We are already poorer, but worst is to come, writes JAMES BALL in this week’s Deconstructed.
There are moments when it seems the government is determined to treat Brexit like the bleak joke that it is.
Perhaps the most striking of these was the strategically leaked pre-announcement to the Sun ahead of the Budget that the Treasury will release a commemorative 50p coin to mark Brexit, with the text ‘Peace, prosperity and friendship with all nations’ – a reworking of an isolationist quote from Thomas Jefferson which ends with ‘[and] entangling alliances with none’.
The citizens of the UK will not need a coin to remember Brexit: however the process goes from now, it has already had profound and negative effects on millions of lives, as even Philip Hammond’s 50p coin itself can show.
It is telling that the Treasury didn’t opt for a pound coin to mark the occasion, especially given its contrast to the euro and its status as the name of our ‘sovereign’ currency. This was, perhaps, to hide the fact that thanks to Brexit the pound is worth much less than it otherwise could be.
On the eve of the referendum, the pound was trading at around $1.50 against the euro, only to plunge by more than 15% in the early hours of June 24 2016, as markets around the world came to the shocking realisation the UK had voted to leave its closest economic and strategic relationship.
More than two years on, the pound remains at about that same post-crash level – meaning that even without any further shocks or bad news, Hammond’s new coin is in effect a 43p coin, not a 50p one. A clearer symbol of what Brexit is doing to us is hard to picture.
As regular citizens, we tend to only think about the value of the pound against other currencies when we’re going on holiday: we suddenly notice at the currency exchange that we’re now only getting around one euro per pound, making our holiday money go much less far than when we went there a few years ago.
But even though it’s less visible to us, the same thing happens to us all every day: the UK imports close to half of its food, and huge amounts of manufactured goods and components. The businesses that do this now pay around 15% more for those than they did just before Brexit.
That drives up the prices that we pay on the shop shelves, and has been a major factor in keeping UK inflation well above its 2% target for much of the last two years – meaning prices have been rising faster than they are supposed to.
This has especially devastating consequences for the 10 million families who receive benefits or tax credits, which have been frozen in cash terms for a fourth year, meaning they don’t get any extra money to help them cope with the Brexit-vote induced inflation, leaving these families up to £700 a year worse off, thanks to a toxic combination of callous government policy and the decision to leave the EU.
As the official guidance on the UK economy – which is produced by the independent Office for Budget Responsibility, alongside the Budget – states there are still more effects of the decision to leave that have hit the UK, even while we remain members of the EU.
The OBR report notes ‘uncertainty regarding the Brexit negotiations appears to have dampened business investment (by more than earlier data suggested)’ – meaning the chaotic atmosphere of the negotiations alone has stopped businesses investing in new equipment, training, and new jobs, which all serve as one of the key drivers of the economy.
The result, according to the OBR analysis, is that the UK economy is already between 2% and 2.5% smaller than it would be in an alternative universe where Remain had won the day in June 2016.
This might not sound like much offhand, but 2% to 2.5% in two years is massive in cash terms, given UK GDP is just over £2 trillion a year. Taking even the lowest estimate – 2% – and moving it into cash terms means the UK makes around £40 billion a year less than it would have done if we were not leaving the EU. For those who remember Vote Leave’s ridiculous promise of £350 million a week for the NHS, the growth we’ve already lost – even before we actually leave – is worth more than £750 million a week. Anyone mentioning a ‘Brexit dividend’ is not challenging a forecast or a prediction: they are simply being dishonest about what we already know has happened.
As the OBR puts it, the UK’s sluggish performance since the vote for Brexit is ‘taking the UK from near the top of the G7 growth league table to near the bottom’.
The Budget given this week, praised by newspapers as a ‘spending’ budget with some voter-friendly giveaways, is less than it first appears – especially for low earners – but is also based on relatively gloomy forecasts, and as Hammond has said, would be thrown out in a no-deal scenario, as he’d have to deliver a new emergency budget to deal with that scenario.
But even the ‘deal’ scenario forecasts bear scrutiny. At present, the OBR’s assumptions on our future growth is based on a smooth Brexit: an orderly transition for the next two years and a good future trading deal. Even that leads them to predict five years of growth at well below 2%, the historical long-run average – meaning that versus the Remain alternate universe, the UK could soon end up around £1.5 billion a week worse off thanks to Brexit – and that’s under the relatively optimistic Brexit scenario.
Working out what could happen under a no-deal Brexit – a scenario seen as an impossible bogeyman just months ago, but now one that seems at serious risk of happening – is all-but impossible, as nothing quite like it has ever happened before.
In a separate report earlier in October, the OBR said putting numerical forecasts on no-deal was largely impossible, as no country had ever done something like it before – but it did warn of risks of goods shortages, hoarding, and panic buying, leading it to compare the situation to the ‘three-day week’ of the 1970s, which caused the economy to crash into a sharp recession, losing 3% of GDP in one quarter alone.
The global ratings agency Standard & Poor’s, though, has ventured where the OBR feared to tread and has made public predictions about the short-term effects of a no-deal Brexit.
Given their failure to predict the 2008 financial crisis, the ratings agencies have a less glowing reputation than once they did, but we should remember they missed the crisis because they were too optimistic – which makes their dire warnings of what no-deal will look like even more striking.
The immediate consequence of a no-deal Brexit, S&P says, would be a recession lasting between four and five quarters – the same length as the UK recession which followed the global financial crash.
The consequences of this in terms less abstract to us – prices, jobs and more – border on terrifying. The agency predicts that in this scenario the UK’s unemployment rate would almost double, rising from 4% to 7%, and inflation would soar, reaching almost 5% at its peak – perfect conditions for a cost-of-living crisis which could sink millions of families already struggling to get by.
House prices, it predicts, would fall around 10% in two years, trapping some in negative equity and greatly damaging the consumer confidence of far more. And even after the predicted recession would end, the UK would recover and grow very slowly, leaving the economy around 5.5% smaller than even in the orderly Brexit scenario, let alone the Remain one – a sum that equates to more than £2,000 per household.
Again, this is not some release from a left-wing think tank, or from an anti-Brexit campaign: this is one of the world’s most significant financial players issuing a warning to investors – one that caused the pound to drop 0.7% in one day alone. The bankers are taking this seriously, even if Brexiteer politicians are not.
Brexit has already caused us all significant financial harm, and we have the clearest and starkest warnings yet of all the extra harm continuing down this path can do to us all. But money doesn’t capture all the ways in which Brexit is already damaging the UK.
The most obvious to most of us would be the bitter divide it has caused in UK politics, and even among regular families: almost no-one has made any effort to heal the divide between Leave and Remain voters, and the divide is becoming ever-more bitter, and it seems whatever happens next, it will continue to be a source of anger and resentment – and thus danger.
But the final risk is almost invisible: it is the opportunity cost of Brexit, the consequences of the huge amount of time and political and media attention the process has taken up. The UK was a nation facing many challenges before David Cameron ever decided to call a referendum on what was then for most voters a niche issue.
The UK already needed to get to work tackling knife crime violence, climate change, the productivity crisis, mounting inequality, the social care funding crisis, the consequences of the power of internet giants, and dozens more issues. All have virtually ground to a halt as Brexit consumes all the time we have in the Commons, and most of the media attention – as it has to.
We have stood still on all the real problems facing our lives for more than two years now, to tackle a problem entirely of our own making. How many more are we going to have to dedicate to it – and how much worse will the problems which already faced us be by the time we get to tackling them?