Brexit Becoming More Unpopular as Yet More Warts, Like VAT Administration, Come Into Focus

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Perhaps because this was a bank holiday week in the UK, there hasn’t been as much political posturing and arm wrestling as we typically see these days on the Brexit front. That may have allowed for a bit more reality to work its way into the press than usual.

A major European business group told Theresa May that they will refrain from making investments unless they get more “clarity” on Brexit. They must have awfully short planning horizons to be clearing their throat now, with Brexit ten months away and radically different outcomes, namely a crash-out versus a transition agreement, still very much in play.

But on top of that, they think they can have a magic sparkle pony, namely, “frictionless trade.” And they are so poorly informed that they think a customs union will provide it.

From the BBC:

A group of major European companies [the European Round Table of Industrialists] has warned the Prime Minister they may cut investment without more clarity over the terms of Britain’s EU exit.

Business leaders, including from BP, BMW, Nestle, and Vodafone, told Theresa May that “time is running out”.

In a statement after the Downing Street meeting, they said that a trade deal with the EU must be “frictionless as with a customs union”…

Senior figures from firms including BMW, Phillips, E.On and Ferrovial also attended the meeting with Mrs May and Brexit secretary David Davis.

The ERT represents Europe’s 50 largest companies, with combined revenues of 2.25 trillion euros (£2tn) and millions of employees.

Now of course, it may well be that most if not all of the key players in the ERT are well briefed and know that the Government is not capable of improving on its shambolic performance to date. Their lobbyists and strategic prognosticators are almost certainly well plugged into Brussels and getting unvarnished reports on the state of the negotiations.

So if that’s the case, this meeting could instead have been an exercise in papering the record: “We told you what we needed to keep and expand our operations in the UK. You didn’t deliver it. So don’t blame us when we downsize in Britain.”

A new poll shows that citizens are becoming more downbeat about Brexit. A good summary of the Guardian sponsored poll from Business Insider:

The latest ICM tracker poll for the Guardian, published on Wednesday, suggests that a growing number of British people now believe that Brexit will have a negative economic and social impact on life in Britain.

According to the poll:

  • 45% of Brits now say Brexit will have a negative impact on the British economy, with just 30% saying it will have a positive impact.
  • 39% of Brits say Brexit will have a negative impact on life in Britain, with just 32% saying it will have a positive impact.
  • 32% say Brexit will have a negative impact on their personal finances, compared to just 14% who believe it will have a positive impact.

The findings are the most negative ICM have found since they began tracking public opinion on Brexit since the EU referendum in 2016.

The Government has ignored the VAT issue, which is going to bite it no matter what it does. The Financial Times published an excellent in-depth report, VAT: Brexit’s hidden border dilemma. The short version is the Government hasn’t thought about VAT despite it being a large administrative issue with real costs. Goods bought from other EU members now come in without being charged VAT at the border. That will, or rather should, change once the UK leaves the EU.

But since it has no plans to set up the needed infrastructure to assess VAT on these goods, it faces two choices: not charging VAT, which will lead to considerable loss of revenue and will seriously damage British firms, or accept and comply with the EU VAT regime, which means ceding control over VAT charges and accepting the jurisdiction of the hated ECJ.

Key details from the story:

More than 2m parcels a day can be expected to travel through Royal Mail’s Heathrow Worldwide Distribution Centre…

The bulk of packages from EU countries continue along conveyors straight to dispatch. The rest are sent to the fiscal charging area to have value added tax applied and often customs duties. Once VAT is applied, Royal Mail add an extra £8 handling fee and will not release the goods until all charges are paid.

This is Britain’s VAT border. It requires huge infrastructure, does not always work well and it inconveniences recipients, yet is barely discussed. Mr Thompson told MPs this month that parcels were something in the Brexit debate “which hasn’t really ever been a conversation with anyone”. VAT is the silent Brexit border problem…

If Britain were to treat EU goods the same as non-EU goods, adding VAT at its borders, including with Ireland, would require huge new infrastructure.

As usual, the UK wants to leave the EU but have everything remain the same. In this case, that would mean continuing to participate in the information exchange system that shows what items have crossed European borders. That is a non-starter. From the pink paper:

An EU diplomat handling Brexit said: “VAT is a huge issue, huge, but it’s not talked about publicly because nobody understands it. How on earth do you deal with it? And the Brits just saying we’ll be part of the system without the ECJ? Give me a break. It is like suggesting they take part in every month with 29 days.”….

