Negatives aside, Brexit has not been the unmitigated disaster that some would have hoped for - John McLaren
The obvious place to start is trade. Have exports and imports to the EU been negatively affected by Brexit? The answer is yes but unfortunately that’s where the easy conclusions end. As well as Brexit, trade has been massively affected by the COVID closedown and by the impact of the war in Ukraine’s impact on commodity prices. On top of all that, the methodology used to calculate trade statistics was significantly revised by the Office for National Statistics (ONS) at the start of 2021, i.e. at the same time as the new Trade and Co-operation Agreement (TCA) was introduced. All of this makes interpretation of underlying trends very difficult.
What can be said, with some degree of confidence, is that the big depreciation in sterling - approximately 20 per cent - experienced around 2016, the time of the Brexit vote, should have led to an improvement in the trade balance and, thus far, it has not. Furthermore, post TCA, the level of both exports and imports to and from the EU both took a big hit, reducing the UK’s trade intensity, with widespread negative consequences. Interestingly, imports were harder hit than exports initially, although both have since recovered ground. Overall, a variety of analysis has concluded that trade has been negatively impacted upon but the degree is difficult to discern and the picture continues to change over time.
Most estimates of the impact of Brexit on economic growth, including by the Bank of England (BoE) and the Office for Budget Responsibility (OBR), put the negative hit at around three to four per cent, in total. While unwelcome, this pales besides the potential lost growth due to the decline in productivity, which amounts to close to two per cent a year since 2009.
In some areas the losses have not been as significant as expected. The governor of the BoE recently stated the City of London and the financial sector had suffered less than was feared, with relatively few jobs lost. This is relatively good news, but any notion that London was about to become Singapore-on-Thames has been revealed as the fantasy that it always was.
Highly pessimistic claims by the likes of the ex BoE governor Mark Carney that the British economy has moved from being 90 per cent of the size of Germany’s to less than 70 per cent, are misleading. As the economist, and Brexit critic, Jonathon Portes points out, this apparent shift stems from currency movements, not from a dramatic deterioration in living standards in the UK.
In terms of labour supply, the impact has not been what was expected, with long term immigration numbers rising rather than falling. However, its composition has changed significantly, with a shift away from lower skilled, eastern European, immigrants towards higher skilled, non EU, ones. Again uncertainty prevails here as the figures, especially for 2022, have been unduly affected by large numbers of Hong Kong and Ukraine refugees gaining entrance. Whether this is a one off allowance or their place will be taken by visa issuance to other immigrants in future years remains to be seen.
Another high profile pre-Brexit claim was that Budget savings would arise with extra funds being available for the NHS and beyond, although the original claims were knowingly inflated by excluding the UK rebate. At this year’s Tory Party conference Michael Gove claimed that the rise in NHS spend proved that this had actually happened. Alas, the reality is that substantial tax rises have allowed for this. If anything the overall fiscal impact of Brexit on tax revenues is likely to have been negative, due to lower growth in wages and company profits than might otherwise have occurred.
In other areas, there has been no bonfire of EU legislation - as Kemi Badenoch said, she is “not an arsonist” and therefore was unwilling to create further uncertainty for British businesses - while the shared defence and foreign policy approach does not appear to have been negatively impacted upon - as the close co-operation over the invasion of the Ukraine has illustrated.
What’s still to be decided? Plenty. When will the UK trade entry requirements for EU goods finally be enforced? What will the final agreement over traded services look like? How will the Northern Ireland Protocol/Windsor Framework evolve over time? What sort of re-negotiated trading relationship might a Keir Starmer led UK government agree with the EU?
So a lot of ifs, but the bottom line is unlikely to change much and that is what most economists said from the get go - if you put more barriers up between you and your biggest trading partner then costs will go up and trade will go down, along with economic growth as a whole. The scale of these negatives is arguable, their existence is not. Equally ‘unexpected consequences’ can play a significant role in determining the final outcome, including in relation to international events (Ukraine) and evolving domestic policies (immigration).
What are the lessons to be learnt for any future debate on Scottish independence or greater devolution? The biggest one is - don’t ignore the experts! They might not get the scale of specific changes exactly right but they tend to be fairly accurate in terms of the direction of travel. So while Brexit has not been the unmitigated economic disaster that some would like to portray it as, it has generally had a negative economic impact and many of the counterclaims for offsetting benefits have proved to be false or slow to arrive.
John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for a variety of economic think tanks.