Don’t blame Brexit for our economic woes

Developing our own distinctive policies is the way ahead, not rejoining the EU single market

The sixth anniversary of the Brexit referendum prompted another wave of warnings about the economic costs. Indeed, if you believe the latest headlines, leaving the EU has been an economic disaster. The aim seems to be to persuade us that the UK cannot prosper outside the EU and should at least rejoin the single market, either formally or following the Swiss model of ad hoc agreements, which could amount to the same thing.

Several of the usual suspects in the media are involved. However, one low point was the claim by Mark Carney, the former Bank of England governor, that the UK economy had shrunk from 90 per cent of the size of the German economy to less than 70 per cent since 2016. Even economists who are known to be sceptical about Brexit denounced this as “nonsense”, but Carney followed up by implausibly blaming the latest interest rates rise on Brexit.

It was to examine, and where necessary correct, such claims that we recently published a detailed report on the Briefings for Britain website. This carefully describes the evidence and methods used in a range of studies and shows how the UK compares with other countries for changes since 2016 in GDP, trade, inflation, exchange rates and the financial sector.

The hard evidence is that leaving the EU has had remarkably little impact on the UK economy. Between the first quarter of 2016 and the third quarter of 2022, OECD data show that the economy grew by a total of 6.7 per cent, a little behind France (7.4 per cent), but ahead of Spain (6.6 per cent), Germany (6.2 per cent) and Italy (4.9 per cent). UK exports to the EU have recovered to long-term trend levels, and the City of London has been little impacted.

Another persistent belief is that the 2016 vote prompted a collapse in UK investment, leaving it well below its trend rate. Such claims are mostly based on extrapolating the growth in investment between 2009 and 2016 and the implausible assumption that it would have persisted indefinitely. In fact, the growth in investment during these years was a strong, but inevitably temporary, rebound from the depths of the global financial crisis. Moreover, UK business investment is only a little below its historic trend, and some of the gap can be explained by lower investment in North Sea oil and gas, which is clearly unrelated to Brexit.

Foreign direct investment (FDI) into the UK has also held up well since 2016, in contrast to predictions of a slump.

There is little evidence, either, that Brexit has contributed to labour shortages (at least, not permanently). UK employment has failed to recover to pre-covid levels and this helps to explain the relatively weak growth of the UK economy since 2019. But this mainly reflects a rise in long-term sickness. The failure of many EU migrants to return to the UK can be attributed to the pandemic, too, which has had a similar impact on migrant workers elsewhere, notably Germany, where vacancy rates are similar.

This leaves two other channels by which Brexit might have “wrecked” the economy. One is inflation. Yet this has been similar to that in the US and the EU, including food prices. The other is trade. But far from collapsing, UK trade with the EU has fully recovered after some initial disruption, with no big difference between UK exports to the EU and those to the rest of the world.

The views of the OBR have been widely cited here. It would be odd to deny that greater EU-UK trade frictions have had any negative impact. But it is far from clear that there has been a significant drop in trade intensity, or that the drop that has happened is primarily due to Brexit. It is certainly a huge leap to assume, as the OBR does, that this is a permanent hit to the long-term productivity of the UK.

The lack of evidence of significant economic harms is especially important, since it was always likely that most Brexit costs would be upfront and relatively visible. In contrast, the main upside was always the increased freedom to develop distinctive economic policies, whose benefits would take longer to emerge. Success or failure will depend on how effective these policies prove to be. But it would be wrong to backtrack on the basis of an anti-brexit campaign built on such flimsy foundations.