No third country outside the EU has full access to this VAT information exchange system. Turkey, which has a customs union with the EU, does not have access; Norway has partial access.

And here is the dilemma flagged in the Financial Times’ headline. On the one hand:

Removing the British economy from EU law on VAT was one of the central promises of the 2016 Leave campaign, which promised to end European rules that force the government to apply VAT on tampons and energy bills. “We will take back control of . . . our tax policy,” Theresa May also insisted this month, a pledge that is possible only if Britain departs the EU VAT area.

But on the other:

If Britain decided that such friction was too costly for business and chose not to police its VAT border, untaxed imports would flood in from the EU, destroying legitimate business for shops in Britain, says Richard Allen, head of Retailers against VAT abuse schemes. Highlighting this is not just an idle “project fear” threat, he says: there is a precedent from the period before 2012 when VAT-free importing of CDs and DVDs from the Channel Islands wiped out most high street music retailing in Britain. “If you say, ‘to hell with VAT checks at the border’ then everything will be imported,” he says.

The prospect of a hard VAT border is already having a chilling effect on UK business, according to Alison Horner, VAT Partner at MHA MacIntyre Hudson. She says her British clients who supply into EU just-in-time industries are being asked to deliver with VAT sorted out in advance. “This creates a liability to register for VAT in multiple jurisdictions, which is a big cost to business,” she says.

As indicted, this is a meaty article, so be sure to read it in full.

The most productive companies are the gloomiest about Brexit. Is that because they are also the savviest? Again from the Financial Times:

Business leaders at more productive companies hold the most negative views on Brexit, according to a survey conducted by the Bank of England….

Surveys found they believe leaving the EU will lead to lower sales, exports and investment, while pushing up unit costs and raising the costs of labour and finance.

Business executives in the top two productivity quartiles said they expected Brexit to cut their sales by about 3 per cent on average. Those in the bottom quartile said they thought the impact on sales would be closer to 2.5 per cent, and those in the second-lowest quartile thought sales would fall by less than 2 per cent after the UK leaves the EU in March 2019….

Roughly three-quarters of survey respondents said they had opposed the Brexit vote, but the proportion of business leaders who said that they viewed leaving the EU as “very negative” has risen sharply in the past year, from 40 per cent to 48 per cent.

Although some businesses may well be reasonably well insulated from Brexit, these forecasts are consistent with a serious recession. Let’s hope they are right, since there are far too many good reasons, like Richard North’s warnings about customs, to expect much worse.

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  1. Bugs Bunny

    There’s also the little issue of EU countries applying VAT on small orders of consumer goods coming across their borders. I order plenty of products from Britain – especially things like vitamins, which are less expensive and more available than in France. If I have to pay customs duty and a service charge from UPS or La Poste, I won’t be doing that any longer. I can imagine the small businesses who ship such things will simply stop delivery outside the UK.

  2. Jeff

    So Brexit has moved from “350M£ per week to NHS” to “We survived the Plague, we will survive Brexit”.
    Now that is something to cheer for.

    1. vlade

      Yes. Except instead of blaming it on Jews/witches etc, the UK will blame the EU.

      If it wasn’t for the fact that no-one in Europe has an army (or navy, or airforce) to speak of, one would wonder whether 21. century would not go in the tradition of having a good, major war early in the century is just a done thing.

    2. Maff

      Everything the establishment supporters of remain wrote and said at the time of the referendum was accurate and done in good faith, of course.

      1. vlade

        Both sides lied.

        But few of the lies the remainers told were as barefaced, and knowingly misleading and manipulating, as what the leave did.

    3. Kevin Lawson

      That’s the thing about the plague–many people did NOT survive it. In many areas there were huge drops in population. Brexit infection will spread similarly as the UK is an interdependent system. Once lorries start piling up in huge car parks, there will be a ripple effect of consequences.

      There are two options now. Brexageddon and cancelling Brexit. Of course one good way to cancel Brexit is to just pretend to Brexit, but stay in CU and SM.

    4. Matthew G. Saroff

      Thereas May opposed the Brexit before the vote, and I’m wondering if she is being intentionally incompetent here.

