Constitution, Europe, External Affairs and Culture Committee

Meeting date: Thursday, February 24, 2022

Official Report 606KB pdf

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UK in a Changing Europe Regulatory Divergence Tracker

Good morning and welcome to the sixth meeting in 2022 of the Constitution, Europe, External Affairs and Culture Committee.

I am minded to note that the committee would like to express its solidarity with the people of Ukraine. We wish for a speedy and peaceful recovery from the precarious situation that they find themselves in at the moment.

Agenda item 1 is an opportunity for the committee to hear more about UK in a Changing Europe and its regulatory divergence tracker. I welcome our witnesses from UK in a Changing Europe: Professor Anand Menon, director, and Joël Reland, researcher.

I will start off with a couple of questions. Will you give us your perspective on how the United Kingdom Government is choosing to exercise its regulatory autonomy following Brexit? Which policy areas might be most suited to regulatory divergence?

“Choosing” is quite a heroic way of putting it, in two senses. First, we have had Covid getting in the way, so there has not been a structured, well-thought-through process of figuring out what we want from divergence with the European Union. Secondly, the politics means that choosing a path is actually very difficult for this Government because, on economic policy, the Conservative Party in Parliament and indeed in the country is a very broad and internally contradictory church. There has therefore been no clear setting out of a direction. There has been a lot of contradictory rhetoric, and this is one of the great paradoxes about divergence and the European Union.

People of my age can think back to the Euroscepticism in the Conservative Party of the early 1990s, which was founded on the belief that Brussels overregulated and that, if we could cut ourselves free of that regulation, we could make a more dynamic and competitive economy. The point of Brexit was to get rid of rules. It was to make a properly competitive, capitalist economy, which we could not do inside the European Union.

The irony is that, having left the European Union, we have become a high-spend, high-subsidising country that has made use of its freedom from the European Union to keep precisely those regulations that the fresh start group and others always banged on about. We have not got rid of the working time regulations. We have kept the environmental regulations and all those sorts of things. We have a new subsidy regime that allows us to give more money to industry so, in a sense, we have left Europe to become more French. There are paradoxes in that.

On areas for divergence, there are some areas where, absent EU membership, we have had to do something. Agriculture is an example, because we no longer have the common agricultural policy. Let me say in parentheses—or, actually, not in parentheses, given who you are—that our divergence tracker is essentially about the UK and the EU. We are well aware that there are UK internal market questions hiding behind a lot of this, and we have plans afoot to supplement the divergence tracker with some more specific consideration of the internal market and the UK dimension. However, let us take agriculture as an example.

I understand that, for you, one of the big issues about agriculture is the devolved aspect, but if you will forgive me, I will talk about the UK and EU aspect. We are doing things differently, and God help us if we cannot put in place a better agricultural policy than the common agricultural policy. Anyone should be able to do that. With what Michael Gove defined and what the Department for Environment, Food and Rural Affairs is putting in place, there are some encouraging signs that we might get a more sustainable agricultural policy that is tailored to what we have in this country if—it is a massive “if”—they do it right and fund it properly.

Before I hand over to Joël Reland, I will make two more points. Immigration is an obvious area where we have diverged, because we have ended free movement and we have a new system in place. All sorts of interesting things can be said about our immigration system, including how liberal it is for non-Europeans compared with what went before and how UK public opinion has shifted dramatically on immigration since the referendum.

For the first time since the early 2000s—since the days when new Labour was busy blurring the lines between refugee asylum seekers and migrants and making the debate a total mess—immigration is not a salient issue in British public opinion. There have been lots of interesting shifts in how the UK public see things. If you think about it, in 2017 and 2019, we had two general elections in which we did not talk about immigration, which is unheard of since the first years of this decade, certainly in England. I see that the convener does not agree with me, but we can squabble about that later.

My other point on divergence is that the Government is saying—quite reasonably, I think—that the biggest opportunities are in new areas of economic activity where we do not have lots of regulation already, such as fintech, artificial intelligence, robotics and gene editing. Those are areas where the British Government hopes to be able to move first and attract investment before the EU gets round to acting. That is not unreasonable, although there is as yet precious little evidence that doing that will compensate for the negative economic impact of leaving the single market and the customs union.

I agree with everything that Anand Menon has said. To supplement that, I note that the impression that we get from our research is that the fundamental thinking behind what the UK Government is trying to do on divergence is somewhat scattergun at the moment. The best illustration of that is the document “The Benefits of Brexit: How the UK is taking advantage of leaving the EU”, which came out a couple of weeks ago. It is a 100-page list of almost everywhere that we could do something differently from the EU. It is highly aspirational, but there is no clear sense of how we might make the most of regulatory freedom.

That is how we end up with a situation where, on the one hand, we have a Government that is trying to increase the size of the state with a new subsidy regime and agricultural regime, specifically in England, while on the other hand we have the Treasury looking to deregulate and make a lighter touch architecture around financial services. Those things do not seem to fit together, and the underlying implication is that the Government does not have a particularly clear strategy for what it wants to do.

