The details of the chancellor’s second budget may have been changing up to the last minute but the broad thrust of it was determined years ago, in June 2016. Like all recent occupants of No 11, Rachel Reeves is struggling to inject growth into a moribund economy. In a break with predecessors, she has belatedly pointed the finger at Brexit and was right to do so.
Two months before the EU referendum, HM Treasury published its analysis of the long-term economic impact of Brexit. The 202-page document forecast a reduction in GDP of between 4.6% and 7.8% (relative to what it would have been had we remained in the bloc) 15 years after leaving the EU and assuming a bilateral free trade agreement was in place.
The analysis came with a foreword by then Chancellor George Osborne. He said:
“The conclusions of this document are clear: none of the alternatives support trade and provide influence on the world stage in the same way as continued membership of a reformed EU; and all of them come with serious economic costs that would affect businesses, jobs, living standards and our public finances for decades to come. To put it simply, families would be substantially worse off if Britain leaves the EU” (emphasis added).
Brexit’s economic fallout proves deeper than predicted
The Treasury forecast that the negative impact on GDP would result in “substantially weaker tax receipts” leading to “higher government borrowing and debt, large tax rises or major cuts in public spending”. It anticipated a loss of tax revenues of £36bn a year after accounting for savings from reduced contributions to the EU.
Nevertheless, by a small majority, the voters went ahead and opted to leave the EU.
Boris Johnson had described the Treasury’s “doom-laden” predictions as a “hoax” and “just not credible”. Nigel Farage attacked Cameron and Osborne for feeding the public “a constant diet of lies” in their arguments for staying in the EU, and claimed the two men were “using the whole apparatus of state in a way that, frankly, is pretty close to cheating”.
“But this isn’t about economics”, Farage added, “I can tell you we will be better off out, he’ll tell you we’ll be better off in. Ultimately, this referendum is not about trade, it’s not about money – it’s about political union”.
In fact, the Treasury analysis was pretty accurate. So, for the right-wing press, advocates of Brexit, and leave voters to huff and puff now about falling living standards requires a bit of chutzpah on their part. The only group able to take crumbs of comfort from last week’s budget are the economists and civil servants who prepared the 2016 Brexit impact paper. They have been vindicated.
But as pessimistic as the Treasury was in 2016, it was not quite pessimistic enough.
The NBER – UK losses far exceed 2016 forecasts
The National Bureau of Economic Research (NBER) based in Cambridge, Massachusetts, USA, recently published working paper 34459 on The Economic Impact of Brexit. It’s an extremely credible, serious, independent, piece of work that is very hard to dismiss out of hand and it confirms the Treasury’s 2016 analysis, claiming a relative fall in GDP of between 6% and 8%.
To arrive at this estimate, the NBER used the average of five separate methods and found that “the UK has performed materially worse than other countries since 2016 across all these different approaches”. There are fully four pages of references to related working papers, reports and studies by other reputable organisations, including many international journals.
But, and here’s the important point for last week’s budget, the NBER calculated that we reached the 6-8% GDP reduction in 2025, fully ten years earlier than HM Treasury had anticipated.
To put this in context, the UK’s GDP last year was £2.884tn (£2,884bn). Assuming the economy grows by 1.5%, we should reach £2,927bn in 2025-26. If this represents just 92-94% of what we should have expected, absent Brexit, our GDP is short of up to £250bn in national income. The OBR says tax receipts in 2024 amounted to just under 40% of GDP: a post-war high.
Assuming no change in the rate of taxation, and all other things being equal, the exchequer will lose the thick end of £100bn in tax revenues this year. Far from having to raise £26bn in extra taxes, Reeves could have chosen to halve the 20% rate of VAT with money to spare.
Brexit: the £1tn ‘mistake’
Moreover, the NEBR found that this notional reduction in GDP had accumulated “gradually over time”.
If I assume the decline began in 2016-17 and followed anything like a linear fashion, it’s not difficult to see that Britain, by voting to leave the EU, has already foregone well over £1tn in national income and £400bn in tax revenue over the nine years since. This is serious money, and is the cost so far for a policy that two-thirds of the population now think was a mistake. Some mistake.
And note the NBER report doesn’t suggest, nor is it likely, that the losses in national income will magically remain stuck at 6-8% and not continue to ‘accumulate’ in the future.
Mr Bourne regrets
Ryan Bourne’s name may not be familiar to you. He is a Times economic columnist and was also a member of Economists for Brexit (now Economists for Free Trade) one of a vanishingly tiny number of economists who in 2016 believed Brexit would deliver positive results for the United Kingdom.
Bourne, referencing the NEBR report, has apparently come to his senses and written what amounts to a mea culpa [subscription required].
He admits to arguing “in good faith” that Brexit would “unlock long-term economic potential via more policy freedom” but now, nine years on says, with huge understatement, that “we cannot pretend things have gone well so far”.
Brexit, it transpires, was the wrong key.
A qualified revelation
The “so far” indicates he’s not yet ready to declare Brexit to have been the UK’s most expensive foreign policy mistake in the modern era but, to be fair, at least he’s made a start. His reticence is understandable. Conceding you were flat out wrong on the greatest economic question of our time could be slightly embarrassing, especially as Mr Bourne is the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.
Some delusions persist however. He ascribes some blame to opposition leader Jeremy Corbyn between 2015-19 for business uncertainty, despite the NEBR authors finding half of the 7,000 UK firms on the Bank of England’s decision-maker panel listed Brexit as a “top source of uncertainty for years after the vote”.
Bourne has suddenly discovered that managers had to devote, “hours each week to planning for new post-Brexit customs arrangements, regulation and precautionary stockpiles. This displacement activity weakened innovation, delayed investment and distracted managers from core business” all of which, he warns, “cannot be dismissed as Project Fear”.
Britain has “endured Brexit’s downsides, through new trade frictions and protracted uncertainty, with any upsides paling in comparison”. Well, Hallelujah!
There is more joy in heaven, etc. Perhaps he might speak to David Davis?
