Theresa May heads to Florence, and unfreezing the pay cap
The UK prime minister is set to give a big Brexit speech in Florence next week - what might she say and how important is it? And has the government made the right decision to lift the public sector pay cap? With George Parker, Sarah O’Connor, James Blitz and Miranda Green of the Financial Times.
Presented by Sebastian Payne. Produced by Anna Dedhar. Edited by Paolo Pascual.
Welcome to FT Politics, the Financial Times' podcast on British politics. I'm Sebastian Payne. And in this week's episode, we'll be discussing Theresa May's approaching big Brexit speech in Florence and the government's decision to lift the public sector pay cap. I'm delighted to be joined by our political editor George Parker, writer/editor James Blitz, political commentator Miranda Green, and our employment correspondent Sarah O'Connor. Thank you all for joining.
Next Friday, Theresa May is off to Florence for what is being billed as her next big speech on the UK's departure from the EU. This follows on from her Lancaster House speech in January where she defined it as leaving the single market and going full global Britain. As we reported in the FT this week, the Prime Minister will use this speech to discuss a transition deal and the so-called divorce bill of how much the UK will have to pay the EU after departure day.
Mrs. May is hoping to use this speech to unblock the negotiations and move on from departure talks to the future relationship between Britain and the block. But will it work? So George Packer, let's just start with a bit of background of the Brexit speech and how we got there. Since the June election, Mrs. May seems to be taking a bit more of a pragmatic approach to Brexit, dictated by the fact she doesn't have a big majority.
And we heard Philip Hammond and David Davis and many other cabinet ministers actually have quite a practical approach saying we need to have a transition. So after March 2019, the status quo essentially remains. That's what it sounds like she's going to be selling next Friday.
Yeah, I think that's right. Before the election, key voices were silenced in the debate about Brexit by Theresa May, notably, and Philip Hammond, the chancellor, and the voice of business. And I think what you've seen since the election-- you referred to the small majority-- is those voices have come to the fore. And now, Theresa May seems to be locked into a much more pragmatic approach to delivering a smoother path to Brexit.
And yes, you're right that the speech that's been built in Florence for next Friday is going to be the one where she's going to set out how she thinks the transition might work. And I think that's going to be quite a lot of tension between business, which would like to see a three-year transition period and between those in the cabinet, like Boris Johnson and Liam Fox, who would prefer it to be shorter than two years, about the length of the transition.
But nevertheless, it will look like continuing EU membership in all but name. And that's the really interesting thing that's happened since the Lancaster House speech back in January. And you've heard over the summer David Davis, the Brexit Secretary, Philip Hammond, the Chancellor, almost making policy in Theresa May's absence and talking about, what Phillip Hammond calls, a transition which will be as close as possible to the status quo. And David Davis is now calling as close as possible to the current arrangements. So gradually the language has hardened up. And I think we're going to see that solidify in Florence next week.
I think one thing that's worth pointing out-- the status quo is not quite right because on Brexit day the UK will lose its voting rights. So it's actually economically and practically trading sense the status quo. But it's something will change because Britain will have formerly left the EU on that day, even if the free movement and whatever doesn't end.
Yeah, that's right. I mean, what will happen in March 2019 will satisfy some on the euro-skeptic side because we will leave the EU. We will technically leave the single market. We will technically leave the customs union.
But under the transition that's been mapped out, we'll try to negotiate some kind of customs union and single market arrangement which looks very similar to what we have. But as you say, the big difference will be we're going to have to carry on paying into the EU. And in exchange, we won't have a vote.
James Blitz, I think, is someone who sort of wants to not have an economic shock about Brexit. This seems to be a good thing this is happening because the idea that no deal is better than a bad deal that was the language used by Mrs. May before the election. That's now been dropped entirely. And I've noticed the conservatives are now saying the conservatives are the only party that will guarantee a smooth exit out of the EU.
But this comes back to a fundamental problem, which is this is what Britain wants. What does the EU 27 want? And I think that's going to be the real test of this speech. Is it acceptable to the commission and to the heads of the 27 other EU countries?
