John FitzGerald: Extent of UK economy’s damage from Brexit has been masked

All the economic assessments prior to Brexit suggested that it would have a substantial negative impact on the UK economy.

However, when it finally happened in 2020, it coincided with the outbreak of the pandemic, a smoke screen that hid the initial negative economic effects of leaving the EU. More recently, the outbreak of the war in the Ukraine has caused major disruption, further obscuring how Brexit is impacting on British living standards.

On joining the EU in 1973, the UK’s national income per head was about the same as the EU15, and remained very similar to the euro area up to the time of the 2015 referendum.

However, the last few years have not been kind to the UK economy. Its standard of living today is 3 per cent lower than the euro area, principally reflecting inferior economic performance since 2019.

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Based on International Monetary Fund forecasts, over the period 2019 to 2023 cumulative growth in the UK will be less than in other major world economies, and between 1 and 1.5 per cent less than in the euro area. Britain will slip down the world economic rankings.

While some of this underperformance may be attributable to mishandling of the pandemic, it seems probable that Brexit is the major culprit.

Studies undertaken over the last five years all suggested that a major cost of leaving the EU would be lower investment in the UK and, as a result, slower growth in productivity and living standards.

The UK Office of Budget Responsibility’s research suggested that some of the negative effects of Brexit had already kicked in before the UK left the EU, but that the full long-term effects would take considerable time to mature.

Detail of data

A recent London School of Economics study shows that, while total exports from the UK to the EU appear to have been little disrupted, a rather different picture appears from a detailed consideration of the data.

Small exporters have given up on the EU market because the new obstacles to trade are too great. In particular, firms exporting consumer goods have lost interest in trade, as accessing smaller EU markets became more burdensome. This represents a significant cost to the UK economy.

By the time business in the UK wakes up to the danger, it may be too late

By contrast, imports have been substantially reduced, as supply chains have adjusted. However, such adjustments come at a cost to business.

Ironically, some of the firms that have ceased exporting might have continued if they had opened an office in Belfast to exploit the opportunities offered by the protocol.

While such firms would have had to comply with EU rules in transferring their goods in bulk to Belfast, each sale to a different EU country from Northern Ireland would then have met minimal bureaucratic controls as, for this purpose, Belfast is within the EU single market.

However, the UK government’s attacks on the protocol seriously discourage such investment.

Customs border

With the elections in Northern Ireland over, the UK looks set to begin a process that would unilaterally revoke the protocol on Northern Ireland.

If the UK goes ahead with this, and resiles from the legal obligations that it undertook in the Brexit agreement, it will leave the Irish Government with little alternative but to reintroduce a customs border on the island.

This is an issue of huge concern to the Government, not because it would be particularly damaging to the economy, but rather because it could be massively disruptive of political and social relations on the island.

To date, the protocol has been considered in the UK as having no implications for the wider UK economy. However, the continuing rows over the protocol, especially the threat to legislate to set it aside, could change this.

If the UK tears up the protocol, retaliatory action by the EU is certain. This means that for any exporter in the UK, or firms considering investing there, future access to the huge EU market is under threat until the row with the EU is resolved.

Such fallout from unilaterally breaking the agreement it made with the EU would likely set back UK growth for the rest of the decade. Also, other potential trade deals would be at risk if Britain was seen as a faithless partner.

Business in the UK has so far viewed the protocol debate as merely an “Irish” issue.

However, if the UK escalates the situation, the likelihood of retaliatory action will bring home to firms the risks that they face as a result of the Johnson government’s policies. By the time they wake up to the danger, it may be too late.