuania and grow there? Economies do not work like that, do they?

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): We are talking about future flow --

Caroline Russell AM: More emissions from transport?

Andrew Dismore AM (Deputy Chair): What about construction? Construction is affected.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Construction and hospitality.

Andrew Dismore AM (Deputy Chair): Nearly half of construction employers in London are reporting difficulties in recruiting post-referendum.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Companies are going to have to train [employees] much more. That is the big scandal in this. Companies’ expenditure on training has slumped since the East Europeans were available. It is cheaper to get good Europeans already trained, trained construction workers, trained people in all sorts of areas, as well as of course in the NHS, doctors and nurses.

This is a big aspect of why this is not a sensible business model for the country as a whole. It is sensible for companies. One of the things we have to realise here is that the interests of companies are not always coincident with the interests of the country as a whole.

Roger Bootle (Chairman, Capital Economics): I have two brief points. First of all, one of the consequences of the Brexit chaos in which the Government is enmeshed is that they have not properly developed a migration policy and we do not know what the migration regime will be and what they want. This is yet another area - a very important area - where everything is up in the air, frankly. It makes it very difficult for people to plan. It makes it difficult for individuals to know what their rights will be coming and going and so on and so forth.

Secondly, I want to tackle this question of what is good for ‘the London economy’. There is a conceptual issue here and people have to ask themselves some pretty hard questions. What do you mean by ‘the London economy’? Is it true that the more people who come to London, the bigger the London economy will be? The answer is almost certainly yes. Assuming that they are working and they are going to be creating some sort of activity or performing some sort of economic task, the London economy will be bigger. Presumably, you might want to say that bigger equals better. I do not know. Therefore, what should be the objective of a body like this? Should you be wanting to maximise benefits for the London economy such that that means you want the London economy to be bigger? This is a pretty crude way of approaching economic welfare, I have to say.

There is another set of questions or criteria you might want to follow and that is to say, “Should we be asking what is in the economic interests of the existing inhabitants of London?” It will not necessarily lead you to the same answer because it is possible that you could make the London economy bigger by allowing in lots of extra people who work and produce economic activity, but in the process, you lower the living standards of the people who are already in London. You are not bound to, of course. It might go the other way. It might actually mean that you do enhance the living standards of people already living in London because these people bring valuable skills, contribute to London’s international reputation and so on and so forth.

However, I must emphasise this very important conceptual question. We must be clear. We must not just parrot out, “It is good for the London economy”. I want to know where the London economy lives. What does it eat? What is the address? Who is this person? I do not know. I understand Mr and Mrs Bloggs at 39 Acacia Avenue, Croydon. I understand. We need to be absolutely clear about whose interests we are talking about.

On the question of doing jobs that British people do or do not want to do - and Graham [Gudgin] wisely added the rider “at the existing wage” - one must not underestimate the ability of the economy to adapt through the price mechanism. I am not saying that we should therefore stop immigration, very far from it. It is in our interests and even in the interests of the existing inhabitants to have a certain flow of immigrants into this country, but we must not just assume that, if particular groups of people do not come in and there is therefore a shortage of workers in that industry, nothing will change. The economic system adapts and one of the things that will change - there are several things that Graham mentioned - is that domestic firms will do more training. The price of that labour that was no longer available would go up and that would encourage more people into those activities and discourage the consumption of those things. This is an integrated system and it has to be thought of that way.

Andrew Dismore AM (Deputy Chair): Can we just come back a bit before [Lord] Andrew [Adonis] comes in? I consider the logic of what you are saying, but what about public services, which are also being hit by austerity? The thing we hear all the time about is care homes, which have problems paying their way even as things stand with the money they get from the Government or local authorities. What about the NHS, which is reliant on overseas staff? We saw that the Government has had to change the rules because of the long-term trend on training more doctors. The problem still remains with all the other workers in the NHS. How are we going to afford to pay them lots more with the overall economic picture?

Roger Bootle (Chairman, Capital Economics): I do not see how that question bears on what I said at all, actually.

Andrew Dismore AM (Deputy Chair): If you are talking about Mr and Mrs Bloggs at 39 Acacia Avenue, Croydon, they will want to use the NHS. They may want to move into a care home in due course. At the moment, both of those services - also the rest of the country but London in particular - are dependent on overseas workers. The problem we also have is paying for those services. If the net result is that because of the shortage of people, therefore we have to pay higher wages, where is the money coming from?

Roger Bootle (Chairman, Capital Economics): I will try to answer that quickly, if I may. These are just particular industries or sectors that fit perfectly well within the framework that I have laid out. If you want to follow these criteria, by the way, of trying to maximise the economic welfare of Mr and Mrs Bloggs existing in this country already, that welfare is bound up partly with the state of public services including the NHS. If it is the case that the availability of those services is going to be hugely impaired by the fact that fewer people are coming in, that is a very powerful factor to put into your assessment of what the economic interests are. I am not saying do not pay attention to it at all; I am just making clear a very important conceptual point that this concept of ‘the London economy’ or ‘the economy’ and what is good for this does not have any economic content. It is flabby conceptually. You have to be very clear about what it is that you want to improve and what you want to optimise.

