Half a decade after the referendum, the economic hit to the UK caused by Brexit is becoming clearer. But it will be years before the true impact is understood
It has started already; you will have noticed it yourself; the pro-Brexit press is starting to write those articles we all knew were on the way… The British economy is not bouncing back from Covid and the lockdown, oh no, this is a ‘BREXIT BONANZA’; Global Britain is booming it seems, not because the constraints of Covid are coming to an end but because we have left the EU.
Strange that there doesn’t seem to be a single industry that isn’t complaining about more red tape, higher costs, more restrictions, barriers to trade and staff shortages; but still this is a ‘Brexit boom’.
Except it isn’t, we all know that, anyone with an ounce of common sense knows it isn’t. You just have to ask yourself: What has made trade easier in the last six months? What regulations have been eased? What has happened that Brussels would have stymied six months ago? Where are the millions of British workers trained and ready to replace EU immigrants? Where is the money saved from EU contributions being spent to boost growth?
Five years on from the referendum we would probably all be more aware of the painful consequences of Brexit had Covid not presented the government and its Brexit supporters with the ideal camouflage. How do you spot the damage caused by Brexit amid a far worse medical and economic crisis? How do you show that the economy is doing worse than it should when it is booming after Covid restrictions end?
Well actually it can be done quite easily, for two main reasons.
First, a great deal of damage was done just by the prospect of Brexit between 2016 and 2020 and; second, nothing about Covid makes the economic prospects of Brexit better. We know what happened and what to expect and it isn’t going to change.
The damage already done before the UK officially left the EU was considerable and was caused mainly by lower immigration from the EU, a fall in UK investment because of uncertainty and perhaps, most importantly, a fall in investment into the UK from abroad.
The level of immigration was one of the major reasons behind the vote for Brexit but ironically it has been of huge help to the British economy. It boosts growth, eases skills shortages and so means higher tax revenues for the Treasury. But since the referendum immigration has fallen dramatically and whole industries are suffering.
Just listen to the cries of pain from the hospitality sector, as it faces staff shortages while trying to re-open for business. Covid may have made this worse as many laid off workers went home and haven’t returned but the message is clear, immigration from the rest of the EU is good for the UK and now there is less of it.
Investment by British firms also took a huge hit from Brexit, it was on a long rising trend before the referendum and froze dead in its tracks almost immediately afterwards. It was stuck at that level for four long years as uncertainty and confusion meant British business held back on ten’s of billions of pounds worth of investment every year. Lost investment means lost growth, lost jobs and lost taxes. (Covid made the investment figures far worse, but that bit at least should bounce back.)
Foreign Direct Investment (FDI) into the UK from abroad, paints a similar picture. It matters immensely to the UK because productivity here is very low. France, Germany and the USA are all 20-25% more productive than the UK. One of the few things that helps keep the UK’s productivity at even this miserable level is that the UK has attracted high levels of foreign investment over the years. Foreign companies are only prepared to set up the most productive and efficient factories in countries as expensive as the UK and they demand their supply chains are productive as well.
Without high levels of FDI that will not happen as much and FDI is falling, from a record high of £192bn in 2016 to £35.6bn in 2019. These figures are very volatile but even so FDI fell for three straight years after the referendum and that looks set to continue. Research by UCL and the LSE has found Brexit will cause a further 37.5% fall in FDI because it was the very attractive membership of the single market that drew foreign firms into the UK like bees to honey. The decision to leave the single market will therefore be a disaster for FDI and UK productivity.
This is one of the major reasons we can see that the damage caused by Brexit has only just begun. Up until the beginning of this year the best calculations are that the British economy has lost some 2-3% of growth since 2016. To put that in context the UK spends 2% of its GDP on defence.
Looking forward, there is nothing to suggest that the pain is not going to get worse. The Treasury’s own analysis of Brexit found the UK economy would be 6% smaller in 15 years’ time than it would have been if we had stayed in the EU. Similar results have been calculated by many highly experienced and reputable economists.
The reasons for this are not hard to find. On top of everything already mentioned, the UK government has spent billions on new border controls and hiring civil servants to deal with Brexit and since the start of the year has imposed billions of pounds worth of red tape on British industry. All of this has hit trade and yet the UK government has not even started implementing several parts of the agreement, including collecting VAT. More pain for business is on the way.
Covid travel restrictions have also disguised the hit that the service sector will take from the loss of freedom of movement and leaving the single market. The complaints from the UK’s arts sector that new visa requirements make touring in the EU uneconomical will be as nothing compared with those service companies which discover their staff can no longer visit and work in EU countries at will. The City of London is also having to come to terms with the fact that the government hung it out to dry in the Brexit negotiations and the rest of Europe intends to benefit at its expense.
So, what will be the final figure for the economic damage of Brexit? Economists are divided, with the government’s own economics watchdog the Office for Budget Responsibility saying that the 2-3% of lost economic growth already suffered is part of the 6% that was predicted at the time of the referendum.
Others point out the 6% was a calculation of what would happen once the UK left and so will come on top of the damage we already know about. So, the total damage is somewhere between 6-9% of UK GDP. But this will be spread over a long period of time and will depress growth not reverse it.
Even so, with average UK economic growth well below 2% a year in recent years, this will mean losing between 1/4 and 1/3 of annual growth for the next 15 years. The huge bounce back from Covid will hide this for a year or so but it is still there, still painful and no amount of government misinformation and propaganda will change that.
Remember any benefits from new trade deals or replacing EU regulations with UK ones, cannot possibly repair the damage done by leaving the single market. Just look at the recent trade deal announced with Norway, Iceland and Liechtenstein. It is worse than the one we had before as part of the EU; strangely the Norwegian government mentioned this, the British government didn’t.
One final thing, all these calculations are based on the EU staying as it is. Yet the EU has continually improved the single market and will hope to do so in future, especially in the area of services. For the UK, which is heavily dependent on its service sector this a tragedy; it would have gained enormously from staying in the single market and encouraging reforms. Now those improvements will be designed to benefit EU member states and most certainly not the UK.
Jonty Bloom is a freelance journalist and former BBC business correspondent. Follow him @jontybloombiz
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