Yes, that is the key question. There are three things I think that that Mrs. May's got to do in Florence next week. Number one, as George has said, she's basically got to give the official imprimatur to everything but Davis and Hammond have been saying about a standstill transition. We've heard hardly anything from the Prime Minister. This will actually be her first big statement on Brexit.
In nine months.
Yeah, since basically the Article 50 letter. I mean, she is somebody who says very little and then takes a big position. And that's basically how she seems to operate. So she has to underpin everything that Hammond and Davis have said.
The second thing then is on the money. She basically needs to use the transition-- this is what the Europeans want-- as a way to start saying, look, in that two or three year period I will continue to pay into the EU budget approximately 10 billion euros a year. Fill that gap so that the Europeans are not left with a huge gap over that period. And that's something that really concerns them.
Now, if she does that, I think she'll certainly move some of the way to doing what's needed to move to phase two in the discussion of the trade agreement in the second phase. So she'll do something of that. Although, Michel Barnier, the EU Brexit negotiator, and others in the commission want to see more than that. They actually want to see the UK also saying more about its other liabilities that it's got to pay, pensions agreement, and so on.
I think that's going to be very difficult for the prime minister before the Conservative Party Conference. But I think if she says enough about filling the budget, she should do enough to move to phase two.
And then the third she's got to address, again, when nothing is said, is what roughly do the British want in terms of the long term relationship? And that's very important, not just for the Europeans who actually want to know roughly where things are going once they move to phase two. It's also really important I think domestically because the more Mrs. may can talk about a cleanish break after the transitional period is over, the more a lot of these cabinet ministers around her are going to say, OK, the transition will be fine. And they can sell it. So that's quite important.
And I think the key thing on the bill is-- if I'm right-- basically if we continue to pay as we do now, that will be 20 to 30 billion euros. And if these sums we've heard about like 60 billion divorce bill, that goes half way to doing that. But the thing that does worry me there was some polling that came out recently that said the only acceptable sum to British voters was 10 billion. And anything above that, there was huge majorities against this.
And I think that is a worrying thing depending on how this is framed by euro-skeptic papers such as the Daily Mail or the Daily Telegraph is that people will not accept this sum because nobody in the government has laid the groundwork for paying any kind of divorce bill until now.
I think that's absolutely right. I don't know what you think, George, but my view is that Mrs. May may well be going off to Florence to make a speech directly to the Europeans. But the truth is actually the government has not created any of the ground for any kind of payment with the British public. And it is going to be a difficult speech in that regard.
Yeah, I agree with that. And the choreography of this is difficult, partly because of public opinion. And partly because if you put too much money on the table implicitly at the start of this process, you're in danger of throwing away your leverage because money is our big leverage really with the final trade talks.
This is what a cabinet minister said to you in your story.
Indeed, that fine, you know, we start talking about the money in terms of the transition for two or three years. But we need to have some money in reserve for leverage for the free trade association discussions. And the point about that-- James was alluding to this-- the EU position is well, fine, if you want to pay into the budget during the transition period, of course, you've got to because you want the benefits of the single market. But that doesn't cover your past and future obligations.
So it's a very, very difficult political trick to pull off. And the fact that Theresa May said virtually nothing about this over the last few months makes it harder.
Now, we did hear reports of the summer of this wunderkind civil servant appearing in Brussels with David Davis to dissect the commission's thinking on the Brexit bill here because this is part of the reason that we've heard nothing from the UK government is there doesn't seem to accept the fact there is a bill and the formula of how that works. How is she going to tee that side up with this acknowledgment expecting that there are sums to pay?
Well, that's a good point because, as you say, the legal team went through the commission demand line by line. And according to the account in the Daily Telegraph at least, it left the EU side flabbergasted as they were confronted with the reality. The truth is that there's a huge amount of legal grey area in what the commission is demanding in terms of future and past obligations. Nobody wants to see this go into the European courts in the Hague to be settled.
The good thing about the transition, from the point of view of the negotiations, is it's a way of muddying the waters slightly because everyone would agree if we want a status quo transition in terms of single market access, then that implies pretty much status quo ongoing British contributions during the transition. Now, the more you can wrap into that the commitments we've made that haven't been exercised yet, the [INAUDIBLE] day as they say in Brussels, all that stuff, the more that can be mushed into the transitional arrangement the better.
