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Opinion & Analysis

The future economic prosperity of Gibraltar

By Roy Clinton

We all have an interest in the future economic prosperity of Gibraltar represented by the health of our public finances and the success of our private sector economy. It is fundamental to our wellbeing that our economy prospers and grows because without the tax revenues it generates Government cannot provide services such as healthcare and education.

We have two immediate concerns that affect our economy, the first is the Covid-19 crisis and the second is Brexit. The Covid-19 crisis has had an immediate but short-term economic impact and Brexit has not yet had any immediate economic impact but its effects will be long term. It is important to assess how each has or could affect our future wealth.

COVID CRISIS

We have in Covid-19 what is commonly called in the world of financial markets a ‘black swan’ event that was not expected or predictable. All world nations have suffered a terrible toll both in human life and economic loss. With the roll out of the vaccine we have the hope that the worst will soon be behind us and we can start the process of economic recovery. For us we will remember and mourn those whom we have lost and count the economic cost which so far is £167 million and expected to rise. We have the use of a UK guarantee for a £500 million loan facility but this will only last for three years and needs to be repaid.

Sir Joe Bossano has said in no uncertain terms that Gibraltar’s public finance position is “unstable” and that “hard decisions” will have to be made. Ignoring that Brexit exists for a minute, we can assume that just as world economies will take a year or two to start to recover it will be at least three years or more before our public finances can be restored if tax revenues increase at the same rate.

The Government can tackle this dilemma by trying to stimulate and grow the economy in public sector projects as any follower of Keynes would advocate, but in this respect the Government has already overplayed its hand with excessive development and borrowing over the last eight years and has little room to manoeuvre. All it can do now is to manage its spending according to priorities and target it to those that produce the maximum public or economic benefit.

In this respect the Government must be fully transparent as to the extent of its indirect borrowing and publish full audited accounts for all Government owned companies. It would be unacceptable for this Government to expect the taxpayer to suffer without coming clean. In this respect the forthcoming budget session will be of interest where the focus has to be on the numbers and harsh reality.

HARD BREXIT

The subject of Brexit and indeed a ‘Hard Brexit’ is one that deserves closer economic analysis, because of course its meaning is different in a UK context to a Gibraltar context. Hard Brexit for the UK simply put means leaving the EU without a trade agreement. For the UK this could have had a dramatic effect in respect of tariffs on manufactured goods and exports as it left the Customs Union. For Gibraltar we have never been in the Customs Union and thus this element would not have such an obvious economic effect on us except in terms of importation of foodstuffs and other essentials as we are seeing now. These had traditionally enjoyed a laxer importation regime even though we were not in the Customs Union while we were in the EU.

The Government produced a comprehensive guidance booklet about the effects of a ‘no deal’ Brexit for Gibraltar in terms of its practical effect on day to day life and businesses but little on economic effects. Sir Joe Bossano in his 2019 manifesto was confident in having a post Brexit economic plan and that Gibraltar would prosper regardless.

FRAMEWORK AGREEMENT

We are now presented with a Framework Agreement that could in six months lead to a UK-EU Treaty in respect of Gibraltar. This is a form of trade deal that of course should deliver more economic benefits than no deal at all.
This Framework Agreement is centred upon two main elements, namely freedom of movement of persons in the form of Schengen and freedom of movement of goods in the form of a Customs Union.

The Chief Minister has described the Schengen provisions as those that “will” be included in any treaty but that the bespoke Customs Union provisions are termed as ‘may’ be included.

To be honest I am as concerned about the Customs Union as about Schengen because of its long term economic consequences.

Remarkably the GSLP/Liberal 2019 manifesto mentions Brexit 114 times but not once do the words ‘Schengen’ or ‘Customs Union’ appear.

The Leader of the Opposition has explained our position on Schengen controls in detail over the last few days and so I want to concentrate on the economic issues stemming from a possible Customs Union deal instead.

CUSTOMS UNION

The optional element of the Framework Agreement is the idea that Gibraltar might form a bespoke Customs Union with the EU. Sir Joe has stated that he currently does not see the need to join a form of Customs Union, and I also have yet to be convinced as to the economic benefits of a bespoke customs arrangement with the EU. We have not needed one prior to Brexit so why would we need one now?

Let us be clear, the EU will not allow us anything that undermines its single market in goods and Spain has already made it plain that it is seeking to harmonise the pricing of certain products in our economy and ensure we introduce a form of VAT and comply substantially with the EU external tariff and trade policies. Given the cost of introducing new systems and imposing VAT, I’d like to hear the economic arguments in favour of this.

Of course there are precedents we can look at such as San Marino as to how it handles its customs union with the EU, but each requires professional technical analysis, advice and careful consideration. The Chief Minister has created a new body called the Treaty Liaison and Advisory Committee (‘TLAC’) to consider the question, but they must be provided with full technical advice/support from specialists and any reports the Government may have already commissioned. In that respect I would ask that the Government release such reports if they exist and table them in Parliament.

Once we go down the route of the Customs Union it will be difficult to undo and we may have lost business and business opportunities and some freedom and control in managing our economy. There has to be a clear cut economic case that joining the Customs Union, in whatever form, will either prevent a loss of business or increase our level of business without crossing the red lines of sovereignty, jurisdiction or control. This discussion has to be open and frank.

It will have not escaped anyone’s attention that to remove the physical border, which is Spain’s political objective, will require not just Schengen but also a Customs Union arrangement as to have one without the other would not meet their aspirations.

WIDER ECONOMY

All this does not directly affect the mainstay of our economy being financial services and gaming.
Covid-19 may have affected the profitability of the gaming sector but in respect of Brexit most had already made contingency plans where access to the single market for services was concerned.

As regards financial services over 90% of its business is UK facing for which we have secured market access from the UK.

We have been offered nothing in the Framework Agreement that would be of obvious interest to either of these in the service industry.

The tourist industry due to Covid-19 may take years to recover, and it will be interesting to hear if they or indeed other industries such as ship bunkering or ship repair see any opportunities or threats in the Framework Agreement.

DEBATE

We are being asked to accept the Framework Agreement as a “masterpiece in negotiation” among other such praise. You will forgive my scepticism because the Spanish Tax Treaty was heralded in a similar way and even the House of Lords later recognised it was a treaty that was drafted heavily in favour of Spain. A treaty that was neither approved by nor debated by the Gibraltar Parliament.

So whether the Framework Agreement will deliver a treaty that gives us greater economic benefit than not having such a treaty is an open question. To arrive at an answer will require honest and detailed technical, economic and political analysis. This is an important debate which I was disappointed to read being described by a contributor to the Chronicle as resorting to “village politics”, a suggestion I find deeply offensive to our mature Parliamentary democracy and freedom of speech.

So we face some harsh realities of life which no one ever said was fair, we are suffering the immediate human and financial cost of Covid-19 which in itself will require years to recover from compounded with Brexit.
Gibraltar has indeed suffered under Covid-19 and it now remains to be seen whether the Framework Agreement can deliver a new horizon in our prosperity in a fair, safe, beneficial and balanced Treaty.

This is not “village politics”, we must all take an active interest in the debate on our public finances in recovering from Covid-19, and also in what economic treaty is concluded in the next six months, because make no mistake that what is at stake is nothing less than the future wellbeing and economic prosperity of Gibraltar.

Roy Clinton is a GSD MP and Shadow Minister for Public Finance.

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