Yes, Brexit has failed to boost the economy, but it’s still all to play for
Real battle for substantial benefits has yet to begin – and the forces of darkness will fight tooth and nail
The UK experienced an unusual cyclical boost as the Continent languished after the euro crisis
Irecently attended an international conference of economists in Vienna. When the subject of the UK came up, the atmosphere was one of universal gloom. One German economist pronounced that “Brexit has been an unmitigated disaster for Britain”. I thanked him for reacquainting us with the German sense of humour but said that the evidence didn’t unequivocally support his assertion. How can assessments of the economic effects of Brexit be so different?
Those who believe that Brexit has been an “unmitigated disaster” usually compare the UK’S relative performance since the Brexit vote with the years leading up to 2016. And it is true that on most key variables, there is a distinct deterioration. On GDP, for instance, during the period from 1992 to 2016’s Brexit vote, the UK substantially outperformed its European neighbours. After 2016 this hasn’t been true.
But how can anyone be sure that this is down to Brexit? It is always difficult in economics to make such an assessment because you can never be sure of the counter-factual – that is to say, what would have happened in the absence of the factor that you are trying to assess.
How much greater is this difficulty when we have recently lived through such extraordinary times – the Covid pandemic, the Russian invasion of Ukraine, and various political shenanigans, including, let us not forget, the serious possibility running up to the Conservative election victory in 2019, that we could soon face a Corbyn-led Labour government.
As for comparisons with the years before the Brexit vote, the UK then experienced an unusual cyclical boost, while much of the Continent was languishing after the effects of the 2012 euro crisis.
Rather than engaging in elaborate “what if ” calculations, the most straightforward approach to this question should be to examine the bare facts. They are striking. The economists Graham Gudgin, Julian Jessop and Harry Western, have pointed out that from the second quarter of 2016 until the second quarter of this year, the real economic growth rates of leading developed economies were as follows: the United States 12.9pc; France 7.6pc; the UK 6.8pc; Spain 5.9pc; Germany 5.5pc; Italy 4.2pc; and Japan 0.5pc. No unmitigated UK disaster there.
Admittedly, if you look at GDP per capita rather than overall GDP then our relative performance is not quite so good. But it is still pretty reasonable.
Even so, this leaves open the possibility that Brexit has indeed had a significant negative effect. It is likely, for instance, that business investment is below where it would have been. But we really cannot be sure. It is not an open and shut case.
What we can be sure of, though, is that there have been hardly any economic benefits from Brexit. This isn’t very surprising. Most economists who supported Brexit, including yours truly, believed that in the first few years there would be net losses as there would be some reduction in trade with the EU as a result of the introduction of various frictions following our exit from the Single Market. Meanwhile, the potential positives would take time to develop.
They certainly have. In anticipation, there were three main possible economic gains from Brexit – saving our annual budget contribution; being able to strike Free Trade Deals (FTAS) with countries around the world on terms favourable to our interests; and being able to reshape the regulatory system away from the excessively intrusive EU regime fashioned in the perceived interests of the Continent.
As things turned out, we undoubtedly gained from something quite different, namely having a more nimble approach to vaccinations than virtually all members of the EU. But we could have followed this same path had we remained a member – although we probably wouldn’t have done so.
And as for the conventional economic benefits, they are still very much a work in progress. It is true that stopping the payment of our annual tribute to the EU will be enjoyed every year in perpetuity. As things stand, however, we are still making contributions to the EU. According to the Office for Budget Responsibility, between 2021 and 2028 we will make net contributions to the EU of almost £19bn. What’s more, a further £5bn is set to flow to the EU stretching out to 2064. Mind you, this compares with a net annual contribution of about £9bn in the years before our exit and £12.6bn, or 0.6pc of GDP, in 2020.
There have been some FTAS and they will bring some benefits but both the number and the reach of such deals has been rather low. The impact of the Australian FTA has been vitiated by the UK’S insistence on continued substantial tariffs on imports of Australian food in order to protect our own farmers. Meanwhile, the really big potential FTA, namely one with the United States, remains elusive.
All along, I thought that the potential gains from FTAS were considerably exceeded by the potential gains from regulatory reform. Yet here we have, so far, achieved next to nothing. This is partly because the Government’s approach was first to enshrine all EU law in British law and then to set about a detailed investigation of such laws, leading to some being substantially amended or rejected. Only now are we coming to the point where such an examination is about to take place. The Retained EU Law (Revocation and Reform) Bill is still passing through Parliament.
As and when it is passed, there will be much to play for. The real fight for substantial Brexit benefits will then begin. Yet the forces of darkness will fight tooth and nail to maintain regulatory alignment with the EU. And within about two years there is going to be a general election that could deliver a government with a decidedly different attitude to the EU. Brexit has always been not so much an event as a process. It is proving to be a long drawn-out one.