During the debate on Brexit in the 2016 referendum Lord King, the former Governor of the Bank of England, observed that if the UK left the EU, in terms of its overall economic effect it would make little difference. When economists looked back at national accounts data over a fifty-year perspective Brexit would barely register one way or another.
Since 2016 there have been at least two much more pronounced shocks that have affected the UK economy. The first being Covid and the second being the adverse effect on the UK’s terms of trade arising from the shock to energy prices resulting from the war in Ukraine. There is arguably a further third pronounced shock, the increase in the price level that arose from the central banks’ loss of monetary control and inflation in 2021 in response to those shocks.
In or out of the EU’s Single Market and Customs Union was unlikely to make much difference. This lack of economic impact reflected the principal EU policies and institutions that the UK participated in. These were farm policy, external trade policy and the internal rules and regulation of the Single Market. Changes to these policies were unlikely to have much overall effect on the UK. External trade policy – tariffs and quotas – mainly touches on trade in goods rather than trade in services. The EU has made little progress in developing a Single Market in services. It is not an accident that the recent Draghi Report on the EU economy and its relatively disappointing performance, emphasises the need for progress in developing integrated financial services and a banking union.
The UK was the first country to experience an industrial revolution between 1790 and 1840. The UK has also been the first advanced industrial economy to undergo a comprehensive process of structural change that has largely replaced its manufacturing industrial sector. The long decline of British industry started in the inter-war years. Sectors such as shipbuilding and cotton had lost their comparative advantage and were in evident decline in the 1930s, even as the economy as a whole recovered strongly after 1931. In the post-war years the affluent society and the years of Harold Macmillan’s ‘you’ve never had it so good’, could not conclean the accumulating difficulties of British manufacturing not least the car industry, re-organised by Lord Kearton’s Industrial Reorganisation Corporation in the 1960s. Tony Benn popularised the term deindustrialisation. As Secretary of State for Industry writing in his departmental magazine Trade and Industry in April 1975 in an article Tony Benn writes about industry, he regretted the ‘devastating trend to contraction of industry’.
The British economy was undergoing a process of de-industrialisation. As government ministers poured money into British Leyland and Chrysler cars, the old Rootes motor company, the Cabinet’s Central Policy Review Staff explained that UK volume car production was both uncompetitive and exhibited over capacity.
A dysfunctional labour market that exhibited excessive trade union power, had been the Achilles’s heel of the British economy, since at least the 1920s. Maynard Keynes blamed high unemployment in the slump years on ‘institutional’ factors that prevented the labour market from working. In the middle of the 20th century the problem of trade union power and industrial relations dysfunction was magnified by an unrealistically low objective for full employment policy, use of direct controls on prices and incomes and failed attempts to curb trade union power both by Labour and Conservative governments – In Place of Strife White Paper in 1969 and the Industrial Relations Act 1971.
The costs of the necessary disinflation between 1979 and 1981 were aggravated by inflexible product and labour markets. The monetary shock that squeezed inflation, expedited an inevitable process of structural change that had been delayed. A futile rearguard action of economic intervention that had attempted to head off the inevitable.
The result of the sustained structural adjustment in the 1970s and 1980s was a much smaller manufacturing sector in Britain. In the 2000s the final wraith of British Leyland, MG Rover was liquidated and sold to Chinese investors. The remains of the steel industry progressively succumbed to the cost of the green transition, decarbonisation. This has given British industrial users of energy some of the highest costs in the world, and added a green dimension to a longstanding process of economic change and deindustrialisation.
When the UK left the EU five years ago services accounted for about 80 per cent of national output. Manufacturing output as a share of national income was heading towards 8 per cent. Agricultural activity barely scored at 1 per cent of GDP. The suggestion that changes in trade rules affecting manufacturing and farming, would have a significant impact on the modern UK economy was implausible.
EU policy in relation to the UK was in terms of macroeconomic management largely a bystander. The principal instruments – monetary policy, spending taxation and borrowing remained in the hands of the UK Government at Westminster. Likewise most of the significant policies that shaped the micro-economic performance of the economy were determined locally: structure of tax and social security benefits; taxation of income, saving and capital, payroll social security taxes, such as national insurance, trade union law; planning law and regulation of land use and housing policy.
EU policy did affect the UK economy in the details of product markets, aspects of employment regulation and competition policy. On the whole the EU competition policy offered a welcome improvement. Largely drawing on the German liberal Ordo tradition. EU antitrust policy was much more astringent than anything that British competition authorities had developed. The result is that today the UK enjoys the most effective competition policy in its modern economic history. Much of the regulation of the Single Market, however, was awkward or clumsy for the UK. Many of the difficulties could be located in the challenge of reconciling a European civil law tradition of regulation with the English common law practice.