That's why people in the treasury regard the transition as being key to the money issue. But the problem is once we put money into the transition-- that's going back to what I was saying earlier-- the problem that the Brussels side could come back for a lot more.
Based on what George and I have been talking about, James, do you think this speech will help could unlblock the talks at the moment because some progress was made in the last draft? But the real worry seems to be enough progress isn't being made before this October the 19th summit, which is when the UK really wants to get the go ahead to start talking about the future relationship. But the bill seems to have been a sticking point for that.
So if Mrs. May says this, do you think that will help move things forward? Or is it not going to be enough?
It really does depend how firm she is and the tone she adopts. I've always felt that at the October 19-20 summit the Europeans will be very inclined not to give the green light to phase two. Just from bargaining perspective, they want to make the British sweat. Remember that at the end of the day, the fundamental British weakness is that they're on a conveyor belt that comes to an end after two years and then we're out.
And so because they've got a time constraint, any kind of delay makes things even more difficult for the British. And it squeezes things. So I think there'll be a very strong incentive to try and do that.
That said, if Mrs. May really comes forward with a speech that addresses a lot of these issues on the budget, is clearer about the end state, and is very clear on the transition, then I think the risk for the Europeans is that they start looking a bit churlish and cynical. And I think at times in the last week or two I've felt that Jean-Claude Juncker, the European Commission president, has got some of his language a bit wrong. I mean, talking about how David Davis was unstable. I think that was something that came out recently. Talking about how the British will regret Brexit.
This isn't really helpful, frankly, from the European Commission perspective. And I think they need to be careful about being too gratuitously offensive. Otherwise they make it very difficult for the UK side.
And this is what we've said in a FT leader quite recently that the UK needs to have far more clarity in a practical sense, but also there needs to be a bit more flexibility from the other side. I'm aware that he's quite restricted in terms of his negotiating mandate about what he can and can't do. But it does seem that we're stalling because of those two things.
Now, George, in Theresa May's mind the one thing she's always thinking about is the 52% of leave voters and all those conservative MPs, the ones who did for David Cameron, did for John Major, and may do for her if they feel Brexit is being betrayed somehow. Now, over the summer, the whole ECJ stuff that came out, that actually went down quite well because they introduced this concept of direct jurisdiction, which I think as our legal blogger David Alan Green said there's no actual legal basis for that. It's just a made up term for jurisdiction.
But that went well with Jacob Rees-Mogg, Bill Cash, other MPs who have a sort Theresa May does worry about. How are they going to feel about this speech and about transition?
Well, I think they will feel uncomfortable. But I think one of the features of the summer has been the way that the euro-skeptics so far have basically sucked all this up. I think it's quite interesting.
It's quite surprising, actually.
It's quite surprising. But they do have bottom lines. And I think the bottom lines are becoming clearer. One is that they expect there to be an end date for this transition period, no further than two years away, so 2021, not to be extended written into law.
And the other thing is that the links to house principles that he's set out in January in the end are adhered to-- control of borders, control of laws, control of money. And I think provided that all comes to an end in 2021, a year before latest date for the general election, I think they will be prepared to accept quite a lot during the transition.
However, I think there's a problem here which you can start to see coming over the horizon. Let's say that Theresa May announced she wants to transition deal for two years going up to 2021. At that point, the negotiating power goes over to the European Union. Some of the impetus about getting a free trade agreement goes out of the discussions because, frankly, the EU's got to swear they want us.
They've got an open free trading arrangement with the UK. We're paying the bills. And we've got no vote on their project. It's exactly where they want us.
And they know that we've effectively pushed the cliff edge back from 2019 to 2021. There's a sunset clause saying the transition phase has to end in 2021. Now, of course, the EU is very well-versed in extending sunset clauses.
Could Theresa May do that in the current political climate? Almost certainly not. And you will have business saying, well, hang on a sec, '21 starts like a very dangerous moment. It's a year before the election. So you know, I think the transition period is potentially a dangerous bit of can kicking down the road, to be frank.
