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12 May 2022

The economic cost of Brexit is only getting worse

Rather than starting a trade war with the EU, the UK needs to forge a practical and constructive relationship.

By David Gauke

A consensus very quickly formed that this was, at best, an underwhelming Queen’s Speech, unequal to the tasks of addressing the greatest squeeze on living standards we have seen since the 1920s or the long-term prospects of slow economic growth.

The consensus view is correct, although to be fair, the Queen’s Speech was never going to provide an answer to the current inflationary surge. The best opportunity to do that was in the Spring Statement because the most effective ways of protecting living standards in the short term are to spend money or cut taxes.  

Being generous, the job was left half done. The Chancellor is right to say that he could not protect everyone from the impact of higher prices, that it is unrealistic to expect the state (or, more precisely, future taxpayers) to step in as happened with Covid, and that there is a cost to relaxing fiscal policy at a time of inflation, in that interest rates will have to rise even higher than would otherwise be the case. In normal times, the increases in the National Insurance threshold and the supposedly temporary cut in fuel duty, plus the council tax rebate previously announced, would constitute a big set of measures. But the priority should have been the welfare of the poorest, which required action on benefits (such as raising Universal Credit). The failure to take such action meant that the overall package was inadequate and unbalanced.

Governments of the centre-right can survive criticism that they are inadequately responding to short-term economic pain if they can demonstrate that the country subsequently came through difficult times with a stronger and more competitive economy. The Conservatives won both the 1983 and 2015 general elections having endured such criticism mid-term but persuaded a sufficient number of voters that this was a necessary sacrifice.

The worry for the present government – exposed by the Queen’s Speech – is that there is no particular plan to deliver a strong or competitive economy. The Thatcher government sought to conquer the inflation that had blighted the country for most of the 1970s; the Cameron government sought to stabilise the public finances. What is the economic mission of the Johnson government?

One can draw up a long list of economic challenges and opportunities but it is hard to identify a single case where there is a coherent response to confront the challenge or exploit the opportunity.  

This comes at a time when the need for a credible agenda on growth has never been greater. The Bank of England may be an outlier in its forecast but its recent assessment of the economic prospects for the UK is shockingly grim. Not only does it anticipate a recession later this year but it also predicts very little economic growth in the three years that follow. If this turns out to be correct, the government will be forced to defend a wretched economic record at the next general election.

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If anything, the government looks set to make things worse. For all the talk of unleashing the benefits of Brexit, divergence from EU rules might be more trouble than it is worth – making it harder for businesses to trade with Europe. On data protection, for example, no one argues that the EU rules are perfect, but if we go our own way – as the government proposed in the Queen’s Speech – British businesses will be faced with the additional complexity and cost of having to comply with both UK and EU rules.

A similar point applies to financial services, which is why industry voices are cautious about the post-Brexit opportunities when the practical consequences of leaving the EU could be to make trading with the bloc even harder. The Treasury has generally listened carefully to the sector, but Brexiteers such as Jacob Rees-Mogg are growing more impatient for tangible change.

The most significant manifestation of Brexiteer economic recklessness is, of course, its approach to the Northern Ireland protocol. There are numerous arguments for why legislating to enable the government to unilaterally change the Northern Ireland protocol is a foolish idea, but the economic case is a particularly powerful one.  

At worst, the EU will take retaliatory measures designed to cause asymmetric damage to the UK, including imposing tariffs and quotas on British products. It may not come to that (I am sceptical that this legislation will get through the House of Lords) but, at best, this stunt will damage trust in the UK still further. The prospect of further cooperation with the EU can be dismissed under the current government, as can even the remote possibility of a US trade deal. Furthermore, yet more uncertainty will hang over the UK, discouraging business investment and diminishing our long-term productivity.

It is, sadly, the same old story of politics trumping economics. This has real consequences. The Office for Budget Responsibility estimates that our GDP will be 4 per cent lower than it otherwise would be because of Brexit (even without any further deterioration in the UK/EU relationship) and Brexit disruption to supply chains has already contributed to 6 per cent higher food prices. 

The Brexiteers’ purist view of sovereignty is doing real damage to living standards and will continue to do so. If we really want to return the country to strong economic growth, we need to change course and forge a practical and constructive relationship with the EU. Instead, the government appears determined to press on regardless.

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