It is no great revelation that the Cabinet is split on Brexit but the most fundamental split is not one that the mainstream press spends much time analysing. The big divide is between those Cabinet members who want a Canada-style free trade agreement and those who want Norway-style access to the single market. A free trade agreement would mean some upheaval for business but would put Parliament and the British courts in charge. A single market access deal would change little in practical terms for business, but leave power with the European Court of Justice while single market rules and regulations would be made without UK input.
The Chancellor has cast himself in the role as defender of the City, arguing successfully that a minimum two year transition period should run from March 2019, which would give the UK single market access. This would enable the banking industry to retain current passporting arrangements and stop the exodus to the continent of the UK’s one million financial services jobs. While we all like to bash the bankers, sending them away would be bad for us – even if a quarter of the financial industry left due to Brexit, this would represent an economic contraction of 1.8% – a fairly material recession from the contraction of just one key industry.
Even if a quarter of the financial industry left due to Brexit, this would represent an economic contraction of 1.8%
Mr Hammond’s prime motivation is not love of banks and bankers, nor any offers they might make to him when he leaves the job, as his detractors might claim. He is motivated by the fear of being remembered as the Chancellor who let Britain slide back into fiscal ruin. The financial services sector contributes £66 billion to UK tax receipts, representing 11% of total tax take. Lower revenues from financial services would put an end to all hopes of bringing the budget back into balance – even at the top of the economic cycle (as we may well already be).
Yet to many politicians, the banks symbolise a failed version of capitalism: a capitalism which gave the banks the freedom to privatise their profits and nationalise their losses. Critics say that the financial services industry was allowed to grow unregulated, using its muscle to extract unfair profits from British business. Rather than bringing benefit to the real economy, they stand accused of extracting investment from the real economy.