And I think on the length of it, because there are some as you said businesses want three years, but the problem with that is it takes you right up to the next general election. I think conservatives are worried that if we do hit a cliff edge at that point, the Tories will get the blame for it. They might still get the blame for it a year before that. So it seems like two years is the most reasonable thing because one year is not enough time to plan. So two years seems to be the most reasonable thing.
I think it's the most that Theresa May can get away with that without the Tory right going mad about this. Because for the Tory right, the absolute bottom line is this, we've got to be out properly before the general election. If there's any sense this is sliding into a general election issue, they will rise up. And we saw a little bit of that last week with this letter from the so-called European Research Group, some of the conservative euro-skeptics. So a bit of a sign that they're starting to get a little bit uneasy about the way the argument's going.
And finally, last quick question, James, is that going to be a cliff edge at the end of this? So if we have this extra two years of preparation, will that give businesses enough time and Whitehall enough time to get the systems in place? Because clearly, I think we'd agree things can be ready for March 2019, hence why we're talking about transition. But will they be ready in March 2021?
It doesn't look long enough, frankly. I think from the position of business, and I think from probably the private view of a lot of people in the civil service, it just isn't long enough. You need a good deal more time.
We had, for example, the head for HMRC giving evidence this week saying, you know, you need an awful lot done in terms of all the infrastructure you need for customs. I think business needs much more time to adjust. I think it's a bit of kicking down the can.
We'll see what Mrs. May says. I have to say, I think this is the hardest moment for her-- I don't know if you'd agree, George-- on the whole thing because she's taken such a strong view on hard Brexit up till now. She's got such a reputation for flip flopping as a prime minister. And I think this is actually the biggest flip-flop of all. And I wonder really whether she's going to get away with it.
The big domestic political story this week was the government's decision to lift the public sector pay cap. On Monday, it was announced that police and prison officers would see about roughly 2% rise each, which breaches the overall 1% cap that's been in place through the years of austerity. Politically, this was a big moment for Theresa May's government. But how much practical difference will it make to those people receiving it? And will it placate the trade unions have been angling for something much greater?
So Sarah O'Connor, let's begin with the practicalities. Inflation is now 2.9%. So this increase doesn't really seem like a rise, a bit more like a lesser cut.
Exactly. And it was slightly strange timing for the government to announce these pay rises on the day that we got the new inflation number because it really just underlined that this is still a real [INAUDIBLE] pay cut. Right? So it's a slightly smaller cut.
But yeah, I was in Brighton when the news was announced down with the trade unionists who were gathering for their annual congress. And they were completely unimpressed. And if anything, I think they were heartened in the sense that they smell blood in the water from the Tories on this. And they feel as if the pressure they've been putting on is starting to work. And they were having lots of conversations with each other saying we would be stupid to let this moment pass. We need to just step up the pressure.
One guy said the head of the PCS trade union, Mark Serwotka, they need to feel the hot breath of the trade unionist down their necks. Like we need to really push this now. So I don't think this is the end of the story.
I think it was Mark who described as a pile of crap--
--I believe when the announcement came through there. There is obviously a clear issue for the government because they're feeling political pressure since the general election when Jeremy Corbyn ran on a spending platform, saying let's end austerity, let's [INAUDIBLE], and give everyone a pay rise. So for the government to then listen to that, it shows like they accept some of what Mr. Corbyn's been saying?
I suppose yeah. And also the bigger reason I think why the government is starting to move on this is just that there are now genuinely recruitment and retention problems all across the public sector and particularly in places like the NHS and teaching. And so the pay review bodies that set to pay for some of these sectors have been coming back to the government and saying, look, there's a massive shortage of trainee teachers. We're losing nurses hand over fist. Like these are practical problems that the government is realising it has to do with regardless of whether Corbyn won the argument or not.
Miranda Green, there is a slight problem with this because they chose two parts of the public sector to give a pay rise. And Mr. Corbyn came out and said this was playing people off against each other and Tory divide and rule and all the rest of it. But now they've given them to these people, it does look like they're going to have to attend to other sectors. So the firemen, for example, are also angling for a pay rise as are nurses. So you end up in this argument by just targeting these two parts of it that everyone else wants to pay rise as well.
