Is Brexit to blame for the current financial crisis?

Six years on from the United Kingdom’s vote to leave the European Union, the country finds itself contending with a cost-of-living crisis and plunging towards a recession.

In his Autumn Statement, Chancellor Jeremy Hunt announced tax rises and public spending cuts he said were necessary for the UK to give “the world confidence in our ability to pay our debts” as he sought to plug a fiscal black hole calculated by the Treasury to be worth some £55bn.

The UK is “not alone in its financial woes”, said Euronews, and like many other European nations, it is having to confront “the aftermath of the coronavirus pandemic, a supply crunch, soaring inflation and rising interest rates” as well as historically high energy prices due to the war in Ukraine. But some economists have argued that Brexit has been the major factor in worsening the country’s finances “and will continue to do so”, said the news site.

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UK a ‘global laggard’

The extent to which Brexit is truly to blame for the UK’s economic stagnation is not “clear-cut”, said Rosie Carr, deputy editor of Investors Chronicle. Brexiteers “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”, while many EU countries are also facing their “own economic troubles”.

Nevertheless, the UK is a notable “global laggard” when it comes to its post-pandemic economic recovery, continued Carr. She pointed to figures from the Centre for European Reform that found that, while global price hikes in manufactured goods and commodities had the biggest impact on inflation, “in the final quarter of 2021 UK GDP was 5.2% smaller than if the UK had remained in the EU; that investment was 13.7% smaller and goods trade 13.6 % smaller”.

Meanwhile, research from the Economic and Social Research Institute released in October suggests that the impact of Brexit has significantly hindered trade from the UK to the EU and vice versa. The institute compared UK-EU trade to a “scenario in which Brexit had not occurred” and found that goods trade from the UK to the EU was 16% down on anticipated levels if Brexit had not happened, while trade from the EU to the UK fell 20%.

Michael Saunders, a former Bank of England Monetary Policy Committee member, told Bloomberg that the UK economy has been “permanently damaged” by Brexit. In reference to the Autumn Statement, he said that “the need for tax rises and spending cuts wouldn’t be there if Brexit had not reduced the economy’s potential output so much”.

Economy has ‘trundled on’

But while there is “no dispute” that the UK is facing “serious economic problems”, said The Guardian’s economics editor Larry Elliott earlier this month, many of these “predate the Brexit vote in 2016.

“Britain has not run a surplus on trade in goods since the early 1980s, and wages adjusted for inflation have barely grown since the global financial crisis of the late 2000s,” wrote Elliott. And the UK is far from alone in facing a cost of living crisis: “the annual inflation rate for the 19-nation eurozone currently stands at 10.7%, higher than the UK’s 10.1%”, while in the “US inflation peaked at just over 9% in the summer”.

Elliott added that while “all sorts of dire predictions were made for the UK economy at the time of the Brexit vote”, such as warnings that “house prices would tumble, unemployment would rise by 500,000 and the economy would sink into an immediate recession”, six years on “none of it happened. The economy has trundled on.”

And some frequently cited data, such as the view of the Office for Budget Responsibility that Brexit will reduce the UK’s productivity by 4%, bear closer examination, said economists Julian Jessop and Graham Gudgin in The Telegraph.

While it would be “odd to deny that the increase in trade frictions between the UK and EU has had any negative impact”, they argue that “it is not clear that there has been a significant drop in trade intensity, at least in the latest data, or that the drop that has happened is primarily due to Brexit”.

It is a “huge leap to assume, as the OBR does, that this is a permanent hit which will reduce the long-term productivity of the UK by as much as 4 per cent”, they added.

“The lack of evidence of significant economic harms from Brexit is particularly important because it was always likely that most costs would be upfront and relatively visible,” Jessop and Gudgin argue. “In contrast, the main upside of Brexit was always the increased freedom to develop distinctive economic policies, whose benefits would take longer to come through,” they added.