Another illustration of that is the new Minister for Brexit Opportunities and Government Efficiency inviting Sun readers to write in with their suggestions. Reportedly, lots are coming in. That is not necessarily a good way for civil servants to make the most of their time, given what might be a good opportunity.

On divergence, business in particular would appreciate it if it had a clear direction. Business is very clear that it takes five, if not 10 years to adapt to new regulatory regimes and new rules, so it needs to have an idea of what is coming and clear goals to work towards. It also helps if there are common goals across departments, because policies then tend to fit together and we do not end up with a situation where, on the one hand, we are pursuing a new emissions trading scheme and we have net zero goals while, on the other hand, the Treasury is cutting fuel duty on domestic flights. Those things do not seem to have any internal coherence. That illustrates that, if we want to make the most of divergence, we need all departments to be singing from the same hymn sheet, which also helps business in its preparation.

On the question about where divergence can go and where the biggest opportunities are, I again agree with Anand Menon. Emerging sectors are the obvious answer. I point to the Treasury as the one department that has a clear idea of what it wants to do with divergence. It was faced with the clear reality that, after Brexit, financial services would have less access to the European market. There are equivalence agreements, but it has made the very clear decision that we are not going to try to get close to the EU. We will keep that distance and try to make the most of it by becoming, as the Treasury would say, a more competitive environment. We are going to remove EU solvency regulations, which should make some bookkeeping processes a bit simpler for financial services. We are going to go in that direction.

The clear direction of travel is to innovate around fintech, with regulatory sandboxes to try to encourage innovation, and the sector can work with that. That model could be transplanted more widely across Government.

I apologise to Anand Menon. I did not mean to not have a good poker face. I was just surprised by what he said, as it is not my experience. I am sure that some committee members will comment on the subject. The context is that, on Tuesday this week, the Scottish Parliament rejected the legislative consent memorandum on the Nationality and Borders Bill, and I was thinking about our discussions and how much immigration features in what we do.

We move on to questions from committee members, starting with Mr Ruskell.

The tracker is a really useful tool and a really useful summary for policy makers. It is exciting to hear that you want to overlay some of the United Kingdom Internal Market Act 2020 and devolution aspects.

The tracker highlights financial services, greening finance and the development of a UK taxonomy. Where do you see potential divergence or alignment with the EU or other countries that are developing their own taxonomies? In the EU, there has been a strong debate about the inclusion of gas and nuclear in its taxonomy. Do you see an inevitable alignment there, given that we face similar energy challenges across Europe, or is there a different tilt or perspective with other countries that might end up getting wrapped up in some of the trade deals that the UK is looking to set up?

I would not take it for granted that the EU will come up with a united stance on that. At the moment, it has fudged it quite effectively. One thing that the EU has become very good at over the past year to 18 months is papering over differences very effectively. Even if we look at the position of Ukraine at the moment, there are real divisions between member states, but they are managing to keep going.

I go back to what I said at the start. Joël Reland knows this area a lot better than I do, so I will defer to him, but it strikes me that there is a fundamental ambiguity about governmental ambition in this country. We have rhetoric firing off in different directions. As a rule of thumb, we can take divergence seriously when it is driven by the Treasury, because it at least seems to have a plan, as Joël Reland said in relation to financial services. Anywhere else, we find evidence of cross-departmental squabbling and different parts of Government going off in different directions.

For now, the picture is so blurred that I am reluctant to even hazard a guess, to be honest. However, Joël is a lot braver than I am, so he might do that.

On the specific issue of nuclear and the green taxonomy, my guess is as good as anyone else’s. I simply do not know what the thinking about that is or where it is going to end up.

The green taxonomy is a good and quite unique example of the UK and the EU moving at the same time, which is unusual when we look at divergence. Normally, either the UK is creating new regulations because it has chosen to or it has to now that we have left the EU, or the EU is doing likewise. Here, they are moving in the same direction, and it will be an interesting test case. It will be interesting to see whether there is a desire to move in lockstep and have mutual assurance—in this case, it is the opposite of mutually assured destruction—whereby we do the same things without saying that we are doing that, which just makes life easier for everyone. Alternatively, are the EU and the UK going to try to push the boundaries of what they can do, get ahead and ensure that Amsterdam or London becomes the centre of green finance in Europe, and potentially the world?

My instinct is that the Treasury is thinking more towards the latter scenario and getting ahead, for the reasons that I mentioned earlier. It has a clear idea of what it wants to do with divergence, and a lot of the rhetoric that is coming from ministers is that the Government thinks that it can get ahead of the EU because we are one country rather than 27. I would not be surprised if we see gaps opening up in green finance taxonomies in the coming months and years.

That is interesting. When it comes to how that taxonomy is interpreted within the devolution settlement, within the UK and across Europe, where there are sub-state actors that are looking to invest in particular technologies, do you have any thoughts on how that might play out?

