Eight years on

Eight years on from the Brexit referendum, the world looks a very different place. While in 2016 it was the UK which had to deal with an onslaught of rampant populism, it is now a feature of the political landscape across the industrialised world. The European Parliament elections made it clear that electorates across the EU are running out of patience with centrist governments which have failed to deliver on promises to make life better for long-suffering voters (chart above). Meanwhile on the other side of the Atlantic, Donald Trump has every chance of getting back into the White House as he feeds on the discontent of an America unsure of its place in the world.

As we head towards a UK general election that looks set to banish the Conservatives into the political wilderness, it is possible that the UK may be one of the few western democracies about to swing back towards the political centre. Yet it is notable that the policy which helped Boris Johnson win an overwhelming majority in 2019 has not even figured on the 2024 campaign trail. The Tory party cannot bring itself to admit that its signature policy has failed while the Labour Party is so fearful of alienating voters in Red Wall seats that it simply will not go near the issue of Brexit. But it is the Tories who will have to carry the can, since this is a policy with which they are closely associated, and spent so much political capital delivering the hard Brexit that many of us warned against that it has become an albatross around their neck. Moreover, it absorbed so much political bandwidth that the party was unable to deal effectively with the other tasks involved in governing. This included managing the pandemic and ensuring compliance with the basic standards required for governance in modern democracies which is one reason why they lag so far behind in the polls (chart below).

Look beyond the 2024 election

However, just because the electorate is about to hand the keys to Downing Street to a party of the centre-left does not mean that they are about to repudiate some of the more extreme versions of nationalist politics. If the performance of Reform UK in the polls is to be believed, quite the opposite. Recent history suggests that political turnarounds are very much in fashion. Back in 2021, not long after Labour had taken an election hammering and lost one of its safest seats in a by-election, it seemed that the centre-left was on the ropes. When the SPD unexpectedly won the German election in 2021, it was not long before sentiment turned against them, while Emmanuel Macron’s 2022 election triumph is a distant memory as the right-wing Rassemblement National is currently the most popular party ahead of the snap French parliamentary election. Life, as they say, comes at you fast. And just as Brexit was a cry of rage against the prevailing status quo in 2016, so we should interpret any (potential) Labour landslide as a rejection of years of Conservative government incompetence rather than a general buy-in of what Labour are offering.

If a week is a long time in politics, as former UK PM Harold Wilson once remarked, a couple of years is an aeon. Thus, to the extent that politics is a long game, we have to look beyond the upcoming election and think about what the future of politics will look like. Labour’s ability to deliver any form of economic improvement over the next five years will determine whether they stand a chance of winning a second term. Labour will have to manage expectations in such a way that they can deliver some progress and that they are not swept away in a tide of disappointment later in the decade. But if they do not deliver, what might the options look like in five years’ time? This in turn depends on how the Conservatives respond to what currently looks like being a very heavy defeat. Will they double down and move further towards the populist end of the spectrum? Or will they do what Labour did in the wake of their heavy defeat in 2019 and tack back towards the political centre?

It is currently difficult to envisage the latter option, partly because many of the more moderate members of the parliamentary party were purged by Boris Johnson in 2019. The alternative is thus a shift towards right-wing populism of the sort espoused by many prominent government ministers of recent years, and the non-negligible possibility of a tie-up with Nigel Farage’s Reform UK. It may sound far-fetched – a wild fantasy dreamed up the political commentariat – but as the rise of RN in France and the AfD in Germany illustrate, if the traditional parties cannot enthuse and inspire voters, they will look for alternatives.

The case for tax reform

It is thus evident that Labour will have to deliver something tangible in order to pacify the electorate and generating faster growth is a priority. In contrast to 1997, the economy's trend growth rate has slowed considerably (chart below) which is excerbating the fiscal constraints under which the government will be forced to operate. Labour's manifesto offers nothing particularly interesting in terms of economic thinking, with a very limited set of fiscal promises. Obviously, Labour does not want to give too many hostages to fortune but if I were the new Chancellor, one of the first things I would do is to announce a review of the tax system, building on the excellent and under-appreciated Mirrlees Review of 2011. One reason for doing this is that the government needs to quickly find some fiscal space. In much the same way as the Blair government announced reform of the monetary policy framework in 1997, a fiscal reform is overdue. It may not deliver a significant amount of revenue immediately but if a new government is serious about tax reform, it may be able to open the fiscal taps halfway through its first term on the basis that the returns will come through later.