      Given her general level of incompetence, I’m dubious, but it does seem like she is choosing the absolutely worst way of going about this.

  3. The Rev Kev

    The UK Government becomes aware that there will be a serious problem with VAT payments and the EU post Brexit.

    Number of days since the Brexit Vote was taken – 707 days.

  4. paul

    The UK administration looks to me to be in complete meltdown.

    They never had a plan for winning the referendum, because they had gotten away with them before.

    They had never dealt with national government before and realised this was was not what they went into politics for. (Vanity and public assets to acquire)

    They have reverted to a public relations war, which is the only thing they seem to understand.

    Strangely enough the PR veteran, Cameron, performed probably the one honest,revealing act in his life by quitting.

    Cometh the hour, scarpeth the man.

    The only ‘activists’ within the government are year zero zealots,dreaming of one gigantic freeport/seasteading.

    The rest are just fatally resigned.

    I’m just waiting for the next referendum in Scotland, one which the establishment will take far more seriously.

    Here’s a heartwarming example of a largely,but not completely, independent small country.

    1. Colonel Smithers

      Thank you, Paul.

      I wouldn’t call Cameron a PR veteran.

      A job was found for him at Carlton TV to give him a bit of “real life experience” before going into the Commons. He alienated many City reporters with his antics.

      My former boss knows him from when she was a junior minister at the Treasury in the Major government / Clarke chancellorship. Her thoughts on Cameron and Osborne are too anglo-saxon / industrial for this family blog. Our colleagues who were Tory activists were equally scathing about the pair.

      1. paul

        I think I used the word ‘veteran’ because,in my mind, he was compared to the unter toff Gideon Osborne who fermented almost entirely in the conservative party grotto that was smith square

      2. Andrew Dodds

        Yes.. the trick is to name any of Cameron’s achievements. Gay marriage and, well, that’s it. Also trashing Libya and then walking away.

        Osborne had his austerity and a gift for political tactics.

        And they let their ministers get away with a lot of nasty stuff; Gove doing a hatchet job on education; the health and social care act, IDS being quite evil.

        1. paul

          Yes.. the trick is to name any of Cameron’s achievements. Gay marriage and, well, that’s it. Also trashing Libya and then walking away.

          One open goal does not a leader great

          Osborne had his austerity and a gift for political tactics

          Not in my opinion, he had the establishment and a scourged population who believed,or preffered, his o level economic bullshit.

          This is the generation who took selfies and mopped their tears in 2013 with their ‘hang mandela’ t shirts.

          I find it hard to understand these grievance driven, spoilt and greedy pricks, let alone forgive them.

        2. Mirdif

          Allegedly, both Cameron and Osborne were and perhaps continue to be involved heavily in giving strong financial support to the rural economy of Colombia.

    2. begob

      They have reverted to a public relations war, which is the only thing they seem to understand.

      Strangely enough the PR veteran, Cameron, performed probably the one honest,revealing act in his life by quitting.

      Live by the sword, die by the sword. May’s career is built on appearing on the front page of the Daily Mail.

      There may be even more trouble coming her way on the PR front. The BBC seems to be a little out of step today on the Skripal affair – the Jeremy Vine lunchtime radio show had Vanessa Feltz asking cheeky questions about the Babchenko fake assassination, then her journalist source repeatedly used the word “apparent” about Ukraine’s claims and reported without comment Russian TV’s linking of the fakery to the Skripals, and then in a phone in from a member of the public the guy made the same Skripal link without challenge.

      Could be a Fukushima summer.

      1. Synoia

        May’s career is built on appearing on the front page of the Daily Mail.

        She’s certainly no candidate for p3 of the Sun.

  5. PlutoniumKun

    As a colleague said over coffee to me a few days ago ‘Brexit would be hilarious if we weren’t within the blast zone’.

    Just to note that from what I’ve gathered, the main business organisations in the UK are fully aware of the limitations of the Customs Union, but they’ve failed to get traction on highlighting the complexity of the issues with people who matter. I suspect the quotes above are intended solely so they can say ‘we told you so’.