Well, that's absolutely right which is why coming forward to say that police and prison officers would get this rise effectively was interpreted as, that's the end of the pay cap. So this quite long-standing policy now of a 1% cap on public sector pay is out the window. And yes, indeed, I think Sarah's quite right the timing was peculiar, not just because of it being the day on which this very high inflation figure was revealed, but also because it is in the middle of the TUC.
And I wonder whether the government in some way thought they were going to catch them on the hop, maybe catch Jeremy Corbyn on the hop. But in fact, as you say it meant that Corbin's rhetoric about divide and rule was very effective because all the unions were gathered there together, you know, to give a very united response which was very negative.
And also, Sarah is quite right. It's not just a recruitment problem across the public services. There's a huge retention problem. You know, the dropout rate for teachers is horrendous and particularly, for example, in subjects where we need the most, like science. So they have to address this across public sector board.
That, of course, has to be done with a background of rising inflation. So the broader economic picture is very relevant as well. And also, I think you're quite right, Seb, this idea of grievance that built up during the general election campaign, the idea that the economy doesn't work for everyone. Yesterday, the NPC called pay growth, which is very low, the Achilles heel of the economy. So we're good at providing the jobs. We're really not good at pay progression so that people feel that they're getting on.
And as you said, Sarah, the timing was particular odd because Jeremy Corbyn gave his address to the TUC, which would have been watched, but with maybe not as much interest. And he then had a big platform to instantly respond and say, actually, this is just a watered down version of what I want.
And again, it raises that question that there's this sort of crisis in the conservatives' thinking at the moment that they're conceding ground on lots of different issues. And if you are a public sector voter who feels they deserve a pay rise, why would you vote for the conservatives when they're going to give you a little rise while Mr. Corbyn will give you a big rise?
Yeah, I think you're absolutely right. I think the Tories are in a really difficult position now because they have to give ground, and they're starting to give ground, but they're never going to want to give as much ground as Corbyn will. And actually, for people who have had real terms pay cuts for six or seven years, why on Earth would they choose the Tory option over Jeremy Corbyn's option?
And when you look at the state of the public finances, Miranda, because this decision not been met by universal acclaim on the conservative side. It was Francis Maude, who's the former cabinet office minister, who's now Lord Maude, and came out to say that we've still got a deficit to close. And it's not going to be close for another five or into the mid 2020s even. So at that point, once you're conceding that we need to start spending again, you're essentially acknowledging that we don't know where this money's coming from. So it might mean more borrowing, which means, again, this central argument of the conservatives is that we're repairing the finances is just not happening.
Yes, quite right. So the raison d'etre of conservative government since 2010 has been tackling the deficit. And they've managed to do a little bit of it, but nothing like enough if you're looking at debt levels overall. And so loosening the public purse strings on pay is a huge problem if you want to keep that a central priority.
But you see, again, as we saw in the general election campaign people's patience has really been tested with this slow attack on the deficit. And there are people within the Conservative Party, of course, who thought they should have gone much, much harder with cuts in the first few years between 2010 and 2015. And then at this point, we might be able to ease up. But you're quite right, easing up now has its own dangers.
Yes, I spoke to a former cabinet minister who said, the UK should have done what Ireland did actually, which was when they had financial difficulties to go in very quick and very hard. The political cost that would have been huge and the practicalities to people's lives if public services were really brought down. But I think as this minister said to me, the problem with the way we did it was we went through all our spending commitments and promises in the election and ended up right at the bottom, which was local government, which has been cut back quite a lot during the years of austerity.
Yes. And that would have been extremely brutal. And I think you're right. Those who recommend retrospectively that course of action are not really thinking through the politics of it perhaps.
But you know, we still do have a huge problem with the public finances. And the MPC is saying this week that in October inflation is likely to break through the 3% level. And there's a lot of moving parts of this jigsaw. And where the public sector pay settlements fit in just got a lot more difficult.
Sarah, tell us about the mood of what the TUC was like this year. The trade unions seem quite empowered at the moment. And Len McCluskey, who's head of the powerful Unite Union, has been talking up about a lot of strikes and part of this is all about pay. And even talked about breaching trade union laws.
Yes. So Len McCluskey is a real character in the trade union movement.