What might tax reform look like? It certainly will not be a radical big-bang on day one. It is likely to take the form of a Royal Commission which will report after two years with a view to implementing changes in 4-5 years’ time. A more detailed look at possible measures is a subject for another day, but one idea whose time may have come is a land value tax which is a more economically efficient form of property tax than is currently in place today. There is also scope for reforms to the taxation of savings, carbon, wealth, corporates – you name it, and it can be done better. There is also a political dimension to this. Shifting even a tiny bit of the burden away from wage earners (i.e. voters) onto less heavily taxed areas of the economy would go some way towards making voters feel a bit better about things, without necessarily reducing the tax take.

Last word

But whatever the next government wants to do on the economic policy front would be made a lot easier if there were fewer trade frictions with the EU. Although Labour has promised that the UK will not rejoin the EU, it does want to “reset the relationship and seek to deepen ties with our European friends, neighbours and allies.” While it has ruled out rejoining the single market, it does want “to improve  the UK’s trade and investment relationship with the EU, by tearing down unnecessary barriers to trade.” Whatever one’s views on Brexit in 2016, and whether or not they have subsequently changed, the UK does need closer economic and political ties with the EU than we have had in recent years. Those politicians who promised a brave new post-Brexit economic world have been found out. It is time to hit the reset button.

Seven years on

It has been rather quiet on the blogging front these past few months as other projects impinge on my time, but every year around this point I take a look at where we stand on the Brexit issue, and given what has happened in recent weeks it would be a shame to break with tradition.

Johnson disappears and so does a lot of support for Brexit

The most noteworthy event was Boris Johnson’s resignation as an MP – an action precipitated by a report from the Parliamentary Committee of Privileges which would otherwise have recommended a suspension from the House of Commons. Never one to accept personal responsibility, Johnson flounced out of parliament, blaming everyone but himself for the circumstances of his departure. His exit nonetheless raised a whole raft of questions surrounding his toxic legacy and the circumstances that allowed him to thrive.

Both of these issues have been well documented on this blog over the past seven years and have their roots in the poisoned well of public debate triggered by Brexit. Quite simply, Brexit was a strategy designed to further the ends of those populist nationalists who largely happened to be members of, or associated with, the Conservative Party. This is not to say that the parliamentary Tory party of 2016 was rabidly pro-Brexit but it became so when the tone of public debate shifted in the wake of the referendum such that those who questioned the wisdom of the strategy were denounced as enemies of the people. It was in this environment that Johnson was enabled to rise to the top, promising his oven-ready Brexit deal despite the fact it was known in 2019 to be a far less economically attractive proposition than that negotiated by his predecessor, Theresa May. The same supporters egged him on to prorogue parliament in 2019, as he sought to subvert due parliamentary process. In so doing, Johnson kicked 21 Tory MPs out of the party who had the temerity to oppose his strategy. Perhaps it was that point that the Conservative Party became spectacularly unmoored.

Admittedly Johnson did win a handsome electoral majority in December 2019, although this was due in large part to the quality of an opposition led by Jeremy Corbyn. Not long afterwards, a combination of the Covid pandemic and apparent lack of interest in the business of governing caused the government to rapidly lose its way. Indeed one of my biggest concerns in recent years has been the lack of effective governance.

As many of those who agitated in favour of Brexit gradually leave the stage, they leave behind a toxic legacy. Following Johnson’s ousting from Downing Street last year and the implosion of the Truss premiership, the gilt has been slowly peeling from the Brexit crown. Since autumn 2022 the survey evidence points to a lead of 20 points for those who believe that voting to leave the EU in 2016 was a mistake. That does not exactly scream “will of the people.”

It's not just Project Fear

Many of the fears of those who pointed out the economic consequences of Brexit are now being realised (I include myself in that camp). It is simply more difficult to conduct cross-border trade in a world where barriers have been erected where once there were none. As of Q123 the volume of UK goods exports was 9.1% below the average levels in 2019 whilst import volumes were down 8.1% (admittedly the figures are volatile on a quarterly basis so we should not over-interpret them). But the OBR has pointed out that the UK’s trade intensity (trade as a share of GDP) has fallen below that in other G7 economies.