We are meeting in Scotland, which has vast renewable resources. If you were to devise a green taxonomy for Scotland, maybe by creating a financial centre for green investment in Edinburgh, what would that look like? Could that exist within an EU taxonomy that is perhaps tilted in a slightly different direction, or which emphasises some technologies over others? Do you have any thoughts on that?

09:15  

Could you clarify your question? I am not 100 per cent certain what you are getting at.

To put it simply, the issue is how we utilise the resources and the advantages that we have with energy in Scotland to maximise the opportunities for green investment here and create a focus under a green taxonomy. Does the potential exist for there to be a divergence or a particular emphasis in Scotland under a green investment taxonomy in the UK?

I will say two things. First, this is way beyond my pay grade; it is not an area that I specialise in.

My second point is that there are two phases to all such questions. The first is how you regulate to encourage investment. The second is, having attracted that investment, whether you are able to trade easily with the European Union. With divergence, that is the rub. It is all very well to say that we will create rules in such a way as to make us a leading centre for X. Let us take the example of gene editing, on which the British Government wants to liberalise the rules. We want to be less bound by the precautionary principle than the EU is, the logic being that that will attract inward investment that will not go to the EU, because it is less easy to experiment with gene technologies in the EU than it is in the UK.

That is fine. We might attract the investment, but that investment will come to fruition only if, subsequently, we can trade those products with the EU, which happens to be the largest market on our doorstep. One thing that is absolutely missing from the UK Government’s considerations of divergence and the benefits that it might bring is that trade-off, whereby, if you diverge, you might make investment easier to gain but trade harder to do, which will play back into investment decisions.

The final thing to say is that divergence will always—or in many cases—impose costs for the UK’s internal market with regard to Northern Ireland. For instance, staying on the example of gene editing, if we change our regulations and we diverge from the EU, it might well be that the goods that we manufacture cannot be legally sold on the market in Northern Ireland because of the protocol.

That was a very vague and generic answer for the reason that I gave you, which is that I am not an expert in this area. I do not know whether Joël Reland wants to have a punt as well.

Maybe we could read that across to renewable energy, to see whether such an approach is possible there. Joël Reland, do you have any thoughts on that?

Yes. I add that the impression of divergence so far, as I am sure that you will be aware, is that there is very little sense of communication or co-ordination between the four Governments of the UK with a view to creating the kind of example that you have given, whereby Scotland could be the centre for one aspect of a new regime and Wales and Northern Ireland could be centres for another.

To an extent, that challenge is probably an inevitable result of the fact that the UK has not had to do its own regulation for 50 years. To a large extent, the EU has set the processes for how we regulate, so we are a nascent country in having to regulate things again. Many processes still need to be worked through. While it will take business 10 years to adapt, it will probably take Government five or 10 years, at least, to adapt to working out how to do that effectively, especially given the sometimes clashing political dynamics between the four Governments.

An interesting aspect of that will be the review of intergovernmental relations and how the new councils and so on that have been set up work in practice. There has been some tentatively positive commentary about how the review might foster better relations and better working processes, although the fact that the interministerial committee on finance seems to be beset by more problems than the other committees might be a tension, particularly in relation to green finance. I think that it is incumbent on ministers in all parts of the UK and officials to make those things work properly, because it will require a lot of political good will to make that stuff a success.

I have a final question about the EU emissions trading scheme. I think that you say in your tracker that you expect the scope of that to be significantly widened. Do you see the UK falling into the same scope, or do think that there might be tensions over aviation or other areas?

I think that the biggest tension will be over the carbon border tax, which is the secondary element to the emissions trading scheme. They tend to work hand in hand. We know that the EU is developing plans in that area and it is not clear that the UK will necessarily follow it in that area. That is where I think that the bigger element of divergence could emerge.

For the time being, the EU and the UK are thinking in broadly similar ways about emissions trading, so I do not expect major elements of divergence, although there might be some nuances as those things mature over time, because they are both very new. There will be some needs that are specific to the EU that we will not necessarily want to replicate here but, largely, I would expect things to move in a similar way. It is the carbon border tax that is potentially a more sensitive and more dramatic move for the UK to make, and that might depend largely on who is in government.

You alluded to the experience of businesses that trade in goods. You talked about how Brexit had not simplified regulation—I think that you were talking about trade—from the point of view of businesses that find that regulation might have been multiplied or at least duplicated. Can you make any observations about the Scottish Government’s intention to attempt to keep pace with regulation in Europe? What might the impact of that be? Are there any areas that it might be fruitful for the Scottish Government to concentrate on to minimise that experience of duplicated regulation or of complication from the point of view of people who trade in goods?

I will flag up one issue, which Joël Reland will be able to talk about. The key examples at UK level—we focus very much on a UK rather than a Scottish Government level, but we will try to talk about Scotland a little bit—are probably the CE mark, its own alternative to which the UK Government had talked about bringing in, although it has delayed that, partly, I suspect, because of pressure from business, and chemical regulations.

