Capital Controls In The UK?

The post below was first published on our Policy Matters blog

Since the US Dollar departed from the gold standard in 1971 much of the world has abandoned or substantially relaxed capital and exchange controls. International trade and investment has grown dramatically since that time and it is acknowledged that open markets stimulate trade. The UK has been since the 1980s at the forefront of countries advocating open economies and international trade and investment.

Until recently, it would have been laughable to envisage the UK either needing or wanting to introduce capital and exchange controls, but there have been persistent rumours that the Labour Party would take this course, if it won the next General Election, in order to counter a flight of capital from the UK, or the risk of this occurring. The Shadow Chancellor, John McDonnell, in a speech in January 2019 was emphatic that the Labour Party, if it came to power, would not introduce capital controls and there is no reference in the Labour Party manifesto.

The rumours have provoked debate and prompted us to research the issue. We have prepared a paper that looks at the legalities and practical issues related to exchange control, which concludes:

The UK would be unlikely to meet EU rules that would allow introduction of capital and exchange (payment) controls while still an EU Member or in transition, unless and until it became at imminent risk of being unable to meet its debts as they fell due. Labour plans for future relationships with the EU after the UK ceased to be an EU Member State would likely produce a very close relationship with the EU in which the UK had to agree to EU rules on free movement of capital and payments, reinforced by the need to support the economy of the island of Ireland with no internal borders. The alternative, following a referendum, might be continued membership of the EU. If the UK did leave the EU into transition, but transition ended without a new trade relationship with the EU being finalised and the UK reverted to WTO terms in dealing with the EU, then the...