    I have to confess I’ve never given any thought whatever to VAT within the Eurozone. I’m old enough to remember rigorous checks for lower VAT and excise on products on trips to Europe, but it seems a long time ago, the only checks now are for those taking far too much wine in their vans from France (and even then, you have to practically have a truck load before they’ll stop you). I have noticed in the past that UK online outlets rarely mention VAT on their sites, but German ones do, albeit in a vague fashion. The UK is quite successful with online shopping – Wiggle for sporting goods and a variety of online fast fashion outlets have been very popular. Presumably these will be looking for EU bases to avoid delays for their EU customers and to save VAT for their UK customers.

    1. Clive

      For those with strong stomachs who don’t mind getting down and dirty in the griminess of the technicalities of it all, Thomson Reuters maintain an excellent freely available resource — which manages the rare trick when it comes to Brexit coverage of being completely dispassionate about the whole thing* — on (as here) taxation.

      It is, erm, rather complicated.

      It is the only place I’ve come across which manages to explain why the EU is happy to leave tax policy to Member States where they retain competence, but then also allows the EU to poke its nose into the subject of cosy corporate tax deals, which the U.K. is no stranger to indulging in. I often wonder if it isn’t the big business tax gimmies which is the main bit of the “control” that the ultra Brexit’ers want to “take back”.

      * Places like Brexit Central are a good digest and a handy round up of news but are so rabid that they’re pretty much unreadable, which is why I won’t dignify them with a link.

      1. Ignacio

        I often wonder if it isn’t the big business tax gimmies which is the main bit of the “control” that the ultra Brexit’ers want to “take back”.

        Well I didn’t have the stomach to follow the link but this phrase caugth my eye. I have noticed several times that wealthy people get so mad about paying full taxes they indulge in quite embarrasing schemes, and they die leaving such a messy legacy that cannot be resolved. Retrospectively they look irrational. That’s why I think your reasoning has merit.

        1. PlutoniumKun

          Thanks an excellent point. We assume the 1% are highly competent at what they do, but there are plenty of examples of an irrational hatred of taxes and regulations resulting in the rich damaging themselves, like the person who drives 100km to fill up their car with petrol 2c a litre cheaper. I strongly suspect that much of the motivation of rich Brexiters are not part of some grant plot to make themselves even richer, it is driven by something more malign.

          1. Clive

            A really good friend of mine from school days married a French national who was one of those kinds of Frenchmen you very occasionally get who are vehemently anti-big government. They live in semi-retirement and when they moved from Paris bought one of the nicest properties I have ever seen (I’ve seen a lot) in Saint-Tropez.

            But he complained and complained about “high” taxes, so eventually to keep the peace, they agreed to move to Monaco. I’ve visited a couple of times and it is easily in my top 5 most loathsome parts of the world. And while you can live there tax free, the cost of living is astonishing.

            The quality of life trade off was just nuts, absolute craziness. All to avoid a bit of tax, which they can easily afford. And I wouldn’t say French tax rates are in any way punishing. They end up sneaking back to the south of France as often as they can without risking their tax-free eligibility.

            Yes, the 1% often haven’t got the brains they were born with. Cluelessness abounds.

            1. Colonel Smithers

              Thank you, Clive.

              A friend / former colleague told a similar story about a Brit millionaire who moved to one of the Channel Islands.

              I agree with you about Monaco and wonder why anyone would leave Trop for that place, especially if one is lucky to have one of the cottages in the vineyards nearby or the hills above. It’s not just the cost of living, but the obnoxious rich and their hangers-on. I used to work in and with private banking.

              1. Clive

                I used to cover my TBTF’s high net worth offices! Interestingly, I found that the obnoxious types were over-represented in the “up north” ones rather than the “down south” ones. I never could really figure out why. And yes, when the 1% (or possibly the 0.1%) are gathered together en masse, it seems to bring out the worst in each other. Like Lord of the Flies, but set in the Hamptons.

            2. PlutoniumKun

              I only visited Monaco once, on a day trip, and I thought it was a miserable, dull place, certainly in comparison to the many beautiful towns in the French south-east. I can sort of understand a sportsperson basing themselves there for tax reasons, as they’ll be on the road most of the year. But if you are rich enough to choose where you want to live, it seems to me you’d have to be almost psychotically greedy to live there just so you would pay less tax.