To date, the Government is facing an awful lot of pushback from business on divergence. This is where the issue ties in with the situation in Scotland, but I would not be at all surprised if, at the end of the day, the UK Government diverges far less than early rhetoric suggested that it might do because there is pushback from business, which is saying that divergence will add so much cost. It might be that Scotland has less work to do in remaining aligned, because London is doing it anyway, so it becomes less complicated.

That is a guess and, of course, our politics is nothing if not massively unpredictable at the moment. The identity of the occupant of Downing Street will have an enormous implication for the future direction of travel but, as far as I am concerned, the signs at the moment are that, having talked tough on this stuff, the British Government is slightly backing off the idea of widespread divergence in this area, because it is becoming more aware of the costs.

I absolutely agree. The UKCA marking that is replacing the CE mark on a manufactured good when it comes into the country in order to be able to circulate on the British market is creating a lot of—I do not need to explain it in detail—extra bureaucracy for businesses in getting everything reapproved. In some product areas, it might take 60 years to get every product restamped, so it is a big headache for business. That is why things have been delayed.

In chemicals regulation, the UK is trying to set up its own architecture, but that takes time and, at the moment, it is simply not able to move at the same pace as the EU. There is a risk of an element of divergence by default in the meantime, because the EU is regulating on more harmful chemicals than the UK is able to keep pace with.

The challenge for Scotland in those two areas—I admit that I do not know every fine-grained detail of the situation—is that it is not immediately obvious how Scotland could be allowed to keep greater pace with the EU, because we are talking about things that seem to be done at the UK level. I might be wrong about that—you might want to look into that—but those are the two most obvious examples for the time being. I do not see how Scotland can mitigate the most significant effects of divergence. It is somewhat reliant on the UK Government rowing back on its earlier commitments, as Anand Menon said.

The most obvious area where Scotland has an element of autonomy is agriculture—it can develop its own agricultural policies, for example on gene editing. There is also the new Office for Environmental Protection. I know that England has an office and that Scotland will be developing its own one. Those are the obvious places where there are grounds for Scotland to keep closer to what the EU is doing than England is, if that is what Scotland wants.

I am interested in divergence in the field of climate and environment. You have produced an incredibly interesting report, in which I note that you say that, in theory, Brexit could make it easier to enact policies for reaching net zero. I realise that we are at an early stage of the process, but can you indicate what the early evidence is suggesting on the UK’s approach to divergence from that of the EU with regard to target setting and mandatory commitments to help to tackle climate change?

There is very little divergence. Coming back to what Anand Menon said right at the start, we have left the EU to become more French, more European and almost more European than the Europeans when it comes to climate change. At the moment, the UK’s ambition is higher even, in terms of the ultimate pace of getting to net zero, than it would have been if we had been part of the EU’s nationally determined contribution. There has been no backsliding or moving away on that level of professed ambition. Largely, if we look at what the UK is trying to do at the moment in getting there, we see that, although it made mention of Brexit in the net zero strategy, there is very little, if anything, that requires regulatory autonomy to move there. For the time being, there is no major indication of the UK having a different strategy outside the EU.

That may change with time—that is more what the comment that you referred to meant. In theory, we have the autonomy to change VAT on certain products that we did not have before, if we so wish. There are tweaks around the edges that could be made. We might want to use state aid subsidies in future. The example that is always mentioned is gigafactories—money could be put into those factories for the development of solar panels. The new subsidy regime may enable that, but we are still very much in the theory rather than the practice stage. There are those opportunities if the Government—now or in the future—chooses to take them, but for the time being it is a level playing field.

I go along with what Joël Reland said. At the moment, it is very hard to say. I understand that there is a weirdness about Brexit. It is all that we have talked about since 2016, yet it is very early days. We just have to live with that paradox, because the Government has not had a chance to act.

At the moment, the Government talks a good game, but everyone knows that the current UK Government is a very performative Government that is good at sending out signals but which, as yet, has been less good at delivering in practice. We can see that playing out a bit with the rhetoric over sanctions in relation to Ukraine and the reality of our sanctions as compared with those of the EU, when actual action was necessary. I suspect that, for all the rhetoric about the fact that we are doing stuff first, we will cleave quite closely to the EU.

09:30  

That is very interesting. I think that some of your analogies can also be applied up here in Scotland with respect to climate change narrative versus delivery.

I want to ask you specifically about the UK’s nationally determined contribution, which is highlighted as being a 68 per cent reduction in carbon emissions by 2030. The EU’s target is 55 per cent. In the impact assessment, there is an indication that although being part of the EU would not have stopped the UK putting in that more stringent target, it would not have been able to present it in the same manner, if you like. Could you perhaps expand on that? I note that there are a number of examples of other areas where the UK is striding ahead to tackle climate change, such as on oil and gas boilers, more sustainable agriculture and petrol and diesel cars, and I am very keen to hear comments on that.

We will start with Professor Menon this time.