The Rt Hon the Lord Andrew Adonis: It is very important to beware of simplistic economic models and causation. This idea that somehow because we have less immigration therefore our training system will dramatically improve is not borne out by history at all. I am a former Education Minister who spent the best part of 10 years reforming schools in order to improve training levels, particularly in London schools. I was Minister for London Schools for four years and did a huge amount of work, including with colleagues around the table. Andrew [Dismore AM] and I did a huge amount to invest in improving London’s schools.

The period when we had almost no net immigration coming to Britain at all is also the period when we had absolutely deplorable standards in our schools. Why? The markets do not work in these ways. We had very inefficient public services and a very poor quality of school leadership. We found it very hard because of all kinds of rigidities to attract good, high-quality graduates into teaching. Inner London schools in this period were amongst the worst in terms of standards in the country. Indeed, on my tombstone will be written, “Reform of London schools”. It was a massive, really difficult and tough job.

It was actually in the period while we had big immigration coming in after 2004 that we also brought about radical improvement in the quality of London schools, thanks to the work of the central Government working partnership with the boroughs where you, Chairman, and other Members of the Committee all come from. There was in fact a virtuous circle.

Actually, as I look at it, because these are complex interactions, the impact of migration into London and very dynamic migrant communities, as I look back on it, helped the process of reforming schools because what you had was extremely dynamic parents, immigrant parents in particular, who were not prepared to accept substandard education and schools. They, interacting with public service reform and ambitious school leaders and Teach First and a whole lot of other things that were happening, brought about a dramatic improvement in London school standards, which also benefited - perhaps particularly benefited, actually - the indigenous London community, which had been so short-changed by poor school standards before.

You cannot make a direct and simplistic connection between low levels of migration and therefore high levels of training. On the contrary, if you look at what has actually happened in London over the last 50 years, it was a period when we had the highest levels of immigration into London that also saw the most dramatic improvements in the quality of training and education in London, particularly benefiting the indigenous population.

A second point, if I may. The biggest weakness about the UK training system at large - and I am afraid this is also true of London - is our apprenticeship system, which we have never yet managed to get right. There are complex reasons for that and, Chairman, if you want me to, I could give my views on it, but it has emphatically not been directly related to particular levels of immigration. We had a useless system of apprenticeships before we had high levels of immigration into Britain with the enlargement of the EU and we have a useless apprenticeship system now. The interaction has not been straight. The idea that companies were brilliant at training before we had large-scale immigration I am afraid is a complete myth. They were terrible at training before and they are terrible at training now.

There is a really important London imperative for continuing to improve the quality of schools. In the report I presented to the London Assembly recently from the King’s Commission [on London], which looked at the future of the London economy, one of the two things that we highlighted as most important to the London economy irrespective of Brexit is sorting out further education in London - further education standards in London are far too low - in conjunction with the apprenticeship system. That has to be done either way, but I certainly would not say that somehow depressing the supply of immigrant labour to London is going to spontaneously produce big improvements in the quality of company training and educational standards. That is not borne out by the history of London in the last century at all.

Susan Hall AM (Chairman): If we can try to keep it towards Brexit because, if not, we keep understandably veering.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): I do not disagree factually with the things that Lord Adonis has said.

Susan Hall AM (Chairman): Goodness. That is twice.

The Rt Hon the Lord Andrew Adonis: We are forming a strong consensus.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): That was just a rather lovely argument that we need to bring in ambitious foreigners because the dozy Brits will not do the job quickly.

The Rt Hon the Lord Andrew Adonis: I did not put it quite like that. That is a gross simplification.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): No, I agree. You did not quite, no.

The Rt Hon the Lord Andrew Adonis: What you need is really excellent Ministers of Education who can get to grips with public service reform. That is that what you need.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): I had two nephews at the time who were going to Rotherhithe Primary School, which I

discovered had the seventh worst records attainment records in the whole of the UK, not just in London. The schools were pretty bad. That cost me a lot of money, actually, to put that right for our particular family.

Look, Andrew has just sidestepped the key issue. It is true that company expenditure on training has slumped since the East Europeans became available. It is very hard to get companies to spend money on training. They do not want to spend money if they can get the labour more cheaply. If there is a supply of labour, this is Karl Marx’s reserve army of labour. I would have thought a Labour peer might have some sympathy with it.

The Rt Hon the Lord Andrew Adonis: No, I tend not to follow Karl Marx very closely, I should say.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): That is the problem with a lot of the modern Labour Party, but we will leave that there. It is very hard to get companies to spend money on training. If they have an alternative route, they will avoid that. I absolutely agree that there has been a huge long-term problem with apprenticeships.

Actually, this is relevant to Brexit because Brexit is in some ways a revolt of the working classes and part of that revolt has been that UK education policy for all of my life - and I am now in my 70s - has emphasised universities. It has emphasised, really, the welfare of the children of the middle classes and the vocational training system has always been unsatisfactory. It has been reformed time and time again, always half-heartedly. The latest reform is completely half-hearted. We need to do something about this, but that is independent of Brexit. We need to do that anyway.

Andrew Dismore AM (Deputy Chair): Just to follow up on that last point about the revolt of the working classes, it is important to note that the working class voted to remain.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Not the working classes in London.