The fall in immigration from the EU has also contributed to the UK’s economic difficulties in a material way. Since 2020, there has been net outward migration of EU nationals: no longer can the UK rely on skilled labour from continental Europe to fill gaps in the domestic labour market. Although this has been more than offset by a net inflow of non-EU nationals (+606k in the year-ending December 2022), only 30% of them came to work, with almost as many being granted leave to remain on humanitarian grounds and therefore not immediately eligible to work (most of the remainder came to study - chart above). Labour shortages have contributed to second round inflation effects, following Covid-related supply bottlenecks and an energy price spike, which are making life harder for many. This is not to say that Brexit is wholly responsible for the cost of living crisis but its role cannot be denied.

However, to get a wider picture I have updated my estimate of the hit to UK GDP based on synthetic control analysis which attempts to measure the performance of the UK economy relative to a panel of 23 similar economies that did not experience the disruption of Brexit (chart above). Last year, I estimated that by Q122 the UK had underperformed the control group by 3.5%. This year my estimate suggests that the underperformance gap widened to around 6.5% by Q123 (admittedly better than the double digit figures recorded in 2020 and 2021 but still alarming). The figures are distorted by the pandemic period when differences in the way non-market services were recorded across economies made cross-country comparisons very difficult. Nonetheless, rebasing the figures at mid-2021 (by which time many of the pandemic restrictions were being eased) actual GDP still underperforms the control total by around 2.5%.

These figures have to be treated with caution. Nonetheless they do suggest that Brexit has imposed a sizeable hit to the UK economy. This should come as no surprise: The way that the UK trades with Europe has changed and it is no longer as easy to cross borders as it was prior to 2021. Eurostar services between London and Amsterdam, for example, have been suspended for a time as construction work means there is no space to perform passport and baggage checks in Amsterdam (ironically well reported in the Brexit-supporting Daily Telegraph).

What happens now?

Nobody really knows. Labour has ruled out returning to the European single market and the customs union, promising instead a “pragmatic” relationship with the EU. Obviously it is trying to win back voters in its core seats where it lost out to Boris Johnson’s promise of an oven-ready deal. But the polling evidence suggests that closer relationships with the EU would not be a vote loser.

Brexit remains an emotive subject. Economically, it poses additional costs at a time when global inflationary pressures are rising, along with interest rates; productivity growth remains sluggish; the fiscal position is less than ideal and the demographic profile is not supportive of a decent medium-term economic rebound. Some of its strongest proponents continue to claim that a “true” Brexit has not yet been tried so it is no surprise that it has failed to yield any benefits yet. Such people are the equivalent of flat-earthers who would not recognise facts if they were presented in a gift-wrapped box. They are, however, increasingly a minority who will probably be left howling at the moon as the political pendulum swings back towards the centre while the likes of Nigel Farage represent a no-trick pony.

However, nobody has the stomach to overturn the events of 2016 for fear of the bitterness it would unleash. It will take a new generation of politicians, untainted by events of the past decade, to find a rapprochement with the EU. By the time that happens, a future generation of historians will likely judge Johnson and his ilk as harshly as those of us who predicted much of the disaster he unleashed.

Don't do dumb stuff

A decade of distress

On 23 January 2013 David Cameron gave his (in)famous Bloomberg speech during which he announced his intention to hold an in-out referendum on the UK’s membership of the EU. The intervening decade has been a difficult one. Looking back over all this time, the speech might be viewed as the starting gun for a process which led us through four prime ministers, including the incompetent Boris Johnson and the hapless Liz Truss, and the steady erosion of trust in the political process.

However, in some ways what Cameron said in 2013 needed to be said. We should remember that at the time the euro area was in the throes of a debt crisis which came very close to scuppering the single currency project. He called for enhanced European competitiveness by extending the single market; a flexible structure which "can accommodate the diversity of its members"; allowing "power … to flow back to member states" and enhanced democratic accountability and fairness so that “whatever new arrangements are enacted for the eurozone, they must work fairly for those inside it and out." There was in 2013 a growing sense that the EU was disjointed and unsure about how to proceed and it was important to ask the right questions which would allow it to get back on track. Moreover, as I wrote at the time, “the speech also gave a reasoned and rational account of the benefits of staying within the EU, notably the enhanced influence which it gives the UK on the global stage, and the benefits to jobs and growth arising from the huge FDI inflows which have come from the EU.”