I will say something very general, because Joël Reland is the person who actually knows something. In general terms and more or less across the board, the EU sets baselines in regulation. It sets baselines for the member states and member states are absolutely at liberty to go further than those baselines suggest. That is true when it comes to rights and to environmental targets. As far as I am aware, there was nothing in EU law that would have stopped us saying, “We will do this by an earlier date than EU law mandated.”

The argument that some Conservative members of Parliament make is, “Yes, that’s true, but this has given us an added incentive to prove ourselves.” There is a sort of political will element that is built into this, because we have left the EU, that was not there before, and you can agree with that or not as the case may be. As far as I am aware, there were no legal strictures that would have stopped us setting a higher target as a member state of the EU.

I absolutely agree with that. The main benefit from having the UK’s own NDC was symbolic, particularly in the run-up to the 26th UN climate change conference of the parties—COP26. It allowed the UK to say, “We have this 68 per cent target,” whereas if it had been an EU member, it might have had to repeat the 55 per cent line, in the sense that that is the unified position, albeit that it could have pursued exactly the same goals that we are pursuing now outside the EU. There was the purely symbolic element of being able to talk about that, and the diplomatic leverage that that perhaps provided.

There is an open question as to how well that was used. We come back to the point that, for the time being, the benefits that we are seeing in climate change policy are still very much in the rhetorical sphere. It is a question of being able to say that we are signed up to a new British target, or that we will create a new British—or, in fact, English—agricultural system that will be greener and that will use public money for public goods. Rhetorically, it means that we can say that we are moving differently from, and faster than, the EU.

However, the fundamental issue is that we have not yet had delivery, and we do not know whether the Government will be able to deliver on what it has promised. That is where the real test of making use of regulatory freedom will come.

I think that you are quite right to highlight that setting ambitious targets is very much the easy part of tackling climate change and that it is on delivery that things come home to roost, as we are seeing.

I have two specific questions about the tracker that you have provided. On migration, in your introductory comments, you talked about the importance of robotics and the investment in this country and about how research and development could be sold on. How does that tie in with no longer being in the Erasmus+ scheme and with the new Turing scheme? The Erasmus+ scheme supports inward students and provides a different and improved university experience, but it also supports research and lecturers. It provides wider experience in universities and colleges and allows for wider research. How does that tie in with the current situation?

I will say a couple of things about that. In relation to the R and D base, Erasmus+ is far less important than the horizon Europe programme, which is being held up as a function of the on-going uncertainty over the Northern Ireland protocol. I have absolutely no doubt whatsoever that the European Commission is using that as a political weapon. It might deny that, but the fact that there has been no decision yet on the horizon Europe programme is linked to what is going on over the protocol. That really matters, and it has the scientific community exercised, and rightly so, because access to such research networks is fundamental to the future of British science. If we want to be a leading knowledge economy with a leading universities sector, having that access is absolutely fundamental.

The effect of the Erasmus+ scheme is as much cultural as it is scientific, in the sense that it involves people coming here and getting experience of living here, so they might come back and settle here. It was always interesting when the scheme was discussed in UK universities—certainly in English universities, where I have experience—because we tended to get far more students than we sent. In my experience, it was always a bit of a struggle to get English students to go to Europe, and there was always a bit of an issue because we had fee questions that universities in Europe did not. That is a separate but important debate that we can add to.

Another cultural issue is the British Government’s surprising decision not to recognise EU identity cards, which is having a calamitous impact on school trips to this country. On the cultural side, I suspect that that decision will have serious medium-term implications, because kids will simply not come to see this country and have experience of it.

Does Joël Reland have anything to add?

Anand Menon has largely covered the points that I was going to make.

Sorry.

No problem—you have saved me some words.

I will give a slightly broader reflection on divergence. We are obviously limited in what we can do through the tracker, but we try to identify what we call significant cases of divergence. Broadly, we measure that in financial cost—new non-tariff barriers and other administrative costs for businesses and citizens.

The Erasmus+ and Turing schemes provide interesting examples of what is more culturally intangible; by definition, such things are very difficult to measure. One of the most challenging aspects to keep track of is what divergence means in relation to people-to-people links and the sense in which the UK is tied culturally to its neighbours. If things are lost, that can have very serious implications down the line. Students who come to the UK are much more likely to remain here, to come back to invest here, and to take holidays here.

If we were doing a divergence tracker now, we would not be able to say, in relation to all kinds of elements, the cost that had resulted from the loss of inward student movement and what is not part of the Turing scheme, but there could be a very significant effect. There could be more such areas that we simply have not come across. The Erasmus+ scheme is a high-profile issue that we talk about a lot, but there might be others out there. That is a challenge for everybody in this sphere.

That is a really good point. We have taken evidence about the importance of having soft connections; that is certainly the case on the cultural side. In relation to the diaspora of a country, we are talking not just about people who have left but about people who have come here and gone away again but who keep coming back and continue to have those connections.

