Brexit isn't going away

Opinion piece (Encompass)
26 January 2023

It’s frustrating and boring, but economists must endlessly repeat themselves about Brexit. That’s because Brexiters continue to deny its obvious economic costs. Rishi Sunak wants to settle the Northern Ireland protocol and probably would shelve the Retained EU Law Bill if he could, but to keep hardline MPs onside, he is still pursuing policies that create even more trade and regulatory uncertainty. Labour is largely ignoring Brexit, even though it’s making it harder for the party to achieve its main objectives: more money in the pocket of the less well off, and better – or at least less dysfunctional – public services.

For the UK to turn itself around, voters and politicians need to accept that the hard Brexit that Boris Johnson negotiated – and his confrontational strategy for dealing with the EU – has failed. My estimates, based on the ‘doppelgänger’ method, suggest that the UK economy is around 5 per cent smaller as a result of Brexit, and it has severely curtailed goods trade and investment. The UK is one of the few advanced economies that is still smaller than before the pandemic. New research by me and Jonathan Portes of UK In A Changing Europe suggests that the British labour force is around 1 per cent smaller thanks to the end of free movement. Employers in logistics, hospitality, administrative support and manufacturing – sectors dealing with the biggest shortfalls in EU workers – face a tricky balancing act between raising wages and prices, investing in automation and cutting output.

These problems were predictable, and predicted. In its long-term forecast, conducted in 2018, the British government concluded that a free trade agreement with the EU would reduce GDP by around 5 per cent. If immigration rules were changed so that the UK ended up with zero net immigration from the European Economic Area, GDP would be further reduced by about 2 per cent. And Brexit’s impact on tax revenues has been big – crudely, around £40 billion smaller – which forced Sunak to raise taxes when he was Chancellor. It was also why markets took fright when Liz Truss tried to cut them again.

None of this is to say that Brexit is the only problem Britain faces. Underfunding of the National Health Service has had macroeconomic consequences, as hundreds of thousands of working age people are off sick or waiting for treatment. Former chancellor George Osborne’s spending cuts meant the British state was ill-prepared for Covid and Putin’s invasion of Ukraine. And the UK is more reliant on gas for heating and electricity generation than many of its peers, which has meant it has struggled with the energy crisis. But Brexit has made dealing with those problems more difficult.

To turn things around, economists will have to continue to highlight these problems. But, you might ask, what should Britain do, given that the referendum was only six-and-a-half years ago, and voters gave Johnson a mandate for a free trade agreement with the EU (and, one might add, the Northern Ireland protocol)?

The first thing, rather obviously, is to stop making the situation worse. Resolving the protocol would help to improve relations with the EU and end the threat of a trade war. Sunak could shelve the Retained EU Law Bill, and decide whether to maintain or diverge from EU regulations on the basis of cost-benefit analysis.

Then the government could seek to improve the trade deal with the EU. The effects of this will inevitably be small, but there are some improvements that can be made. The public is showing signs of regret, as voters realise that Brexiters were wrong to argue that Britain could take back control without economic consequences. Future governments might be able to unlock more market access in exchange for more EU law.

Finally, Britain needs to realise that Brexit requires big changes to its economic model. The manufacturing, food and farm sectors will be smaller. The country’s advantages are in high-value services, including finance. To help these sectors, the country will have to spend much more on improving its very unequal educational outcomes, densify its cities and improve commuter transport, to give workers a wider selection of jobs within easy reach of home, and try to stop the NHS and social care from gobbling up more and more of the budget. Taxes may have to rise further – and loading all of those tax rises onto workers, rather than the owners of capital and housing wealth, will only make it harder for the country to recover.

John Springford is deputy director of the Centre for European Reform.