Andrew Dismore AM (Deputy Chair): Anyway, what we are going to go on to is the question of regulations. There is an assumption that EU regulations are bad and we can do better ourselves and so forth. Maybe I will start with Andrew. What is your view of the organisation and regulations and the potential of divergence in regulations depending on what they all come up with?

The Rt Hon the Lord Andrew Adonis: Of course, the Government’s position is not to have a bonfire of regulations. Indeed, the Prime Minister yesterday was very clear in the House of Commons that the Chequers agreement is about high standards of environmental and social regulation. She said in terms that she does not see those standards falling below those which currently apply with directives and other obligations that come from the EU. That is a theoretical debate. The Government itself is not proposing that we start having a bonfire of regulation. On the contrary, it has gone out of its way to make firm commitments that we are going to keep broadly the same regulatory structure when it comes to environmental and social regulation. Although I can see that theoretically there might be some economic benefit - and some free-market economists take that view - it is not in the real world because it is not going to happen.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): This is becoming repetitive but I largely agree with that, but of course there are some regulations. In Boris Johnson’s [MP, former Secretary of State for Foreign Affairs] resignation speech yesterday he mentioned one. He has been trying to get lower windows on London buses for safety reasons for ages. He has been slowed down in doing that or prevented by the --

The Rt Hon the Lord Andrew Adonis: I am not absolutely sure that that is true.

Caroline Russell AM: It is not. There is a press release from 2015 where Boris Johnson achieved those lower windows and the lorry safety regulations and so he has been playing that one in two ways.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): I defer to your greater knowledge.

Roger Bootle (Chairman, Capital Economics): Briefly on manufacturing, again, I agree with Andrew [Adonis] on this particular thing; that is to say that it is not Government policy to diverge greatly on regulatory standards. That does not of course mean to say that it is right. It does not mean to say that that policy is going to stick. It does not mean to say that it accords with the case for Brexit. As I said earlier on, before you [Lord Adonis] arrived, if there is an economic case for Brexit, it rests on a number of pillars. One is the ability to do your trade policy independently and another is the ability to diverge on regulatory standards. This is another sense in which, from a pro-Brexit point of view, the Chequers agreement is really a dog’s breakfast, as I described it earlier on, because it is. I agree with the Government’s approach.

On that question of regulation, what importance should be attached to it? First of all, with regard to selling into some export market or other - the EU, for instance - if the UK overall did not obey EU regulatory standards, it would still of course be possible for particular industries or firms to comply with those regulations, just as when we export to Australia, Canada, Japan, the US or whatever we have to obey those country’s standards with regard to the goods. That is absolutely normal.

It is very common for people who are not economists, dare I say it - and I am not the greatest fan of economists or economics - to fall for the idea of high standards being some costless desideratum which must be followed come what may. Regulatory regimes are often imposed as a way of constructing a protective barrier around existing producers. They are often just protection by another name. This is true in the EU, I would argue, quite extensively. This is a debate we would have to have. Whether we are going to have it or not I do not know, but certainly in my own case and I think others on my side of the debate, we are not talking about a bonfire of all regulations. That is clearly ludicrous because we have to have regulations. The question is whether we can we do better and whether we can construct a regulatory regime for ourselves which creates a better balance between the extreme regulation, I would argue, of the EU and a looser and lighter form of regulation.

Andrew Dismore AM (Deputy Chair): I have a last question from me. It is about the services sector, which we have talked a lot about. Do you think it is important that the services sector is able to diverge after Brexit or is it going to be better to stay in line with the EU?

The Rt Hon the Lord Andrew Adonis: What is interesting is to listen to what the representatives and leaders of the services sector say themselves and they absolutely do not want to be diverging. They have been very clear. If you listen to what London First has been saying, most of its members are the leaders of London’s major services sectors and they want to stay and have been emphatic that they want to stay in a Single Market and they want to stay in the Customs Union. They are particularly emphatic about the Single Market, precisely because of the regulatory union which we have, which creates huge new opportunities for them in terms of expanding their businesses.

That of course was the reason why Margaret Thatcher [former Prime Minister] went so hard on the Single Market in the first place. The history of this is quite significant. The Single European Act which she signed up to, which is what made possible then the services directive and all the moves on the side, was driven by a

Conservative Prime Minister in Britain who wanted to cut through massive protectionism, particularly on the part of France and Germany. This is what happened and it is the reason why she agreed to all the qualified majority voting provisions of the Single European Act because, otherwise, it would not have been possible to have got agreement on all these changes. Those have been huge gains for the British economy and in particular the London economy because we are so strong in those service sectors.

The leaders of those sectors themselves do not want to see -- obviously, there are particular regulations and things like that which they are constantly arguing about and quite rightly so because it is very important that we get these things right, but they do not want to lose their seat around the table and they do not want to lose the regulatory union. They see both the loss of influence and decision-making in creating the regulations and the loss of the principle of the regulatory union, which is what the Single Market is all about, as losses and potentially very significant losses over time.

Therefore, the right negotiating position for Britain in my view would have been, if we are leaving the EU, to have achieved a situation similar to Norway or Switzerland, whichever it was most possible to negotiate with, but finding - because we are much larger economy - influence them on the making of the regulations even though we are formally outside. That in practice could be reasonably significant, but that is not the Government’s negotiating position at the moment. The Government’s negotiating position is a union in respect of regulations and tariffs on goods but neither in respect of trade in services. That is not what the leaders of these service industries want at all.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Perhaps the Assembly Member can put me right on this. My understanding was that Switzerland did not have a finance agreement with the EU.