Different countries within the UK have different needs. That has been highlighted through the freedom of movement legislation. As the convener touched on, we had a debate in Parliament this week on the Nationality and Borders Bill, which the Parliament rejected. In December, the Scottish and Welsh Governments sent a joint letter to the Home Secretary to raise concerns about the bill. Will you expand on the research that you have done on visas in specific areas? I think that you highlighted heavy goods vehicle drivers, but health boards are crying out for staff. There is also a need for vets and for people to work in hospitality. People are needed across the spectrum. How can we move forward in those areas?

As soon as you introduce control, you end up with a system that is less responsive to economic need. That is what we have done. We had a system in which there was no control—of course, the lack of control was a political issue, as we saw in the referendum—but it could respond more quickly to economic need. Whatever system we put in place will be clunkier than a system in which people from our nearest neighbours—geography matters immensely, too—were able to come and fill gaps in our labour market.

The other day, we held a conference on British politics, and Kirsty Blackman was on the panel. She said—I do not know whether this is true, but it stuck in my mind—that, given Scotland’s ageing population, even if every school leaver went into the care sector, there would not be enough care workers to fill the gaps. Therefore, we have a need, and the new visa scheme does not necessarily address it that well, particularly in lower-paid sectors.

We will have to wait and see whether the Government bends on its position. The signs in relation to HGV driver licences suggest that there is some flexibility in the Government’s position. I do not know whether it will decide that it will have to put in place longer-term structures for certain professions, particularly in sectors such as social care and healthcare in which people earn below the wage threshold. There is an awful lot of pressure on those sectors. Health unions are already making it perfectly clear that we cannot train enough people to fill the positions and that, besides which, it takes a long time to train a doctor.

The bottom line is that, at the moment, politics is dominant when it comes to immigration. It is politics rather than the economy that is taking precedence in the Government’s thinking. I do not know whether that will remain the case, but there is a mismatch now. It is inevitable that there will be a mismatch as we move from a responsive system with no controls, in which the inflow of labour was largely determined by the market, to a new system in which the inflow of labour is determined by political and bureaucratic rules.

That is an interesting comment and comparison, given that we hear that some arguments for leaving the EU were economic ones.

Does Joël Reland have anything to add?

Yes. I absolutely agree with Anand Menon that the biggest challenge relates to lower-paid work. Those sectors will have the biggest gaps. There is a certain irony in the fact that we expect net migration to the UK to remain in the hundreds of thousands for the rest of the decade. Taking back control of borders is not about cutting off the borders.

If you have not already done so, I encourage you to read our report on doing policy differently after Brexit, which we published about a month ago. It has a chapter on migration, which makes it quite clear that the UK outside of the EU will have one of Europe’s most liberal regimes, if not the most liberal regime, for non-EU migration. There will potentially be greater avenues for people from the rest of the world to come to the UK than there will be for them to go to the EU, but the challenge remains that it is estimated that, based on the skills and pay requirements, only 50 per cent of jobs in this country would make someone eligible for a visa. People need the money to pay for a visa, and such people will not necessarily be coming to work in the lower-paid jobs in society.

There will be a fundamental change in the type of migrant who comes to the UK. There will be a different diaspora, which will bring with it potential cultural benefits and new links. The type of worker is likely to change. Sectors such as the care sector probably will not benefit much; they will be net worse off as a result of the new regime that is coming in.

09:45  

I have a supplementary question about visas. I am finding the conversation quite fascinating. Prior to Brexit, Scotland had a post-study work visa. You were talking about Erasmus+ not being of economic value, but the post-study work visa was incredibly valuable and incredibly important here. It was initially adopted and rolled out across the UK and then scrapped but retained for Oxford and Cambridge universities. I guess that there is a sense of—I will just say it—grievance in Scotland as to how that was arrived at.

You said that this was all about building a free capitalist economy. Is the Government’s decision last week to shut down the investor visa route with immediate effect, which could limit capital investment, counterintuitive to the stated aims of Brexit?

I will not sit here and try to pretend that we have Government policies that are coherent across the board, because we do not. The investment visa has to be viewed in the context of what is going on in Ukraine and the enormous political pressure on the Conservatives over links with Russian money. Events, as Macmillan said, are driving this rather than anything else.

On the post-study work visas, I take your point about the grievance. I also take your point about the economic importance of those things. My understanding is that they are back for some categories of people. I believe that Indian students in the UK as a whole, if I am not mistaken, can now make use of the post-study work visa, as a result of which, ironically, there has been a massive uptick in the number of Indian students in this country. It has been underreported, but I think that the number has trebled; it is some enormous eye-watering number. If you are interested in this issue, I would strongly recommend that you have a session with our colleague Professor Jonathan Portes on immigration and migration issues.

There is a curious tension in the Government’s position, which is that it understands the economic value of having students here, as you can see in the case of the Indians, but denies it in the case of the Europeans. There are clear tensions in the Government. That is not consistent or coherent across the board, but I think that that is just called politics.

I was very struck by those last comments about the contrast in the approaches to skilled labour from non-EU parts of the world and skilled labour from the EU.

