Despite Scotland having voted to remain, the UK has left the EU. It is operating under transitional arrangements, agreed upon with the EU under the Withdrawal Agreement, which are currently scheduled to finish on 31 December 2020 - around seven months from now.
Once the transition period ends, the UK will have a whole new relationship with the EU, the precise shape of which is not known because negotiations are taking place right now. That relationship will include new arrangements for how UK goods and services access the EU Single Market - which, at 450 million people, is around seven times the size of the UK alone - and how the UK and the EU operate together across a range of policy issues such as security, law enforcement and judicial cooperation, environmental protection, energy, transport, and research and development.
The self-imposed deadline of 31 December 2020 was originally designed by the then UK government to give a transition period of 21 months for negotiating, ratifying and implementing the new relationship. The UK Government chose to include scope for an extension of up to a further 24 months, should more time be needed. Although the Brexit process has been delayed, the deadline has not yet been adjusted, with the result that the time remaining is only a third of that originally foreseen.
Given the lack of time, and the fundamental differences between the EU and UK positions, a no deal outcome at 31 December 2020 is only too possible. In that scenario, UK and Scottish exporters of goods and services to the EU would face tariff and non-tariff barriers that would significantly reduce, and in some cases effectively cut off, their access to the Single Market. But, even if an agreement were to be reached, the UK government's level of ambition for the agreement is now so low that the negative impact would be almost as great as under a no deal outcome, due to a host of new non-tariff obstacles to our goods and services.
Even in normal times, this kind of damage to Scotland's interests would be unacceptable. But we are operating in times that are far from normal. The COVID-19 pandemic has triggered an unprecedented global economic crisis. It is impossible to know how long this crisis will last, or the ultimate consequences it will have for our citizens, our communities, our businesses or our economic prospects. But what we do know is that the economy will still be adjusting to an unprecedented economic shock by the end of this year - when the Brexit transitional phase is currently scheduled to end.
The UK is no longer a member of the EU, however much the Scottish Government - and the vast majority of people in Scotland who voted against it in 2016 - regret the loss of membership. But the full damage of Brexit has not yet been felt, thanks to the transitional arrangements under which the UK is now operating. The principal question we address in this paper is how long the transitional state should be maintained, to minimise the combined damage of COVID-19 and Brexit on the Scottish and UK economies.
Despite our opposition to Brexit - and the refusal of the UK government to involve devolved governments properly - the Scottish Government is doing everything it can to protect Scotland's interests in the Brexit process. In this very singular context, we consider it essential that the UK Government seeks an extension of the transitional arrangements, before the 1 July deadline it agreed in the Withdrawal Agreement. Subject to the agreement of the EU, which we fully expect would be forthcoming, the UK Government should extend the current transitional arrangements by the maximum of up to two years.
As we will demonstrate, the case for an extension rests on three fundamental considerations. While our focus is clearly on the impacts on Scotland, our analysis also touches on some wider impacts for the UK of failing to extend the transition period.
The most important consideration concerns the consequences of introducing more economic and social turmoil to a UK economy already deeply in crisis as a consequence of the COVID-19 pandemic. Failing to extend the transition period would mean hitting the economy with the consequences of a hard Brexit at a time when it is already unprecedentedly fragile. Companies that might otherwise have managed to resume full operations, despite the effects of COVID-19, would face additional headwinds. The impact on Scotland's economy and our productive potential would be long term. This paper sets out our analysis of those risks and impacts, for the Scottish economy and for key sectors within it.
That simultaneous double hit could be avoided by extending the transition period.
The second consideration relates to the immense practical challenges faced by governments, businesses and others. Without an extension, all concerned will have only a few months to implement a workable framework for our economic, social and security relationships with the EU for many years to come. That framework has not even been negotiated and ratified yet, so the actual time available will be even shorter. Furthermore, COVID-19 will still be severely constraining the available bandwidth of governments and businesses. While it is true that the broad shape of the future relationship is clear - somewhere between no deal and a basic free trade agreement (FTA) - businesses, and everyone else adapting to new arrangements, need to know the details so that they can adjust systems, processes, and even entire business models. To suggest that the UK can be ready in time for 1 January 2021 is to recklessly deny reality.
The third consideration revolves around the timetable for negotiations and the inadequacy of scrutiny and accountability across the UK's four nations. The tight timescale, at a time when leaders on both sides are rightly fully occupied with handling the coronavirus crisis, increases the risk of a no deal outcome. The biggest change in the UK's international relationships in a generation must not be carried out without proper scrutiny by and involvement of the Westminster parliament and the devolved institutions. That has not happened to date; whilst an extension alone will not guarantee it happens, what can be guaranteed is that without an extension it will be impossible.
We will argue in this paper that these considerations taken together constitute a compelling case for using the option for an extension that was sensibly included in the Withdrawal Agreement. These arguments are more than enough to justify an extension, even for those who see Brexit as an opportunity, since the reality is that the UK has left the EU and the most immediate issue now is how to manage the end of transition in the least damaging way. But an extension to the transition would also allow for a re-evaluation of the UK's current approach to the future relationship, to take account of the long term impacts of the pandemic.
While clearly putting in place arrangements for an extension will itself require some effort, this will be modest. It should not impact on business, which will simply see a continuation of existing arrangements. The most frequently cited objection to an extension, of continuing UK financial contributions, with the potential for the UK to have to contribute to EU COVID-19 recovery programmes is simply incorrect. The Withdrawal Agreement itself recognises that, in the event of an extension, the financial terms will change, reflecting the fact that the EU will enter a new Multiannual Financial Framework Period at the end of 2020 and the UK will no longer be part of major programmes such as Common Agricultural Policy payments. The Withdrawal Agreement provides for a revised contribution to be agreed between the UK and EU reflecting this new situation. The size of this contribution resulting from an extension will be significantly less than during the current transition period, and very small compared with the loss of economic growth the UK would suffer without an extension, even if an FTA were agreed and implemented by the end of 2020. Most importantly, the size of the contribution (other than for specific programmes in which the UK wishes to participate) would, under the terms of the Withdrawal Agreement, need to be agreed before any decision to extend the transition period, so the UK Government would be able to take a decision on extension in full knowledge of the financial implications.