The Rt Hon the Lord Andrew Adonis: There is a whole set of bilateral agreements. This is the point. They do.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Yes, but they do not have a finance agreement.

The Rt Hon the Lord Andrew Adonis: Some of them do, actually, as it happens, but it does not cover the entirety of their financial services.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): It does not cover banking.

The Rt Hon the Lord Andrew Adonis: Yes, it covers quite a --

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Switzerland does not seem to have done too badly in banking in that situation. There is an obvious danger in the UK tying itself to EU regulations, particularly in finance and banking. We have been able to mould those regulations in the past with a lot of pressure coming to do things in a very different way on fund management and salaries in banking and so on. Without the UK there in future, there will be much more freedom for the EU to do the sorts of things it wants to do on finance. A lot of people in the EU do not like finance and London has been a constraint or the UK has been a constraint on what they can do. They are likely to be more antagonistic to finance in future and it is very important that we are not tied. If they are throwing an anchor overboard, it is very important that that anchor is not attached to our ankles.

Roger Bootle (Chairman, Capital Economics): I have found a note of disagreement with Andrew.

The Rt Hon the Lord Andrew Adonis: Thank goodness for that.

Roger Bootle (Chairman, Capital Economics): As I say, on the reports of listening to the representatives of these trade bodies or these sectors, they are nearly always conservative - ‘conservative’ with a small C - in defending the status quo. I would not be particularly concerned if they are all clamouring to stay in the Single Market.

Again, there is a big area of capacity, really, about exactly what we would do if we followed the Chequers agreement - that is to say we were able to diverge as far as the services sector is concerned - with regard to our regulations. We do not know what the Government would intend and how that would be compatible with what the EU system would allow.

There are some particular regulations, for instance, which achieve reform. I will not say “abolition”. There is the Working Time Directive, for instance, which has had a major impact on a number of bits of society. Arguably, the NHS has been severely affected by this. There is the Clinical Trials Directive, if you listen to what Professor Angus Dalgleish [Professor of Oncology at St George’s, University of London] says about the impact of that on Britain’s position as a country that is very prominent in the development of various treatments and drugs. There is a whole series of areas where, whatever the losses will be from being outside the Single Market for services and there presumably would be some losses, there is scope to make up for them but only if we follow a path of some regulatory divergence, it seems to me. If we sign up to losing the things that we are going to lose and then keep everything else the same, then that does not seem to me to be very clever.

The Rt Hon the Lord Andrew Adonis: I agree with that point completely, but the conclusion I draw is that it is not very wise to be leaving in the first place.

Ben Gardiner (Director, Cambridge Econometrics): Just to follow up, I agree with many of the comments. London, we know, is less Eurocentric than many of the places that have been talked about already and so London has already benefited massively from globalisation and globalisation of services and it acts as a hub. It will suffer, in a sense, less in other areas of the UK from the divergence from EU regulations.

That is not to say that it would not suffer. If UK companies were treated the same as US financial companies, for example, treated as third countries, undoubtedly that is friction that you are adding into the system which will cause issues.

The uncertainty is on the other side. What new regulations would happen? These are all uncertain things that we just do not know about. Until someone can come up with a way of capturing those and modelling those or putting a scale on the effect of the benefits and the flipside of it, then it is all supposition.

Caroline Russell AM: We had quite a lot of agreement just earlier about whether it was most likely that either we will not leave or we will leave without a deal. You seemed to all be coming to some agreement. The Prime Minister has stated that a no-deal scenario is preferable to a bad deal.

Leonie Cooper AM: Did she? When did she say that?

Andrew Dismore AM (Deputy Chair): Ages ago now.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Yes, a long time ago.

Caroline Russell AM: She has said it.

Leonie Cooper AM: She has said it about 100 times.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): It is ancient history.

Caroline Russell AM: Also, we know the Chancellor of the Exchequer in the Autumn Budget said that the Government had set aside £3 billion over the next two years for the costs of leaving the EU in addition to the £700 million that had already been spent to prepare for a no-deal scenario. We have heard from this report that potentially there could be 87,000 fewer jobs in London and also that the professional financial services could be worse hit with 29,000 fewer jobs by 2030. We know that a no-deal scenario would mean that, as well as WTO rules applying, businesses would lose their passporting rights. Our membership of regulatory agencies would cease overnight and also that getting the UK out of the Customs Union would require a lot of bureaucracy and also cost for business to manage that process.

My question is - and I will start with Lord Adonis - how realistic is the prospect of no deal? Is there any scenario whereby a deal with the EU should be rejected?