Can I ask about the pace of divergence? I was very struck by your comments so far about the fact that we seem to be moving very slowly. Obviously, we have had Covid and we have had to move in some areas. There is the opportunity to take advantage by being proactive in other areas, such as financial services. Do you see divergence speeding up in any way over the next few years?

The answer to that is political rather than anything else, in the sense that it depends what happens to the UK Government and the UK governing party. What are the scenarios? One scenario is that we continue with the Boris Johnson Government, in which case I expect a lot more fudge and not much more divergence. There is a lot of rhetoric about Britain doing things first and best, but not much more. If we get a more ideological Conservative leader, there could be divergence and more of a plan to implement the kind of deregulatory agenda that was laid out in “Britannia Unchained”. I do not think that it will go as far as that, but this is very politically driven.

If we end up with a Labour Government, I think that we could have greater alignment. I think that Keir Starmer has said that he would sign a sanitary and phytosanitary agreement with the EU. I suspect that Labour might sign a mobility package with the EU to allow service providers to travel; they might go for more in the way of mutual recognition of qualifications. This is ultimately in the hands of politics, and if there is one thing that is unpredictable at the moment, it is politics.

As usual, I totally agree with what Anand Menon has said, but I will add to that. Basically, divergence takes time. There is no quick way to do it. Even if you want to deregulate and even if you want to get rid of existing EU legislation, you have to consult on it, you have to design processes for it, you have to implement the systems to remove regulation and you have to get prepared for them. You are looking at several years before you can even have a more light-touch regime in a lot of areas. The best example at the moment would be medical device regulation.

Deregulation takes time, and for that reason I cannot see there being a major shift towards it because, fundamentally, Governments are fairly short-termist in what they try to pursue. They have four or five-year mandates, so they do not have the time to pursue reform, which really will take two Parliaments to do properly. I cannot see there being deregulation across the board, even if we were to have a very ideological Prime Minister coming in. I would expect to see it perhaps more in some areas, but I do not think we will ever see major deregulation.

Where you can make the most changes is in limiting some of the obstacles that have been created. Were Labour to come into government, I would expect to see more quick fixes to some of the bigger problems that businesses are facing, which the Government now might feel ideologically unable to address for its own complex reasons.

Anand Menon said earlier that it is a very blurred picture and one of you was referring to cross-departmental arguments and that kind of thing. It strikes me that that is the nature of politics. There will always be internal arguments across the civil service and there will be different personalities and so on. Without being too depressing about it and setting aside the political drive at the top, do you see any clarity emerging on divergence in the years to come? Notwithstanding your very helpful tracker, will we be feeling our way for many years?

We will be feeling our way for many years, yes. It is partly administrative as well as political. We have to wait and see whether Jacob Rees-Mogg is a policy maker or a policy taker. There are two broad models for the Brexit opportunities unit in the Cabinet Office. The first is that he acts on the basis of the reportedly 1,200 letters that he has had from Sun readers about regulations that they would like to get rid of and the Cabinet Office starts making the weather here and saying to departments, “Look, this is what you need to do. The authority of the Prime Minister is behind this.”

The other model for the Brexit opportunities unit is that Jacob Rees-Mogg essentially just takes credit for stuff that other departments were doing anyway that are based on our divergence from EU law. We do not know yet. We do not know how that unit will operate and whether it will be symbolic or substantive. So much of it hinges on the leadership from the top. You are absolutely right that interdepartmental rivalry is part and parcel of government, but interdepartmental rivalry can be mitigated if there is a clear steer from the centre. One of the interesting things about Jacob Rees-Mogg’s appointment is that his rhetoric on tax and regulation is very much that of one side of the parliamentary party, but it is far from being that of all of the parliamentary party, so, even there, it is hard to say how free he is to pursue the agenda that he clearly has. If you ask us back in a year’s time, we might have some more clarity, but at the moment I think that it is very hard to say.

I will ask one final question, which is about the impact of commitments that the UK has under international obligations and the fact that the ability to diverge may be impacted by those international obligations, be they in the TCA or the WTO agreement. Where do you see the booby traps with international obligations affecting divergence?

The TCA is far from the only international obligation. I have put in the chat—I am not sure whether members can see the chat—a link to a report called “Doing things differently? Policy after Brexit”; I draw your attention to the section on public procurement, because that points out very clearly that one of the reasons why, despite very high ambitions, we have not diverged that much from the EU on public procurement rules is that those rules are derived from WTO rules on public procurement. For example, auto standards tend to be global. There are a number of areas where this is not a question of freeing ourselves from EU rules and being able to do whatever we want; it is about freeing ourselves from EU rules and finding that we are still bound by other international commitments that we have signed up to.

The other area where that will become more of a factor is future trade agreements. You can already see it with what has happened with Australia and New Zealand. There have been tensions about what it will mean for certain food and environmental standards. Ultimately, those have not shifted significantly, but there are likely to be implications around financial services and liberalising agreements for movement with Australia. That has a potential knock-on effect for the wider financial services architecture.

