It is hard to believe that it is six long years since the British electorate narrowly voted in favour of leaving the EU. In the interim, many things have changed. The economy has most certainly taken a turn for the worse and although not all of the problems are Brexit-related, there is indisputable evidence that it has imposed significant costs. But for all the economic problems, changes to the political landscape have been even more dramatic. A referendum that was designed to lance the boil of Euroscepticism within the Tory Party and heal divisions within society has had completely the opposite effect: British society is polarised as never before and there are no signs of a healing in prospect as the UK’s reputation for good political governance sinks ever lower.
Assessing the hit to the economy
I recently dug out some analysis I conducted in 2018 based on a model simulation of Brexit costs which suggested that after eight years “real GDP will be 4.5% below the no-Brexit baseline level (falling to 4% after 15 years).” Analysis conducted two years later by the OBR came to the same conclusion. So where do we stand now? In order to provide an answer, I updated the synthetic control analysis I reported a year ago which tracks UK output in terms of GDP outcomes in a control group of 23 similar countries to assess how the UK might otherwise have been expected to perform. Although we should not place too much emphasis on the exact magnitudes, the analysis indicates that the economy has underperformed. The results, shown in the chart below[1], suggest that as of Q1 2022 UK output was around 3.5% below the control value. Even without allowing for inflation (the figures are measured in 2019 prices) this amounts to around £1.5 billion of “lost” output per week. What was that about saving £350 million per week?
Nowhere is the hit to the economy more evident than in trade which has been impacted by the imposition of barriers to cross border flows. Brexit cheerleaders pointed to the fact that exports to the EU in April rose to a record high. They were less vocal about the fact that imports also reached a record high as the trade gap with the EU continues to widen. In any event, nominal trade flows have been boosted by the recent surge in inflation: latest data suggest that the volume of exports to the EU is still around 10% below previous highs.
However, a true picture of the UK’s economic position is only realised by looking at a comparison with other countries. Here is where it gets interesting. German data (based on my own seasonal adjustment estimates) suggest that merchandise export volumes in April were 9% below the 2019 average versus a decline of 11.7% in the UK. A similar analysis suggests that French goods exports volumes are 16% below 2019 levels. In fact, the UK’s performance relative to world trade trends (measured by the CPB’s World Trade Monitor) is not significantly worse than either France or Germany (chart above). The French and German data may be biased down by a reduction in trade with the UK. In 2014, for example, the UK was Germany’s third largest export market: by last year it had slipped to eighth. We thus need more time to assess whether the UK’s trade figures have suffered permanent Brexit damage. But it has impacted on cross-border activity, with bigger queues at border crossings and a rise in bureaucracy. And the UK has still not signed trade agreements with the US or China. There are no trade positives flowing from the decision to leave the EU.
In the domestic economy it is a different story with the latest reading, for the first quarter of 2022, showing that the volume of business investment is 9.5% below its pre-Brexit referendum levels. Whilst the extent of the decline has been exacerbated by the pandemic, even before 2020 there were signs that corporate investment activity had tailed off (chart above). This is despite the government’s introduction of a ‘super deduction’ in 2021, designed to boost capital spending until 2023. Although the latest Bank of England Decision Maker Panel, based on data through May 2022, indicates that Brexit-related uncertainty has fallen to its lowest level on record with just 1.2% of survey respondents citing it as the biggest source of business uncertainty, it should be interpreted with care. To the extent that Brexit is expected to result in a permanent 4% loss of output, the capital stock is likely to adjust accordingly. Moreover, since uncertainty reflects indecision as to whether projects should go ahead, a decision to abandon capital investment plans will be reflected in a reduction in uncertainty just as much as the decision to go ahead. Scepticism is warranted that investment will bounce back any time soon.
Can’t work, won’t work
Whatever the damage inflicted by Brexit on the economy, its impact on the political landscape has been even more profound. Much of what has happened in the last six years bears repeating as politicians continue to gaslight us as to the process which got us here. The campaign was built on lies (here or here) and it is questionable whether it ever represented the will of the people given that only 37% of eligible voters were in favour of it. The Vote Leave campaign broke funding rules which, according to one legal expert, would have invalidated a legally binding plebiscite (the referendum was merely advisory). Nor was leaving the EU Single Market ever on the ballot paper and Theresa May’s time in office was characterised by efforts to placate the Brexiteers in her party rather than find an agreement that minimised the damage to the UK.
Under Boris Johnson, things have got worse. His government prorogued parliament in 2019 in order to avoid scrutiny of his Brexit Bill and was only prevented from doing so by the courts, and in 2020 the government threatened to break international law. Johnson’s government ripped up Theresa May’s agreement with the EU and replaced it with one which placed a customs border with Ireland (north and south) in the middle of the Irish Sea, despite his promises to the contrary. He fought the 2019 election on the basis that his deal was “oven ready” – so much so, in fact, that even now the government is desperately trying to rewrite the Northern Ireland Protocol, claiming that they signed it under duress.
These are not the bitter ramblings of a disaffected Remoaner. The fallout from the referendum matters profoundly for the conduct of democratic processes. The government called a referendum which allowed voters to directly participate in a democratic decision but gave them no direct say in the terms of departure which is profoundly undemocratic. Worse still, Brexit is the Conservatives’ signature policy and it is failing to deliver on its promises. A defining feature of the current government’s approach to Brexit is persistent victimhood – only this week The Sun reported that “Britain is failing to reap the benefits of Brexit because of the defeatist mindset of ruling elites” citing a report by the Centre for Brexit Policy. Never mind that Brexit has been passed into law, that the government won an 80 seat majority at the last election on the back of its Brexit promise and that its key members were educated at some of the country’s elite institutions – it’s always somebody else’s fault.
This goes to the heart of the problem: Brexit was only ever a campaign – its existence was defined by the journey rather than arrival at the destination. Having got what it wanted, the Conservative government cannot make Brexit work because it involves trade-offs they promised we would never have to make. Partly because it is chasing shadows in trying to implement its Brexit policy, it has taken its eye off the ball on almost everything else. As Samuel Earle wrote in the New York Times, “the truth is that Conservatives gave up on governing long ago – a fact that accounts both for Britain’s current mess and Mr. Johnson’s appeal in the first place.”
There is no appetite to reopen the debates of recent years, which explains why the Labour opposition has avoided talking about the problems caused by Brexit. However it need a realistic plan if it wants to form the next government. Aside from a pledge to “make Brexit work which is, make sure we've got a better deal that works” it is far from clear what the alternatives are.
Brexit was supposed to lead the UK to a new economic nirvana. Instead, as Samuel Earle put it, “each one of [the government’s] proposed solutions, offered in the name of national renewal, has made the situation worse … An economy predicated on low productivity and low investment, buttressed by a self-defeating lack of seriousness about Britain’s condition” is now where we are. Six years ago, economists warned this would happen. What was derided as Project Fear is now reality.
[1] It is notable that UK GDP fell by more than most countries during the initial stages of the pandemic but subsequently rebounded much more sharply. One possible explanation for this are differences across countries in the way non-market services are measured in the national accounts. Here for an explanation.
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