With the restoration of a degree of stability to government, the spotlight has drifted away from Westminster (at least until 17 November), and back onto two other major talking points. The first is the Bank of England’s (BoE) monetary policy committee's decision to increase interest rates by 75 bps this week (echoing the Federal Reserve's own 0.75 rise) which takes the UK bank rate to 3 per cent, and represents its steepest rate hike for over 30 years.
The second topic is Brexit. Given the lack of a clear dividend six years after the event, increasingly the focus is on the influence of this momentous decision on our current economic problems. The further we move away from the pandemic, the more we should be able to untangle the economic impacts of these two events. Even so, Brexit continues to divide opinion and provoke volleyball-style debate.
But the discussion is becoming more urgent following the collapse of the Truss government and its reminder that for the Brexit revolution to be complete, further radical steps on tax and deregulation (and a bonfire of rules) are required. Yet these planks of Truss’s tenure spooked markets so much they caused a mini financial crisis. If the freedom to do as we like on tax and regulation – encapsulated by Liz Truss’s approach – is a necessary prerequisite to unleashing Brexit’s potential and benefits, or even simply to maintain prosperity, then what happens now? Has the opportunity to deliver a Brexit golden age now been squandered?
Even if the low tax, low regulation dream can be realised, will it help small businesses trying to grow and expand into the market on their doorstep? Brexiteers point to the recovery in UK trade figures following a dip post-referendum, but that is a only return to previous levels and it masks growth that might have been expected without the added friction of Brexit. There has been a drop-off in the number of trade relationships between the UK and the EU. Research from the LSE and the Resolution Foundation shows a sharp, real decline in trade openness (total trade as a share of GDP) since 2019, something that has not happened for example in France, and cannot be fully explained by changes in the pattern of global trade during the pandemic. It’s a problem that is reflected in FT interviews with small businesses who felt they had no choice but to move the core of their business to the EU to enable efficient distribution (saving costs and time) across the 27 nations of the bloc. Inevitably, that means employing more people within the EU and fewer back in Britain.
Is Brexit to blame for the current economic stagnation in the UK? It’s not actually that clear-cut. Pro-Brexit groups point out that labour shortages stem from the pandemic, not Brexit, and that higher borrowing costs and higher energy prices have nothing to do with Brexit. They highlight that the EU is having its own economic troubles and is facing tough times ahead, and that financial services have not been affected by Brexit.
But Britain is the notable global laggard when it comes to the rebound in economic growth post-pandemic. And the Centre for European Reform says that while the impact of Brexit on inflation is small in comparison to global price hikes in manufactured goods and commodities, in the final quarter of 2021 UK GDP was 5.2 per cent smaller than if the UK had remained in the EU; that investment was 13.7 per cent smaller and goods trade 13.6 per cent smaller. Its figures tally with the Office for Budget Responsibility’s original prediction of a permanent hit to GDP from Brexit of 4 per cent.
Brexit is behind the steep discount now uniformly applied to UK companies despite some Brexiteers, somewhat ironically, pointing the finger of blame for assets going cheap at Remainers’ ‘alarmist’ chatter.
There is no question that Brexit has had a detrimental impact on the economy. The question that remains is, how do we ensure that the potential for further harm is stymied, and prevent our open economy from becoming a closed one? Whether you think Remainer fears are overdone or realistic, I’m interested to hear your thoughts. If you’d like to share them, please email me at rosie.carr@ft.com.