It will come with visas. To go back to Anand Menon’s point about visas for Indian students, there is a geopolitical tension there with the number of visas given to Chinese students. If you try to make agreements with other countries, I am sure that visas will be raised as a factor, so that has a knock-on effect for the immigration regime. Every time you try to enter an enhanced bilateral partnership with a country, it will want to extract things from that relationship, which will have knock-on effects for your wider regulation in that area.

It has been very interesting being able to read the tracker and to see the work that you have been doing.

I want to pick up on lessons learned from other neighbours of the EU. The European Free Trade Association has been going on for decades. What are the lessons that the UK can learn about being a neighbour of Europe but not now being in the EU? Are there any lessons from the other non-EU neighbours of the EU on the economy, divergence and trade deals?

I will say two things. First, if you are a neighbour that does not want to join, it is a bit of a nightmare. That is the first lesson. It is very hard to be next door to the EU unless you pledge allegiance and say that, ultimately, you want to be part of the club. Switzerland has suffered and is suffering as a result in the negotiations. Norway has had far from a smooth ride. This is a purely personal belief, but I have always thought that the European Economic Area model works fine if you are a small country. I was never convinced that an EEA model would work for the UK, given our size and given the nature of our political debate. The kind of—as they call it in Norway—fax diplomacy that works all right for Norway would never particularly work for us. My suspicion was always that we would blow up the EEA if we tried that sort of model.

There is a lesson in reverse that Brexit—and this is without even thinking about Ukraine and the scale of the issues there—has brought home quite clearly the fact that the EU does not have a very well-developed or effective approach for dealing with neighbours that do not want to join. I think that both sides have a lot of thinking to do about that.

Reflecting on the Brexit process, I think that it was a process that very quickly became toxic and political. The hope has to be that, over a medium-term horizon, both sides pull back a bit and think, “All right, look, we are not members, but we are allies, we are partners, we are trading partners and we are collaborators. It cannot be beyond the wit of man to figure out a system whereby we can work together closely without necessarily trampling over the sensitivities of either sides.” However, I suspect that, at the point we are at now, we will need a cooling-off period and a passage of time before we are able to have that rational, cold and calm discussion about it.

That is very useful insight. Joël Reland, do you have any perspective on that?

The situation with the UK lying on the EU’s doorstep is unprecedented. As Anand Menon says, it is not normal to have a country that is not to some extent part of the orbit. Fundamentally, the UK is trying to compete with the EU in a lot of areas right next door, and that has not really happened before, so it is hard to draw lessons to apply to such a novel scenario.

As a wider reflection and thinking about where the relationship might go, I would say that the EU thinks about regulating in a very specific way, which is that it thinks about consolidation between member states and policies that can apply across all, even if they are not perfect—for example, the common agricultural policy—and it thinks about consolidation in terms of preventing external threats and augmenting the power of the EU internationally.

10:00  

A lot of what the EU is doing right now around digital markets, the production of microchips and the regulation of platform companies is all about this idea of digital sovereignty and making the EU less dependent on or giving less power to global corporations, often American, in the EU market. That is a way of regulation that is about control and protection—you might even say “protectionism”—and the UK is not encumbered by those same ways of thinking. This will be the interesting thing for the UK in the next five to 10 years: can it fundamentally rethink how it does regulation? We are inheriting law that is about control and we might want to move to a model that is more about innovation, getting ahead and emerging sectors, and there is no example to follow on the EU’s doorstep at the moment. That is what makes it more difficult.

Yes, and that means that Governments have to think and plan ahead and be much more strategic. As you have observed, it is year 6 from leaving and we are not at that point yet. Professor Menon, it was interesting to get your take on what different future Governments might do on alignment—about whether they might choose to align on most issues and then potentially innovate in areas where they are prepared to put in subsidy and Government investment. You gave the example of solar panels to Maurice Golden and, presumably, Governments could invest in other renewables, but they have to be strategic and think long ahead and put chunks of central Government money in to kick it off.

There are two sorts of non-aligned costs to think about. There is the cost that is inherent in being outside the single market, which leads to the need for certain checks, depending on the sector, to make sure that standards work. That is the case even if we align with the EU in an informal way and track what it is doing—and, in parenthesis, I note that one of the interesting questions, which I think I noticed on your agenda for today, is how you track what the EU is doing to make sure that you are aligned. That is a very big question for all four Administrations in the UK.

Secondly, if you take the initiative and diverge, a second layer of costs for businesses is the need to comply with two sets of regulatory standards if they want to trade with the EU. There are conceptually two different sorts of costs to be thinking about.

That is very useful—thank you.

I am looking around, but I do not think there are any further questions from the committee this morning. Thank you very much for your attendance. Professor, we will make sure that the link that you put into the chat is circulated to the committee this morning. On that note, I will suspend to allow our witnesses to change over.

10:03 Meeting suspended.  

10:04 On resuming—