The Rt Hon the Lord Andrew Adonis: This is a really important question not least because one of the items on the Chequers agenda, which Boris Johnson [MP, former Secretary of State for Foreign Affairs] made something of yesterday in his resignation statement, is that we should up our preparations for no deal. The Prime Minister did a massive disservice to the country and to the debate by saying that no deal is better than a bad deal because what has become clear since - and is now in fact accepted by the Prime Minister and the Government - is that no deal meaning no deal and so the actual meaning of the words, we have no withdrawal treaty with the EU and so we simply leave without a treaty of agreement with them, would be calamitous for the economic and social life of this country. If there is literally no deal next March [2019], planes do not fly. There is not going to be enough petrol in the pump. There will be 50-mile queues at the Port of Dover. We would have to have an immediate erection of border controls between the Republic of Ireland and Northern Ireland because that becomes the external border of the EU. The Government has accepted all of that. It is the reason why it made the 8 December agreement with the EU last year whereby we have agreed, first of all, an implementation period of 21 months where nothing changes at all, that is a deal. Let us be clear, it is a deal. It is where they also agreed the backstop which is if, at the end of the 21 months in December 2020, there is not then a comprehensive agreement on the economic areas covered by the Single Market and the customs union. If that has not happened, there is this backstop. The backstop is rolling over the implementation period.

The big argument with David Davis [MP, former Secretary of State for Exiting the EU], which was part of the reason why he resigned, is the Government has already agreed that the backstop will not have an end date. Those are both deals. Yesterday, the Prime Minister said in her statement, if you read it, that because of the commitments, which are treaty commitments, that the UK is liable for in respect of the Good Friday Agreement and Ireland, that it is not possible to have no deal. That is the reason why the 8 December agreement is in place.

The 8 December agreement, without which there will be no arrangement on anything else with the EU, commits us to the implementation period and the backstop as being essential to fulfilling the commitments of

the UK under the Good Friday agreement to having no border, hard border that is actual customs controls and regulatory barriers and physical controls between the Republic of Ireland and Northern Ireland. Also, the EU Withdrawal Act that is now a law, under amendments introduced in the House of Lords which the Government has agreed to, oblige the Government to fulfil the terms of the Good Friday Agreement. That is as a matter of law within the EU withdrawal legislation itself.

This idea that there can be no deal is not the Government’s policy. It is not possible without wrenching and stopping large parts of the economic life of the country and without breaching the Good Friday Agreement. As I said, the Prime Minister did a massive disservice to the debate by pretending that no deal was possible. The issue is not no deal. The issue is whether what you have is probably best described as a kind of bare bones type deal, which is implementation period, backstop but not much else beyond that, or whether you have a more comprehensive agreement beyond this. You have a comprehensive deal rather than a more limited deal. Even that is quite difficult.

I am the former Secretary of State of Transport. Unless you roll over without any end date, the European aviation safety requirements and agency and all of that, then planes will stop flying. It does not matter whether it is the end of the implementation period or the backstop or whatever; you have got to have an agreement that goes on beyond that. For that, you can replicate agreements in all the areas of economic activity because, of course, these are all the fruits of 45 years of tying our regulatory and safety regimes into those of Europe.

Even there, even though you talk about a bare bones agreement as opposed to a comprehensive agreement, there will, in fact, have to be a comprehensive agreement between the EU and the UK even if we decide to do what I imagine Mr Bootle would want which is to withdraw from a lot of the existing arrangements of the customs union and the Single Market. Even if you do that, you still have to have a comprehensive agreement dealing with all of the safety, customs barriers and checks and the border between the Republic of Ireland and Northern Ireland and those sorts of issues. In terms of the Committee and what you might be recommending as no deal, it is important to get that out of the debate completely because there will be a no deal scenario. The question is how comprehensive your deal is and how significant the commitments are that you enter into now rather than in subsequent negotiations which might come in three or four years’ time if you decide just to move the whole thing to the right and have these negotiations during the implementation period or possibly the implementation period plus whatever the backstop period is you agree with the EU.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): As long as Theresa May is Prime Minister, there is no chance of no deal. That has been obvious for a long time and the matter of deals and no deals was meaningless right from the start. It is certainly completely meaningless now.

The important thing, and Andrew [Adonis] pointed this out, it is to say what we mean by no deal. What the economists mean by no deal, whether it is [HM] Treasury reports or the Cambridge Econometrics report, there is no trade deal. All the other things, the regulatory things, are terribly important and we must sign up to something. Brussels is using threats on this. You have perhaps all seen that John-Claude Juncker [President of the European Commission] was perhaps working together for the European Civil Aviation Authority, even to talk to the UK Civil Aviation Authority about landing rights. This was a threat. They admitted it themselves. This was to put pressure on the UK negotiators. We should just laugh about these threats really. Can you imagine the situation where we get to next March and the EU says, “Sorry, your planes cannot land”, and we say, “All right, your planes cannot land here”? The Americans and the Chinese and everybody flying into Heathrow and they are wanting to carry on somewhere, “Sorry, you will have to get a bus or something”. The reputational damage for the EU in doing something like that would be absolutely immense.

I feel like a spaghetti Western here, “Make my day, punk”, really. They are not going to carry through on this. Andrew [Adonis] is quite right. We need these agreements. Some are much more complex than others. The whole aircraft industry, a couple of weeks ago, was about these air safety certificates. Again, there was a threat. Because these were issues in Europe, and every component that goes into any aircraft, any component made in the UK has to have a certificate and we all want our planes to be as safe as possible. They said, “We just will not sign any of those certificates”. I think they went even further and said they would not receive ones that had been issued in the past. There are planes all over the world. If they happen to have a UK made component in them, would they suddenly have to stop flying? Again, it is a completely over the top threat that we should not believe.

