Westminster won't admit it but here's why Brexit is behind Labour's £40 billion tax rise

On Budget day, as the Chancellor winds up her comments in the House of Commons, a queue forms outside the so-called Vote Office in Westminster. It is made up of researchers, journalists, MPs and others trying to get their hands on the pack of documents with the Budget’s details.

There is only so much that the Chancellor can squeeze into a speech of just over an hour and so these documents in print and online become an important source. Yes, much of the Budget was leaked, frustrating the Speaker and other MPs, but that tends to be done to lay as positive a spin as possible on the government’s plans.

The devil is always in the detail. Given this Budget raised a whopping £40 billion extra in taxes, it is right that businesses, devolved administrations, charities and others figure out what it means for them. It is the reason that a Budget that appears to have gone well can unravel in the days after. There is also the chunky document from the Office of Budget Responsibility (OBR) that sets out the assumptions that are being made by the Chancellor.

This was particularly interesting for those trying to get to grips with the reasons behind the Chancellor’s poor growth estimates, for instance, alongside issues such as planned increases in borrowing and the increase in the tax take. It contained clues as to why the UK is facing such challenges including, unsurprisingly, the impact of the UK leaving the European Union.

‘Weak growth in imports and exports’

At a time when the Chancellor is betting on growing the economy, the long-term structural challenges of having left the world’s largest, and most successful, trading bloc are a major impediment to those plans. In terms of trade, the OBR now assumes that there will be “weak growth in imports and exports” and consequently they expect a reduction in “the overall trade intensity of the UK economy by 15 per cent”. The document states that this is “partly” due to Brexit, though that is the only reason expressly stated in that section.

In fairness to the Chancellor, there have been challenges in recent years with Russia’s full-scale invasion of Ukraine and the pandemic. However, the decision to leave the EU and the policies adopted by the UK Government for a harder Brexit are difficulties that were self-inflicted. Unpublished Treasury documents that MPs were given access to, under the Conservative government, showed that every version of Brexit was bad for the economy with the least bad option being a ‘soft Brexit’ (remaining part of the Single Market and Customs Union). That was the compromise suggested by the Scottish Government as well as several Labour and Conservative parliamentarians.

During a difficult time, our trading and other relationships with our European neighbours represent the single biggest tool that the Chancellor has at her disposal to improve growth and the health of the economy.

The devastating economic effect of Brexit is something many Westminster politicians don't want to talk about (Picture: Jack Taylor) | Getty Images

Hundreds of billions worse off

The figures are eye-watering. The OBR previously assessed that the economy was four per cent smaller than it would have been had the UK remained in the European Union. Back in 2022, the Centre for European Reform compared the UK to similar economies and assessed that Brexit meant a loss of tax revenues of £40 billion.

This week the Chancellor increased tax by £40 billion, the biggest rise in decades. Much of the burden of that tax increase will be on small and medium-sized businesses, the very businesses that employ a huge proportion of the workforce and which were disproportionately impacted by the UK leaving the EU. This week’s Budget was yet another Brexit double whammy that many can’t afford.

Earlier this year, a report – commissioned by the Labour mayor of London and using Treasury analysis – concluded that the UK was already £140 billion worse off due to Brexit and would be £311 billion worse off over the next decade.

Historic tax rises

On top of that, the exit bill to leave the European Union is still costing taxpayers. The UK has paid £24 billion to leave, so far, with billions more still to pay to settle the UK’s obligations. Billions has also been spent on the infrastructure needed for an unnecessarily hard Brexit. All of this for a worse trading relationship with a growing and successful European Single Market. What’s more the OBR assesses that we have only seen about 40 per cent of the impact on trade with worse to come.

These figures are difficult to comprehend but, in Budget week, with historic levels of tax rises and cuts to many services, it is worth reflecting on the price that we are paying for leaving the EU. The Conservative government chose a harder Brexit with more barriers than expected, ruling out membership of the Single Market and Customs Union. Astonishingly, that has been embraced by the Labour party. This a profound act of economic self-harm leaving the UK more isolated from its European partners, even those that sit outside the EU such as Norway, Iceland and Switzerland.

Despite the enormity of its continued impact, Brexit is an issue that dare not speak its name in Westminster circles. The figures and impact on our public finances, never mind our rights and opportunities as citizens, dwarf other aspects of the Budget. What is more, much of the economic pain is unnecessarily self-inflicted with other European countries looking aghast at what has become of a state previously considered quite sensible. It’s time we confronted the impact of the Budget and the elephant sitting slap bang in the middle of the Chancellor’s study.

Stephen Gethins is the MP for Arbroath and Broughty Ferry