              1. larry

                PK, I am inclined to agree with your psychological assessment of some of the rich. Some of them are also psychopathic. Hare and his colleagues are now studying a personality disorder syndrome they refer to as as corporate psychopathy (to distinguish it from physically violent psychopathy, a number of those exhibiting this trait being in prison where they are available for in depth study). Corporate psychopaths are more difficult to study, but they are making progress. One thing about psychopaths is that they are, invariably, incredibly narcissistic.

                1. Tony Wright

                  Problem is, some of them dye their hair reddishd and end up as US President…….
                  New synonym: humanity/ insanity.

          2. vlade

            That distribution of wealth highly correlates with distribution of skills, brains and merit in general is a widely peddled lie which helps to support the status-quo.

            There are certain traits that are more common in the top ranks, but it’s arguable how many of them are actually desirable by the society.

        2. fajensen

          The boss of my boss got nailed and jailed 3 years for tax evasion while resident in Switzerland.

          Wife left him with Half. Of course he got fired also. All over 7% income tax!

          If it was that bad, He could have stumped up the 3 million EUR it costs to never pay tax in Switzerland. But, stingy!

  6. Koldmilk

    What if the UK abandoned VAT altogether?

    Isn’t it a pretty regressive tax, anyway, and unnecessary for revenue?

    Of course, that would not solve the border mess since there’d still be customs, duty tax, standards, health & safety compliance, etc.

    But VAT, along with austerity, would not be missed.

    1. Clive

      Not such a bad idea, VAT is one of those clever wheezes that sounded good at the time, but ended up becoming complex to administer, regressive and needing carve outs to make it anything approaching workable.

      But there would be a big revenue hole to fill. (that link is to the IFS which I don’t like as they are a neoliberal think tank, but that is an exception and contains some useful analysis; just ignore the taxes are bad vibe which pervades it)

      Income Tax and National Insurance would need to increase by about 50-60%. Or you could do a simpler sales tax, but that is just as regressive. Corporation Tax and property taxes would fill the gap if they were doubled (U.K. Corporation Tax would still then not be exceptionally high by international standards) but then you’d get evasion.

      No easy answers, here as with most things.

      1. larry

        Clive, the revenue hole can be easily filled with a well thought out fiscal funding policy.

        1. vlade

          VAT takes 18% of the tax revenue. That translates into about 6% GDP. I’m assuming you’re referring to the MMT, saying that the UK could just create money to pay for the services.

          Please do remember that MMT is STILL constrained by hard resources factors, and that UK is not autarky and cannot reasonably be one (it lacks a number of raw materials – including for example timber for house building etc., which it has to import).

          That means for this to be non-inflatinary, the economy would have to grow rather strongly.

          1. PlutoniumKun

            I think though that in an MMT world, VAT would be first on the list of taxes that should be reconsidered, because its probably the most regressive of the major tax types (which is why, presumably, the usual suspects never object to it as much as they object to capital or income taxes). It also has a lot of hidden costs on society as it places a very large bureaucratic burden on small businesses.

            1. vlade

              yes, on the other hand it’s one of the easiest to collect taxes for the government (together with PAYE) – exactly because it’s burden on the small business.

              Regardless, if we assume that taxes are there not to spend, but to reduce the money in circulation (to avoid inflation), there’s definitely space for extra spend in the UK, but I’m not sure whether it’s 6% of the GDP on an ongoing basis (and assuming stable sterling, to keep imports ok) – that’s a very large output gap that the UK would have to have.

              1. liam

                if we assume that taxes are there not to spend, but to reduce the money in circulation (to avoid inflation)

                That’s the presumption I think people keep missing. MMT works because taxes. People assume because the chicken and egg story get settled in favour of the egg that the chicken doesn’t matter – if you get my drift :) In other words. Just because a monetarily sovereign government doesn’t fund spending out of taxes, it doesn’t mean it can do so without levying taxes.

                Of course, the monetarists, (and most neolibs for that matter), think it’s all about interest rates. Go figure.

                1. larry

                  liam, MMT works not because taxes but because that is the logic of a fiat currency system. Where a government has just started up, no one has any money except the government. So, it must be the first spender. And the spender of last resort. Once the government spends, then it can tax because now there is money in the monetary circuit.

                  You don’t have to be an MMTer to see that taxes don’t fund anything. Beardsley Ruml, in an article in 1946, said exactly the same thing. Taxation serves a number of social functions but obtaining revenue for government expenditure isn’t one of them.

