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Post-Brexit economy: where are we, where are we going?
The ability to provide a clear-headed economic analysis of a change in policy has a habit of being obscured by wider events.
So, it has been with Brexit (as we mark the seventh anniversary of the EU referendum vote). No sooner was the Trade and Cooperation Agreement in place than the global economy was reeling from the impact of Covid and any steady recovery from that crisis was thrown out of kilter by the Russian invasion of Ukraine.
The economic haze of these events is beginning to clear, and the impact of Brexit on the UK economy is becoming clearer. There is little doubt that the decision to leave the European Union has caused economic damage.
Why, given that we signed a Trade and Cooperation Agreement, would that be the case? In general terms, there are four areas where Brexit has been detrimental to the UK economy: trade friction, unequal adoption of regulations, movement of labour and sentiment.
Trade friction has been somewhat brushed off in the media as extra paperwork, but this underplays its impact – and for some dealing with some of our largest trading markets has become impossible or prohibitively costly. The impact on small businesses and some specific sectors across the UK has been severe even if the headline trade figures with the EU in 2022 were at their highest level by value.
The UK has also adopted a position that since Brexit it has not put in place the regulations that it could enforce on EU imports. Creating a friction on inbound products would have a negative impact on the UK economy but in the agri-food market, in particular, UK exports are harder than ever whilst there is a continued free flow of imports unrestricted by the regulations that the UK could put in place.
From a workforce perspective, it is becoming clear that some industries are suffering shortages of staff and at least some of this can be attributed to the inability to backfill vacancies through the employment of EU nationals.
Finally, against the backdrop of these various issues, there is a risk that businesses simply do not prioritise the potential benefits of working with Europe given the sentiment that Brexit created.
The extent to which this has all impacted the UK economy is difficult to assess accurately but both the Bank of England and the Office for Budget Responsibility are clear that overall, the impact is negative. In February 2023 the Bank of England stated, ‘Brexit has dealt the UK economy a “productivity penalty” of £29bn, or £1,000 per household’. In March 2023 the OBR stated that Brexit ‘will reduce long-run productivity by 4% relative to remaining in the EU’.
The economic headwinds from Brexit are not over yet. Some longer-term issues are baked into the Trade and Cooperation Agreement. One example is that UK originated content will need to significantly increase in electric vehicles if tariffs of 10% are not to be imposed on UK exports by 2027.
This issue helps highlight the potential risk to sunk investment in the UK. International businesses have long invested in the UK as an attractive country from which to export to Europe. A business with a production plant in which it has sunk millions of pounds was not going to walk away from the UK immediately – but when there is a change in the product or the need to upgrade the production line, will more money be poured into their UK production base? There has been a trickle of announcements that suggests that the existing stock of UK inward investment is now having its competitive position undermine when UK factory managers are seeking reinvestment decisions over competitor plants in Europe.
Brexit may turn out to be most damaging because of the position that the UK now finds itself in. At the time of the Brexit referendum, few overlaid the issue of the ageing workforce in the UK or the need for increased growth to raise the taxes to help pay for services. Two issues which have been prominent in the UK press recently have been the rise in economic inactivity (or people choosing to leave the labour market) and the need for growth. Neither issue has been helped by Brexit.
Brexit remains a toxic and divisive issue and it does not look as though the decision to leave the EU will be reconsidered anytime soon. It is equally clear the UK needs growth and will need to address the coming decline in working age people. This is likely to mean the UK searching for ways to reduce its friction in trade and investment with as many markets as possible and the attraction of a larger workforce. How this is framed in policy terms is a political rather than an economic issue.
Nigel Wilcock is Executive Director of the Institute of Economic Development, the UK’s leading professional body for economic development and regeneration professionals.