On the other hand, we do need, as Andrew said, our equivalent national regulatory authority. Almost no work, perhaps none at all, has gone into setting up a UK safety regulatory body to replace the EU one. By the way, any such body has to be recognised by the whole rest of the world. You cannot just set it up and say, “Here it is in an office block”. It is a long negotiating process. We should have been doing that for last two years and we have a problem. I do not think the EU threats on these things have any real culpability. Of course, we will have somebody on these things.

Roger Bootle (Chairman, Capital Economics): I agree with Andrew and Graham on this. The words are absolutely critical. This question of no deal has been very misleading and damaging.

The no deal option means no overarching trade deal and, therefore, it comes to the equivalent of embracing WTO rules. That is what it is, and this is a better phrase to use for that specific thing. It is WTO only. That is the rules you are going to do. Clearly, there are a whole series of issues on which we will need to have a deal. It has been damaging to conflate these two things together. They are quite different.

Of course, the time factor has been disastrous here. The Government has mishandled this appallingly. What is it? Two years we have been faffing about and {The Rt Hon] Mrs May [MP, Prime Minister] stakes everything on getting her special, whatever it is, special relationship with the EU which looks as though it is not going to happen in quite the way she intended. Meanwhile, there are a whole host of these nitty gritty issues which should have been sorted out a long time ago. Those people who said at the beginning that we should have planned for no deal, ie no trade deal, are absolutely right. We should have planned for no trade deal and, meanwhile, got to grips with all these myriad nitty gritty issues which are very important.

Ben Gardiner (Director, Cambridge Econometrics): Yes, I agree with that. Our study, in line with many other studies, is a no trade deal. It is not looking at the difficulties of barriers and Northern Ireland or between the North Irish Sea. It cannot cope with those. If you are going to go down those routes, you need to look at an industry’s specific study and say, “What are the serious regulatory barriers that would happen by a real no deal and what are the implications of that?” That is well beyond the confines of what we did.

The Rt Hon the Lord Andrew Adonis: I do not want to overemphasise the measure of agreement here. If you have no trade deal, you do have a hard border between the Republic of Ireland and Northern Ireland. It is a very important point and that is the precise reason why the Prime Minister has not been prepared to say now that that is an outcome that she thinks is acceptable. The Government’s policy, at the moment, is complete confusion. On the one hand, she says that we should up the preparations for no trade deal but that no trade deal, if it is literally no trade deal, therefore, we are withdrawing from customs arrangements and tariff arrangements and all the regulatory aspects of the market, we would require there to be a border, a physical border between the Republic of Ireland and Northern Ireland. I have always thought this was the Achilles heel of Brexit. Jacob Rees-Mogg [MP, Chairman of European Research Group] who, at least, has the virtue of

being so clear and logical in his thinking, what Jacob has said, because I have been doing endless debates with him now, is that the right way of dealing with this is for the Republic of Ireland also to leave the EU and then agree to have our system of trade regulation and tariffs afterwards.

Logically, there is a certain virtue to that but, of course, it is just straightforward neo-colonialism and it is not going to happen. I have been in Dublin recently and it is not going to happen. The big problem that Roger has to address is how can you have no trade deal without having a border between the Republic of Ireland and Northern Ireland that breaks the Good Friday Agreement? Nobody on the Brexit side of the argument has been able to produce an answer to that yet because there is not one.

Leonie Cooper AM: I wanted to bring it back to London. Interested as I am in the esoteric and practical issues relating to the border between the six counties and the rest of Ireland, it is not in London.

The Rt Hon the Lord Andrew Adonis: No, but we are part of the UK. This is a key point. London cannot play Unilateral Declaration of Independence (UDI).

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): The six counties you are referring to, do you mean Northern Ireland?

Leonie Cooper AM: Yes, I do. There are a number of people who have suggested that London should declare UDI. I do not say that is going to happen either. I wanted to come back to the point which Roger was making about the faffing about issue. Earlier on, we were talking about the obvious impacts that are going to flow from this and the failures of apprenticeships, policies and the idea that we are going to make changes to migration. Have we not been wasting time, and some of this is going to have a big impact on London, we have had two years. We know what happened in the referendum. It was in June 2016. It is now July 2018. Could we not have been making quite a lot of preparations for some of these obvious consequences, it seems to me, if you make these big changes? Some of them are going to have quite an impact on London.

My background is working in construction. Every building site I go on has all the safety notices in four languages. I do not speak Lithuanian, Latvian or Polish but all the safety notices are in those languages for a very good reason. Why are we wasting all this time? We have had more than two years. I do understand that there is still a lot of argument going on but the idea of the no deal, assuming it is all going to go ahead next March 2019, surely preparation is of the essence to all of this.

Roger Bootle (Chairman, Capital Economics): I disagree. I do not think there are any of us here who would defend the Government’s approach to all this. Largely, we have wasted two years.

The Rt Hon the Lord Andrew Adonis: Graham needs to reply on Northern Ireland.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): A couple of sentences. I was one of the special advisors for the First Minister in Northern Ireland for a number of years. I have written extensively on the border issue. Obviously, Andrew has read none of this whatsoever. There are ways of tackling this through a range of means.

