Newsletter #36: Reform tease their plans for Government

PLUS: Labour unveil industrial and immigration strategies; and Indian trade deal signed

Good morning.

Today, we discuss the India trade deal, and what it does and (probably) doesn’t mean; Farage’s plans for government, as outlined in The Mail; and Labour’s plans for industrial strategy and immigration, which are set to be unveiled in the coming weeks. (PS: I promise the pieces on Romania and Poland are in the works; stay tuned.)

This newsletter’s agenda: The effects of the Indian trade deal remain unclear, but it’s still fun to bash Starmer with it (free); Reform tease us with their plans for government — but what’s changed since the 2024 Manifesto? (paid); Labour begin to unveil industrial and immigration strategies (paid)

The effects of the Indian trade deal remain unclear, but it’s still fun to bash Starmer with it

The big development this week for Keir Starmer was the announcement that Britain had signed a trade deal with India. The deal was mostly (‘95%’) agreed by the Conservatives, but had run into roadblocks, primarily over the inevitable Indian demands for more visas. (Aren’t they embarrassed about their obsession with exporting their own population?) The break-through despite the continued refusal of Britain to meaningfully issue more visas is widely interpreted as being a consequence of Modi looking to diversify trade in the face of increasing uncertainty internationally.

Under the new agreement, almost all goods (94%) in the highly-protected Indian market will see tariff cuts; 64% of tariff lines will see duties fall to zero immediately, rising to 88% over ten years. Those of most interest to British producers will be the cut to the duty on whisky and gin (from 150% to 40% over ten years) and luxury cars (100% to 10% under an as-yet unspecified quota). The former in particular has been lobbying for a deal with India for years for this reason. Meanwhile, Britain will eliminate tariffs on 99% of Indian goods, with carve-outs for a number of sensitive (mostly agricultural) sectors.

The Government has published some analysis claiming that the deal will increase British GDP by £4.8bn by 2040. Not nothing, but not ultimately of enormous significance. It is notable, as The Economist pointed out, that very little had been achieved for trade in services — which, naturally, is far more important to Britain than trade in goods, given our weakness in manufacturing. Discussions on investment and services are, however, apparently still ongoing.

But the most controversial aspects of the deal did not relate to trade (at least narrowly defined) at all; rather, commentary focused primarily on two things: visas and tax. At least on the surface, there is little to talk about with visas: some relaxations on visas for yogis, for instance, but (apparently) not in any numbers that is likely to make a difference. It was thus to the latter that most attention turned.

The latter, the deal on tax, concerned the so-called Double Contributions Convention. This deal, which is reciprocal, allows for British workers in India (not that there are likely to be many of them) and Indian workers in Britain to not pay social security contributions for up to three years; instead, these workers will pay social security contributions to their home country. Importantly, this only applies to Indian workers posted over here on short-term transfers, not to all Indian nationals in Britain, as some have claimed.

In the British context, this means an exemption from National Insurance for these Indian workers, though these Indian workers will still have to pay Indian social security contributions to India, and will have to pay the NHS surcharge to Britain. In addition, they will not be eligible for the state pension. According to the Treasury, under the assumption of 20,000 Indian workers a year eligible for the scheme, this will cost up to £200m a year in tax revenue (though this does not take into account the potential for numbers to increase as a consequence of the deal). Not cheap.

It has been speculated that this was agreed in place of more business visas, which is the standard Indian demand in trade negotiations (and one which seems to have scuppered the potential for a deal in previous years). Inevitably, there was outcry about — so it seemed — the basic unfairness of it all. ‘Two-tier Keir’ had gone too far: now, on top of ‘Two-tier policing’ and ‘Two-tier justice’, there would be ‘Two-tier taxes’. Equally inevitably, Labour had an easy response to the Tory jibes, this time helped along by leaks from Indian officials: that Badenoch herself, when she was trade minister, suggested similar concessions, but for two years instead of three. Badenoch has denied this.