                  The reason neoliberals concentrate on interest rates is that they think that economic stability and related states can be achieved by manipulation of interest rates. Because they reject fiscal intervention, they are left with interest rates as an economic tool even though it is incredibly crude and doesn’t really work as they would like it to. Why they stick to it in light of the empirical evidence that it doesn’t work as intended I don’t know.

                  1. liam

                    Taxation serves a number of social functions but obtaining revenue for government expenditure isn’t one of them.

                    Agreed. However, one of those functions is to take money out of circulation. Another is to generate demand for the currency. (Re)distributional effects are an additional factor.

              2. paulmeli

                Why would the level of currency in circulation have an effect on inflation? It’s a stock…savings. By definition income not spent.

                Inflation is caused by spending, a function of government spending, investment and bank lending.

                In order for anyone to draw down their savings they would have to spend more than their income. Only we little people do that but we do so by taking out loans.

                1. Yves Smith Post author

                  You are confusing monetary policy (money supply) with net fiscal spending, aka deficit spending. Net fiscal spending is always stimulative (although how much so depends on who gets the proceeds, as in their propensity to spend v. save).

                  But thanks to neoliberalism, there is slack in pretty much every major economy. So more net fiscal spending up to a point shouldn’t increase inflation….but there are limits. And 6% of GDP is a lot of net spending.

                  1. paulmeli

                    Seems you’ve misunderstood my comment. I didn’t say anything about “money supply”.

                    I was responding to this…

                    …if we assume that taxes are there not to spend, but to reduce the money in circulation (to avoid inflation)

                    The point is re “money in circulation”, which may or may not be the same as “money supply”, I don’t know.

                    The point was that reducing the money in circulation has little if any effect on inflation. Taxes reduce incomes. That controls inflation.

                    Inflation is a function of spending, rather than the level of money in circulation.

              3. liam

                if we assume that taxes are there not to spend, but to reduce the money in circulation (to avoid inflation)

                It’s a curious presumption that people have, that because with MMT the we can settle the chicken and egg scenario in favour of the egg that the chicken suddenly doesn’t matter :) Taxes are ironically more important an MMT framework.

                Naturally enough, monetarists, (and neolibs), think its all about interest rate policy. Go figure.

                1. liam

                  Sorry for the double posted comment. I thought my post had got hit by that wordpress ‘disappearing comment’ bug. My bad.

          2. larry

            I realize all that, vlade. We here no doubt think that it not likely that the present Tory government, nor certain Labour ones either, will engage in any appropriate fiscal policy to offset any VAT reduction. And such reduction will hurt the respective companies, not the government, which doesn’t need the revenue anyway. Even if it is under the false apprehension that it does. Which presently it seems to be.

            In the US, sales taxes are imposed by cities, counties, and states. It is only the federal government that imposes an excise tax, which is supposed to curtail expenditure on luxury items. At least, this is the way it used to be. And this is a good use of such a tax.

          3. Grebo

            That means for this to be non-inflatinary, the economy would have to grow rather strongly.

            An overnight 20% reduction in prices, for poor people a 20% increase in purchasing power. I would expect that to result in growth and it would take any inflation a while to catch up.

        2. animalogic

          Revenue gaps could be filled by a small tax on ALL transactions, especially financial ones.

        3. animalogic

          Revenue gaps could be filled by a small tax on ALL transactions, especially financial ones. (Smaller transactions could be tax free)

  7. Harrold

    Strange how British music shops were done in by the Channel Islands and not by Napster, iTunes, Spotify, Pandora and the internet like in the US.

  8. Knute Rife

    It looks like a grunts and postures session by the ERT, as you said “papering the record.” “This is what we need post-Brexit in order to more or less stay the course. Yes, we know it’s impossible; we’ve been saying that from the start. Consequently, this is really just a ‘Dear John’ letter.”

  9. ChrisPacific

    It’s funny how there have been enough examples of magic sparkle ponies by now in the Brexit stories that it’s become a standard term in the lexicon at NC.

  10. Fazal Majid

    The opinion polls on Brexit are not souring because the UK population has suddenly acquired the clarity lacking in their government, but because in the last 2 years about 1.5M brexit-voting oldsters died, and an equivalent number of remain-favoring youngsters reached voting age.

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