To say the least. So yeah, so he came out a few times actually over the last few days and said, a, we're going to strike over this. And I think that that is a credible threat, and not just from Unite. There are a number of unions now-- PCS, the Fire Brigades Union, GNB-- that are talking about strikes. And not only that, but maybe coordinating their strikes to try and wreak the maximum damage on the government. And probably that will come to a head around the time of the budget, which will be November.
However, Len McCluskey also was talking about, as you say, breaching trade union law, which basically means striking illegally. So even if he doesn't get the right number of people voting in the ballots, he would go ahead and do it anyway.
I have to say that most trade unionists, and even ones in Unite when you talk to them privately, they sort of say, it's a bit of bluster really. I think it's very unlikely that trade unions will go down that road because that completely delegitimises when they feel like they have quite a legitimate cause right now. So they feel as if public opinion is behind them. And the sensible unions are planning to try and get decent ballots out there now, consultative ballots, to make sure that they have the support behind them so they can make a big push in November.
And their argument for this month is going all the way back to the miners strike is about the government's laws are too strict. And the last conservative administration brought in even tougher trade union laws that raised thresholds and made it more difficult to strike as well.
But Len compared himself to Gandhi and Mandela this week saying if you looked at what they did that it was probably illegal, but it was the right thing to do, which, again, as Sarah said, is possibly more bluster than any practical sense.
Slightly cheeky I think comparing himself to the Mahatma. He does have other nicknames.
Which worked. He got a front page story.
He did indeed. But no, this is a very interesting question as to how far the kind of militant mood will go amongst the unions. And I think actually with some of them the government's slightly buying them off with other kind of softening reform agenda.
Moves like, for example, yesterday Justine Greening the education secretary announced a whole bunch of change to school tests. Which may sound of minority interest, but actually this idea of tackling teacher workloads and giving them back some of their autonomy. She gave them something they wanted yesterday. So if you're trying to buy off the NUT, for example, on a non-pay issue, she did some of that yesterday.
I think on a broader sense this feeling that the unions have-- Their tails are up. And they're feeling optimistic because they think that the public are on their side. That may be a bit more true than it usually is when Len McCluskey's blustering. Not least, sadly, because we've had the Grenfell tragedy. We've had lots of terrorist attacks in recent months.
And actually, this feeling of rewarding our public servants who are the first responders, as they call them in America, is quite strong I think.
And actually Momentum, which is the outrise Jeremy Corbyn produced a very effective social media video this week about firemen and policemen saying when we have these awful public tragedies, we're the people who are there first. We're dealing with this. And clearly, the unions are buoyed by Mr. Corbyn's relative success in the general election, the strength of his leadership because Len McCluskey is very close to the labour leader.
Well, that's right. And I think also you're quite right to bring social media into it because Momentum's ads during the election were sensational. I mean, there were very, very clever. And this idea of who's winning the hearts and minds fight between the government trying to maintain pay restraint and the unions trying to say, come on, these people who are there in an emergency deserve better. They could win it.
And finally, Sarah, we also had employment figures that came out this week which, again, showed record levels. And this gives the government a good message. But with stagnant pay growth, it's kind of a weird picture that's coming out of the UK economy at the moment. A lot of people are saying, well, we've got these jobs, but they're not good quality jobs. Is this something to celebrate or to stroke our chins at?
Very much a little bit of both. So you can't deny that jobs growth is a good thing. More people having jobs being in work is obviously good news. And the government is right to be pleased about it.
And yeah, the unemployment rate is now the lowest since 1975. It is pretty extraordinary. But as Miranda said, the Achilles heel here is pay growth, which is extremely weak. There's no signs really of it getting any stronger, even though the Bank of England this week is sort of starting to pave the way now for a rise in interest rates. Which frankly, will be quite painful for people because they haven't had a rise in interest rates for how many years now?
A very long time. As long as I can remember basically. As long as my career at the FT has lasted, interest rates haven't gone up. So I think that could be a real shock to people. And at a time in which living standards are basically now stagnant and falling slightly, jobs growth can only go so far to lift the national mood.
And that's it for this week's episode of FT Politics. Thank you very much to all my guests for joining. This episode was produced by Anna Dedhar. We'll be back next week for another instalment. Until then, thanks for listening.