Some of the less cool-headed claims about the deal are simply incorrect. It is not true that all Indian workers will now be exempt from National Insurance in Britain. This only applies in very specific circumstances that only a small proportion of Indian migrants will meet. There are, however, a number of points that outlets interesting in defending the deal (which, as a general rule, are also those which are best informed about it) have chosen to ignore. The first is that most of the other countries Britain has a Double Contributions Convention with are much smaller and/or much wealthier than India. The closest countries to India on the list are Turkey and the Philippines, but the latter in particular doesn’t have any real corporate presence in Britain, making the agreement of only very limited importance. There’s no Pinoy, or even Turkish, Tata or Infosys already here, ready to undercut British workers on our soil with the new arrangements.

The second is the potential for shenanigans. And if we know anything about Indians, it is that if there are any shenanigans from which they can financially gain available, they will engage in them happily. Some of these shenanigans can probably only be worked out by a tax specialist, and even then only when the full agreement is released, presumably alongside HMRC guidance. But the most obvious method, not to say that it would definitely work, would be to endlessly cycle Indian workers on 3-year contracts in and out of Britain. These workers could be paid less than others in Britain, even those of foreign origin, permitting Indian firms operating here to undercut British ones more easily, including for domestic contracts. Nonetheless, there is no evidence that this kind of scam is already in operation in any of the countries that India already has such an agreement with, which includes France, the Netherlands and Germany.

There also are, of course, reasons to think that this might not be as useful as some might claim, not least because this is mostly relevant to trade in ‘invisibles’, in services, where many of these frictions are, in theory, less significant anyway (at least in something like tech), other than in time and in cultural differences. Surely it would often be even cheaper to simply pay the workers in India to do work in Britain, rather than going to all the hassle of sending them here? There are also, more generally, many costs to bringing workers over here in the first place. Best to stay vigilant, but not to simply assume things (that is, as an analyst, as a politician it’s a different matter).

Nonetheless, if no serious protections are in place to prevent this from happening, this could prove an explosive story in a few years time. All it takes is one IT contractor grumbling, and an entrepreneurial politician to push the story. I think we already know who is the most likely candidate for the ‘entrepreneurial politician’ role.

It is interesting, given the political context of a hammering at the local elections and continued poor polling, that Starmer chose to push this deal through. It demonstrates Starmer’s priorities very well: namely, that he believes the key to literally everything, including winning the next election is attaining economic growth. This is a widespread view in centre-left circles at present: the only way you can square the circle of improved public services and funding an aging population without having to hike taxes even further is growth. This overrides any short-term political concerns, at least to an extent.

I don’t think it’s because he believes that trade with India is a magic bullet for the economy, let alone that more Indians is always good for Britain; rather, I think he quite soberly weighed up the likely political costs against the (projected) economic gains, which none have denied are small, and decided to go with the deal anyway in the hopes that it will stoke the economy, even if to a tiny extent. Obviously, I think that he is wrong in this analysis: any economic benefit is so tiny — and perhaps even more importantly, long-term — that it will be outweighed by the damage of appearing to implement ‘two-tier taxation’. But it’s a strategy nonetheless, and in some respects a future right-wing government will be happy that Starmer is actually doing some unpopular things — such as the abolition of Winter Fuel Allowance — for us.

Reform tease us with their plans for government — but what’s changed since the 2024 Manifesto?

This week, off the back of Reform’s stunning victory at the local elections, Farage published an extended piece in The Mail outlining Reform UK’s plans for government. Many months ago, I published what is, to my knowledge, the fullest analysis of Reform’s 2024 Manifesto. It was highly critical, though it was certainly not entirely negative.

For the most part, Farage’s article was a repeat of the Reform manifesto at the last election, with some updates for the events that have occurred since then. Nonetheless, it is still worth having a look at to see what is and isn’t there — whether because of pledges being quietly dropped, or because of a change of emphasis.