My former boss, Lord Trimble, your colleague in the House of Lords who you will remember got a Nobel Peace prize for negotiating the Good Friday Agreement, agrees on this as well. Perhaps we could have a quiet conversation with him.

The Rt Hon the Lord Andrew Adonis: A lot of his colleagues do not agree though. There is a bit --

Susan Hall AM (Chairman): Clearly, Lord Adonis, there is a lot of very good brains that do not agree on a subject and this is why Brexit is so complex because there are so many people and so many genuine beliefs and theories to back them up and it is all contradictory. I would suggest this is why it is taking the Government so long to try to sort these issues out.

The Rt Hon the Lord Andrew Adonis: If I could just make one point. The Government does not agree with Lord Trimble either. This is the salient point. It is the Government’s view, which seems to be what the Prime Minister said about this yesterday, that in order to fulfil the terms of the Good Friday Agreement, and not to have a border, a new hard border between the Republic of Ireland and Northern Ireland that we do need, what the Prime Minister now calls, a comprehensive customs agreement and further regulatory agreements. That is why the agreement of 8 December was made. In fact, the Government does not agree with Lord Trimble either on this matter.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): No, that is absolutely not true, but it is not London.

Caroline Russell AM: Another question here. I wanted to go back to looking at tariffs but in the context of a no trade deal situation. Earlier, Roger, you were talking about what the London economy is and do we make assumptions about if it is bigger, it is better? There has been a lot of discussion within this Committee and also in the Mayor’s Economic Development Strategy about good growth. That is thinking about an economy that works not just for big business but works in the interests of Londoners and for people who are working in these different London businesses.

The question is what is the consequence of any assumptions the report makes about the level of tariffs that would be applied to the rest of the world in the event of a no deal? In particular, would a no deal scenario bring any benefits to the London and UK but specifically London because we are a London body here, economies?

Roger Bootle (Chairman, Capital Economics): We have largely covered this ground earlier on. I do not see major differences between London and the UK as a whole in this regard. We have laid out the structure of the argument. The first thing to say is let us call it the WTO option rather than the no deal; we will just get confused by all that. In a sense, that just gives rise to a whole load of questions, specifically what is your tariff policy going to be? OK, you are going to be trading under the WTO rules, but which tariffs are you going to choose? There is an immediate question, there is an ultimate question. On day one, are you going to impose the common external tariff everywhere? The result of that would be tariffs on imports from the rest of the world stay as they are now but that adverse changes, you imposed tariffs on imports from the EU which, of course, do not bear any. Presuming they are going to stay the same, are you happy with what the day one position would be? Hopefully, you would not want them to stay there. Then you have questions about are you going to set about negotiating free trade agreements with umpteen countries and what period are they going to come to fruition?

There is also the question of are there particular areas, categories where you would not want to impose tariffs, in which case, you choose what those areas are? Again, you see, I do not think any thought has been put into this. It is a big question. If you have the WTO option, ie a no deal in the narrow sense, are there particular areas where on day one, you say, “Right, here you pay top tariffs” just being as an example? Maybe you just do not put any tariffs on at all, whether they come from Spain or from outside the EU. There is a choice to be made there. The Government has not done any preparatory work on it.

The Rt Hon the Lord Andrew Adonis: Can I give a mischievous suggestion? I am confused too. Roger and I might agree pragmatically that so poor has the Government’s planning been on the no deal scenario that the only course which is going to be practical for us next March is to stay in the EU. Even though he might think there are theoretical benefits to be had from a trade Brexit, because the Government has been so poor at doing all these preparatory steps, there is, in fact, no practical alternative to staying.

Roger Bootle (Chairman, Capital Economics): Good try.

Susan Hall AM (Chairman): Perhaps I could just make a comment. You are all very good brains. You all have different views, but the very good people of Great Britain decided to leave Europe, therefore, it is incumbent upon us all to find a way that we can leave. We can talk up London. We can talk up Britain and we can make sure that we deliver Brexit because that is what the good people of Great Britain wanted. There you go. We have both had our comments.

Caroline Russell AM: Given the confusion here about what leaving might mean, it does seem that if people voted to leave, they may not have been voting for the outcomes that we have been discussing this morning.

Susan Hall AM (Chairman): They voted for very different reasons as we all know. They were just concentrating on the economic view of where we are and what we would end up with, at the moment, with a no deal.

Caroline Russell AM: I just have one further question. We have talked a lot about the Government, their lack of preparation. Have you got any thoughts on what the Mayor should be doing to support businesses, both the very small micro businesses who are like the engine of London’s economy, up through to the bigger businesses, the international businesses as they try to prepare for whatever may be ahead?

The Rt Hon the Lord Andrew Adonis: Could I make a comment? The Mayor himself, of course, does not have regulatory powers or is not a party to the negotiations. I am not sure he can do much from that. There is a very important thing the Mayor can provide though from my experience of what is going on in London at the moment. The Mayor has a very important role in providing reassurance to immigrants into this country, EU immigrants into this country at the moment that their rights are not going to be taken away next March [2019], that they are not going to be somehow deported or treated unfairly, that they are absolutely welcome and that we will not tolerate any informal, let alone formal, discrimination against them.