But Cameron’s relationship with the EU was fractious. He was not a committed player and was unable to reach an agreement with the other members that would allow him to land the killer blow to knock out his domestic anti-EU opponents. Consequently, he left the door open to the “fruitcakes, loonies and closet racists” associated with UKIP who went on to run a campaign that knocked the Remainers for six. Unfortunately, the promises made by those intent on winning the Brexit referendum at any price now lie in ruins. Who can forget the pledge to use the £350 million per week that would be saved by not having to contribute to the EU budget to improve the NHS? Not only was that figure a gross distortion (pardon the pun) but it ignored the fact that part of any funds not sent to Brussels would have to be devoted to those areas that the EU previously funded. Consequently the NHS got very little extra cash, despite being protected from the worst ravages of George Osborne’s misguided austerity programme. It is hard to imagine that the NHS could be in worse shape than it is today without actually collapsing. Admittedly the pandemic placed great strains on the system but the fact that it was underfunded long before Covid struck has been a bigger contributor to its current dire predicament.

No shelter from the fallout

The fallout from the Brexit process has had a profound effect on Britain – on its unity, identity and its place in the world. Having taken a close-run, non-binding referendum and imposing a winner-takes-all outcome the government failed to unify the electorate around a strategy to take the UK forward. In the process of trying to square the circle of unreconcilable promises, the government wasted three years of time and effort failing to tackle the mounting economic problems of the day and did a lot of damage to the public perception of parliament. Admittedly, the pandemic blew everything off course but by then the zealots had taken over in Downing Street as moderates within government were either marginalised or exiled from the Conservative Party altogether.

Perhaps one of the most pernicious aspects of the Brexit saga is that it has enabled politicians to lie with impunity and not face any sanctions. As a consequence they have been able to ride out crises that would previously have been a resignation offence as former Chancellor Nadhim Zahawi’s latest trials and tribulations testify and further exemplified by the position of the chairman of the BBC whose close relationship with senior politicians has raised questions about a conflict of interest. Faced with a cost-of-living crisis not seen in decades (even the 1970s were not this bad as wages more than kept pace with inflation) public trust in government has collapsed. It is all very reminiscent of the 1990s when John Major’s government lost public trust following its handling of the ERM crisis and spent almost five years limping towards a heavy election defeat.

The immediate future

Quite where we go from here is difficult to say. The genie cannot easily be put back in the bottle but given the increasing realisation that the current form of Brexit is a mistake it is incumbent on the government to do all it can to mend fences with the EU. Doubling down on the current strategy is not going to get the electorate back onside, given the wide margin in opinion polls of those who think voting to leave the EU was a mistake (chart above). Issues that need to be addressed include the terms of the Trade and Cooperation Agreement between the UK and EU, which allows for tariff free trade for a wide range of goods but does not address the issue of regulatory harmonisation, which is a key element in agreements designed to increase trade flows. The issue of the Northern Ireland border has yet to be settled with the Northern Ireland Protocol Bill seeking to unilaterally override parts of the protocol that governs some aspects of trade in goods between the province and Great Britain.

Businesses face the prospect of considerable disruption in the face of government action/inaction on a number of legal matters. For example, the UK ‘Temporary Permissions Regime’ which allows EEA-based financial services to maintain their ‘passporting’ rights into the UK market, expires on 31 December 2023. If this is not extended or amended, there is the risk that financial services trade could be severely disrupted. Then there is the prospect that the Retained EU Law Bill, which passed unamended through the Commons last week, will intensify business uncertainty. In brief, this allows the government to revoke certain retained EU law at will, undermining the position of many businesses which continue to trade with the EU.

Simple fixes that the government could make include extending the Temporary Permissions legislation and deferring the introduction of the Retained EU Law Bill in a bid to kick it into the long grass. Similarly, postponing debate on the Northern Ireland Protocol and accepting that the current arrangements will have to remain in place for a while, will take some heat of tensions with the EU. None of this is to say that the UK is about to reconsider its position on EU membership. For one thing it is unlikely that the EU would be thrilled about a UK application anytime soon, nor is the electorate likely to have the stomach to rerun the debates of 2016 once again. Needlessly picking fights with the EU on issues we were told were settled two years ago will not get us anywhere, however.

But it is evident that the political class needs to address the elephant in the room that the current form of Brexit will not make the UK better off. That the Conservatives cannot or will not do so is perhaps understandable, given that so many members of the government were pro-Leave. Labour’s position is less forgivable. It continues to deny the extent of the problem for fear of upsetting the anti-EU media ahead of an election, despite recent polling evidence. At the very least politicians owe it to us to take a leaf out of the Obama playbook on foreign policy: “Don’t do stupid sh**.” Whilst in some ways this may be sound advice that comes too late, the next best option is don’t make it worse by ignoring the problem.