The European Court of Justice developed novel principles of judicial procedure such as the concept of indirect discrimination. These ECJ judicial approaches could interact with EU directives and their interface with existing UK statutes, such as the 1970 Equal Pay Act in wholly unexpected ways. A good example is the costly Barber judgment that had significant malign implications for the actuarial solvency of traditional UK occupational pension funds. This had to be reversed as part of the Maastricht Treaty. The same judicial practice resulted in the Manchester settlement of an equal pay dispute in local government and set in train the evaluation of work and pay in local authorities, called Equal Status, raising the local government pay bill. It is the continuing fall out from Equal Status that has contributed to Birmingham City Council’s complex financial problems in recent years. Some aspects of EU regulation removed the UK from important beneficial developments in applications of modern technology, such as the Biotechnology Directive that bans the use of genetically modified crops and limits developments in genetic editing.
The OBR’s estimate is that Brexit will lower UK GDP by 4 percentage points in fifteen years. Given that its main effect is on trade in manufactured goods and agriculture, sectors that amount to about 9 per cent of the UK economy, a 4 per cent loss of output looks implausible. The OBR assumes that trade will fall by 15 per cent, the reduction in trade intensity results in productivity falling 4 per cent, in the OBR’s assumptions. The OBR also assumed lower labour supply as a result of less EU migration. It has turned out that migration from outside the EU has been greater, vitiating that assumption. Business investment has been lower so the OBR maintains its forecast about lower productivity generated by Brexit.
It is not clear that the change in investment can automatically be attributed to Brexit. There were issues that economists debated about the relatively low rate of UK investment in the 1950s when Harold Wilson first drew attention to it as Shadow Chancellor. Lord Kaldor wrote a monograph on the matter in the 1960s. There was a protracted debate in the National Economic Development Council about it in the 1960s. All this was happening when Britain was not part of the EEC. And there was a debate surrounding slowing investment in the UK from the 1990s when it was part of the EU.
The central implausibility of the OBR’s forecast, however, is its numerical precision. The OBR offers a precise forecast of a 4 per cent change in GDP in fifteen years’ time. The idea that a £2,700 billion economy can be forecast over fifteen years to such a degree of accuracy is the sort of thing that gets economic modelling a diminished reputation.
Many people, like me perhaps over look how much appears to have been done already to modify UK regulation outside the EU in ways that are convenient to the UK. Among these changes include : modificiations to local authority procurement that can enable councils involved in regeneration to favour local economic agents; changes to commodity trading rules that facilitate large more liquid trading books, not being affected by the EU ban on investors buying Swiss equities, as a result of the EU ban on EU investors doing so in 2019; changes to institutional trading of equities away from normal trading hours on public markets – essentially rules that are appropriate for the large wholesale financial markets that the UK ha sin London ; changes to rules relating to the present of trading costs that have contributed to making investment trusts less attractive and less liquid, only the UK has a significant investment trust market; change cashless contactless payments, raising it to £100; remove tariffs that the Common External Trade Policy applied to third parties so that now 47 per cent of trade is tariff free compared to 27 per cent of EU trade; end irrelevant EU regulation such as silver foil tops on all bottles of sparkling wine; avoid putting additional tariffs on Chinese EVs; streamline rules about freight and non-EU trade with the UK; expedite new drug trials – the benefits of this were clear with the covid vaccines; and allowing UK competition and market authorities to interrogate and regulate all competition question relating to the UK – before 2020. large EU wide and international competition questions were taken on by the EU Commission. All these developments are helpful.
The new post EU discretion in product and farm policy have been used less well. The CAP has been reformed. The purpose and objectives of UK farm policy have been clarified and become better focused. The chosen focus is on public intervention to achieve public goods that relate to the environment. This reform and modification has been a missed opportunity. The interest of the consumer has been neglected. But there is a clear policy benefit – the responsibility for the neglect of the consumer can be placed at the door of the Conservative Government that oversaw the policy choices. Rules relating to animal welfare have been tightened. These changes have probably been at the expense of farm incomes and consumer prices, and foie gras imports have been restricted.
The ban on GM crops has not been lifted. There remain many examples of product market regulation, such as the rules for nuclear power plant construction that remain in place and bias manufacturing imports to the expensive EU manufacturing sector against the US and Asia.
The dull truth is that the big brouhaha over Brexit and the economy was always exaggerated. Much of the argument about UK membership of the EU was dressed up in economic clothes and economic rationale, because the protagonists favouring remaining in the EU, were uncomfortable with engaging with the principal political and federal purposes of the project. This was a feature of the debates when Britain entered the EEC. The central problem of British membership was that it was reluctant and transactional. The principal benefit of being out of the EU is that the UK has the freedom to pursue a course of action, decide it is a mistake and then do the opposite without an external legal constraint. The great advantage of being out of the EU is that it clarifies responsibility for policy. The public can interrogate policy and identify the minister and public body that is responsible for it. The EU made both the making of policy, and attribution of responsibility for policy, opaque. Today policy makers have discretion, freedom and responsibility. Moreover, while they may be able to run, they cannot hide from accountability
Warwick Lightfoot is the editor of the economic policy substack warwicklightfoot.substack.com
