Addressing the UK’s growth problem is paramount and underpins virtually everything when it comes to public policy. Rejoining the EU, its Single Market (SM) or its Customs Union (CU) will not provide a solution to the UK’s growth challenge and should not be part of any pro-growth strategy.
As Keir Stamer said in his BBC Panorama interview with Nick Robinson during the election campaign, ‘If you look at the problems for growth over the last 14 years, they were there, or many of them were there, before Brexit, so the idea that the sort of single silver bullet is simply the relationship with the EU is not something I accept.’
The UK has had an investment shortfall since the 1970s, a trade deficit problem since the mid-1980s and regional and other imbalances have persisted for some time, too. It is not just that the major challenges facing the UK have long predated Brexit, their solutions are not reliant on being in the EU. Some may argue that Brexit has made the challenges worse, I would disagree, but this can be debated.
The question about Brexit is important in how it is asked. Critics of Brexit said that it would lead to an immediate economic collapse – and that did not happen. So now the narrative has changed to it being a ‘slow puncture’ and far too often Brexit is labelled as the sole or main cause of the UK’s economic problems, when it is not the case.
Yet, in my view, it would be wrong to suggest there has not been an impact, even if overstated. Brexit, as I noted innumerable times before the referendum, would be an economic shock. You cannot be in something for over forty years and leave and not expect there to be an impact. The way I framed it was that Brexit would be a ‘Nike swoosh’ and that after the initial shock, the benefits would accrue over time with sensible policy decisions. Brexit was a political event – about democracy, control of our laws and ensuring power remained with UK voters as the EU moves in the future towards ever closer union. Indeed, I would agree with the former Governor of the Bank of England, Meryvn King, it ‘isn’t really an economic issue: it’s a political issue’.
As the economist Paul Krugman noted recently in the Guardian, ‘Brexit has not had the disastrous effects some predicted.’ While true, it is also the case that its execution has certainly not been as good as it should have been – particularly in the eyes of the public, judging from opinion polls. I suspect this in part is because of how some of its cheerleaders sometimes presented Brexit as a panacea and gave the impression that it would transform the country’s fortunes overnight, and how within the Conservative party there were differing views of what post-Brexit economic policy should look like. Yet, we are still better placed to pursue a reforming, pro-growth agenda from outside the EU. When we were in the EU, there were many things we should have done to improve the economic outlook, but we didn’t, and likewise now we are outside the EU, there is increased room for policy manoeuvre.
Leaving the EU has returned competencies to the UK in many areas, and not just trade deals. Just how much freedom one has in a globalised, or even in a fragmented world economy may vary across sectors. A challenge for the Government is that while remaining outside the SM allows them not to accept free movement, it’s unclear what format any future relationship on regulatory agreement will take. A sensible future relationship with the EU makes sense, but this should not be at the expense of tying the UK’s hands on domestic economic policy or international trade policy.
Of course, a UK-EU deal over trade access is not in trade terms as favourable as unlimited tariff-free access. Yet, membership of the EU was about more than trade – not least in democratic accountability or political terms, but in economic terms, too, as was discussed at length during the campaign. Debates around rejoining the SM or CU overstate how good they have been for the UK in the past, and do not properly address the economic (let alone political) trade-offs rejoining either or both would likely entail.
I have looked at this issue in a new economic note for the CPS. It rebuts the often-quoted idea that the economy will be 4% smaller in fifteen years’ time. The use of dodgy economic counterfactuals is also challenged. Perhaps the best way to measure the UK’s performance is to compare it with that of the major three economies in western Europe who are G7 members, namely France, Germany and Italy. Depending upon the period chosen the performance leads or lags some of these and that can help frame a narrative. Since leaving the EU, the UK has outperformed Germany and France but not Italy. Since the pandemic, though, Italy and France have outgrown the UK, which in turn has outperformed Germany. The reality, though, is that all four face similar challenges and are not facing up to them fully. The turning point for economic growth was not 2016, but 2008 and some of the policies implemented in response to the global financial crisis; not least austerity.
In future, we need to focus on GDP per capita, which is currently falling – but while this is at least partly because of very high levels of relatively unproductive immigration, this was not an inevitable outcome of leaving the EU but rather the result of subsequent policy choices.
Making maximum use of the competencies that have returned to Westminster remains a huge opportunity, and though this need not necessarily rule out dynamic alignment in a few sectors, we need to focus on the domestic policy levers that can be pulled in Britain to boost our competitiveness.
The debate about the future of the UK-EU relationship needs to be cognisant of the changing global environment – which is already very different to 2016 – and which points to a shift in the balance of economic power to the Indo-Pacific region. This is where the bulk of future economic growth lies, particularly for a service sector based economy like the UK.
The decision to leave the EU had and has broad support: 17.4 million people voted for Brexit – more than the number of people who voted for Labour and the Conservatives combined in the 2024 election – and historically Brexit has been as much a left-wing as a right-wing cause. Above all, Brexit was a political event aimed at returning control to Westminster, and in economic and financial terms it would be a process with the benefits accruing over time – with sensible policies.
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