The reason that needs to be said is there is a lot of fear and concern amongst migrant communities as to what might happen. Because he had the bully pulpit and is deeply respected by these communities, my advice to the Mayor would be to be very vocal in providing that reassurance because that hugely matters to our common life here in London and to the families affected, many of whom do fear that they might be adversely affected, both immediately as well as over the medium term, by withdrawal from the EU next March [2019].

Roger Bootle (Chairman, Capital Economics): I agree with that although, of course, there is a limit to what the Mayor can say to give reassurance because we do not know what the regime is going to be. We would not want him to give assurance that appears to be misleading. I agree absolutely with the sentiment.

There is something I think the Mayor can do. Throughout this discussion today, we have talked a lot about London and the UK, what the London interest is. Most of these things and most of these issues, the London interest is the same as the national interest and there is a limit to the extent to which we can divert it. There is an area in which the Mayor does have some leverage which is absolutely critical. He should stick to his

knitting; that is to say continue to ensure that London is a very attractive place to live and do your business and this involves the transport system and crime.

At the moment, one of the things that is detracting the attraction to London is the appalling situation of traffic in the city of which I would make a controversial remark. It has something to do with the policy of his predecessor. There is room for improvement; without dismantling the whole thing, there is room for improvement. Crime, again, very adverse publicity for London in this regard over quite some time. My advice would be to avoid all the highfaluting stuff over which he has no power; stick to the knitting, make London an even better place to live and work than it currently is.

Susan Hall AM (Chairman): The Mayor should be minding his own business on Europe and concentrate on trying --

Roger Bootle (Chairman, Capital Economics): I would not say mind his own business but there is a limit to what he can do, therefore, use his limited energy on the things that he can do.

Susan Hall AM (Chairman): London is a great place to live and work. Ben, what do you think?

Ben Gardiner (Director, Cambridge Econometrics): As a figurehead role for the London economy, what I have written out has echoed Roger’s comments on transport making the city work and presenting the image of London being still open for business and active and doing what he does, visiting different places around the world, not free trade deals but just keeping doors open and ready to go and lobbying for things like skills and training to support the friction that will inevitably occur in whatever deal does emerge.

The Rt Hon the Lord Andrew Adonis: Can I add? We constantly want to try to push the envelope out. Could I also make a suggestion that the Mayor should now support the great majority of these economies in expanding Heathrow Airport which is hugely important to the London economy? He should not be funding, at great expense to London taxpayers, legal actions against a majority of now nearly 300 in the House of Commons. It is clearly not going to be reversed which includes a majority of members of all parties except for Caroline’s. That being the case, the sooner we get on with this and provide the economic benefits that can come from significantly expanding the number of destinations that can be served directly by London, the better for London in terms of its competitiveness and the less of London’s scarce resources that will be wasted on lawyers.

Susan Hall AM (Chairman): He does have a great many Heathrow residents that he is supposed to be representing. The Assembly is unanimous about it. You can relate that to Brexit and the MPs should listen to their constituents. When the vast majority of them say they want to leave Europe, they should make sure that it happens.

The Rt Hon the Lord Andrew Adonis: It is not the case that the majority of Londoners are against the expansion of Heathrow Airport. I said there is no evidence for that whatsoever, Chairman, none.

Caroline Russell AM: There is a huge impact on the health and wellbeing of Londoners from Heathrow but the increase in flights is to do with leisure flights. It is not to do with business flights and there is a lot of spare Eurostar capacity that could be better used.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): It is OK. After we leave, nobody will land there anyway.

Susan Hall AM (Chairman): That is right. No planes will be flying.

Caroline Russell AM: Graham, there is a chance to answer that final question on what the Mayor could do.

Dr Graham Gudgin (Economist, Centre for Business Research, Judge Business School, University of Cambridge): Yes. I have nothing substantive to add. Could I just say as someone who does not live in London, I am enormously impressed every time I do come to London at just what a dynamic and lively city it is? I agree with Roger for the Mayor to keep it that way. It is a great city and it will thrive under almost any conditions.

Susan Hall AM (Chairman): It is indeed a great city. We are very lucky, those of us that live in it and we should talk the city up the whole time, not say terrible things. Doom and gloom, should we or rather when we leave Brexit. Is there anything else any of you have to say?

Andrew Dismore AM (Deputy Chair): One small point on the no deal and that is we should also bear in mind police and security. We heard about this last week, not for the first time, from the Police Commissioner and the [Police and] Crime Committee and that has to be part of something out there.

Susan Hall AM (Chairman): That is fine, that is a valid point. Is there anything any of you would like to say that you have not?

Roger Bootle (Chairman, Capital Economics): Yes, I have one quick point to make. It is about this morning’s proceedings. We have not, on any issue, drawn a distinction between the short-term impact and the long-term eventual consequence. These two things are not the same. Much of what we have been talking about has been the short-term disruption. I am not saying that is negligible and we should not talk about it. We certainly should. Because of our poor preparations, there is quite a lot of scope for substantial short-term disruption. We are making a decision and if you are thinking about the position of London over decades to come, these two things are not the same.

Susan Hall AM (Chairman): Thank you so much, gentlemen, for participating. It is very interesting. It is very complex. It is no wonder we are floundering a bit at the moment, but I am sure we will get there and please the majority.