You say you want a revolution

It has been a tumultuous year for those of us who spend a lot of time looking at the British economic and political scene. Recall that former prime minister David Cameron hoped a referendum would lay to rest once and for all the civil war within the Conservative Party that was being fought on the battleground of EU membership. As it turned out, Cameron’s decision proved to be the most spectacular political own goal in at least 60 years (rivalled only by the failure triggered by the Suez invasion of 1956). Consequently, this has been a year characterised by social division and political anger, with no signs that the divisions stoked by the Brexit decision show any sign of healing. It has also been a year strewn with political mistakes which have compounded Cameron’s original error, notably the government’s failure to clarify what it wanted prior to triggering Article 50 and the shocking error of judgement in calling an unnecessary general election.

Despite all this, the economy has trundled along and looks set to post a growth rate around 1.5% this year whilst the unemployment rate has fallen from 4.8% a year ago to 4.3% today. But the pace of growth is considerably slower than we might have expected in the absence of the referendum. In June 2016, my forecast called for real GDP growth of 2.2% in 2017. A direct monetary comparison of what this means in terms of lost output is distorted by data revisions and methodological changes, which have raised the current vintage of nominal GDP by an average of 1.1% since 2010 compared to the June 2016 vintage. But assuming away such matters and focusing purely on the growth trajectory, latest data suggest that real GDP Is currently almost 1% below the level expected in the pre-referendum forecast.

This is roughly what was predicted in spring 2016 in the event of a leave vote and would appear to reinforce the views of the economics profession which argued forcefully that there would be a cost to leaving the EU (bear in mind we have not left yet), whilst giving the lie to claims by Brexit supporters that such warnings were overly gloomy.  You can argue about whether pre-referendum forecasts were too optimistic, but given the pickup in the rest of the EU this year I would suggest this is not the case. And as Chris Giles pointed out in the Financial Times this week, such a shortfall amounts to lost output equivalent to £350 million per week – the amount which the Leave campaign (falsely) claimed the UK would save by leaving the EU. Given that the net savings in direct EU contributions are only half that amount, the inaugural Dixon Award for Dodgy Analysis (DADA) goes to the Leave Campaign whose referendum victory imposed a cost on the UK economy double the amount which it was claimed could be saved.

Brexit supporters will always claim that there is a short-term price to be paid but it will be worth it in order to reclaim sovereignty over UK laws. Indeed, so committed is the government to taking back control that it planned simply to enact the result of a legally non-binding referendum without any form of parliamentary debate. It took the brave efforts of Gina Miller last year to force a parliamentary vote before implementing Article 50.  Not that it mattered much in the end: the decision to trigger it was passed by a majority of 498 to 114 with 38 abstentions – or, in terms of the arithmetic applied to the EU vote, by a majority of 81.4% to 18.6% which is a rather larger margin than the actual referendum. It is also ironic that each time the degree of parliamentary unanimity on a Brexit vote is less than total, the Daily Mail takes it upon itself to denounce the dissidents as traitors (the most recent example being only last week).

Looking ahead, 2018 promises more of the same both politically and economically. The consensus view is that the UK will again grow at a rate around 1.5%, though I suspect there may be some upside risks on the basis that the inflation-induced constraint on real incomes is likely to ease. But politics will remain as fractious as ever. In my view – and one which I have been espousing for the last five years – opening a partisan debate on EU membership means that many politicians are taking positions which run contrary to the UK’s economic interests. This has met with huge pushback and continues to distort the political debate to the extent that many other pressing economic issues - such as welfare reform and overhauling the social care system - continue to be pushed down the agenda.

I would like nothing better than to write less about the politics of Brexit in 2018 but it is the dominant theme of our time which will have profound economic consequences. Brexit represents a political revolution, with many politicians apparently forced to take positions which they may not personally agree with because they are afraid of acting against “the will of the people.” In some ways I am reminded of the Iranian popular revolution, which unfolded on our nightly TV news bulletins almost 40 years ago. Years of dissatisfaction with the status quo in Iran prompted a revolution, based in this case around religion. Years of dissatisfaction with the UK political status quo has resulted in a revolution based around the cause of the EU. The Iranian case led to years of hardship and international isolation. Quite what Brexit will do to the UK will become apparent only in the years ahead.