An Autumn Statement of Britain's foregone future

The staggering success of Brexit in transforming Britain’s economic prospects has been such that in his Autumn Statement speech the Chancellor mentioned it, well, just once, and that to refer to the fatuous “Brexit Pubs Guarantee”. This is the policy, first trailed in Rishi Sunak’s 2021 budget, and which came into force last August, whereby duty on a pint of beer bought in a pub is guaranteed to be less than when bought in a shop. As Brexit benefits go, this might be thought rather meagre but, in fact, it’s not even a Brexit benefit, as it could have been done whilst being a member in the EU.

The reticence was scarcely surprising, though. In making a statement putting heavy emphasis on the need to boost business investment, Jeremy Hunt could hardly mention that, just the day before, the Deputy Governor of the Bank of England had told the Commons Treasury Select Committee that the decision to leave the EU had “chilled business investment” ever since the referendum. Nor, in putting heavy emphasis on the need for economic growth, was he likely to refer to the Office for Budget Responsibility’s (OBR) forecast from April 2023 that Brexit will cause UK GDP to be 4% a year lower than it would otherwise have been by 2035, even though that forecast was explicitly left unchanged in its analysis accompanying this Autumn Statement.

Hunt certainly wasn’t likely to challenge the OBR’s estimate, as Trade Secretary Kami Badenoch did the other week, since one of the big lessons learnt from Truss’s mini-budget catastrophe, which brought him to the Treasury, is that the OBR’s forecasts are crucial to gain market legitimacy. So trying to pick holes in one of those forecasts would open a can of worms that every Chancellor who follows the hapless Kwasi Kwarteng will want to remain tightly closed.

The long hand of Trussonomics

That is a reminder that, although it seems a long time ago, it is only a year since Truss’s ‘true Brexit budget’ (£) meltdown and the first Sunak-Hunt Autumn Statement that followed. At that time, I wrote that the effect of those events was to begin to break the silence about the economic damage of Brexit. That was true, so far as it went, although it hasn’t persisted to the same degree, perhaps in part because Brexit has been subsumed into the long list of things about which, as I wrote more recently, we ‘mustn’t grumble’.

It’s not just that, though. Opinion polls show that in October 2022, following the Truss debacle, 57% thought that Brexit has made the UK economy weaker than it would have been, and 11% that Brexit has made the economy stronger than it would have been, a lead for 46 percentage points for ‘weaker’, which was the highest recorded since the question was first asked in February 2022. However, in the most recent iteration of this poll, in October 2023, 49% thought ‘weaker’ and 21% thought stronger. At 28 percentage points that is still a considerable lead, but it has not only declined since its high point in October 2022 it is also the smallest lead recorded in any of the polls since the question was first asked. (The numbers responding ‘similar’ or ‘don’t know’ have remained stable throughout, at around 20% and 12% respectively).

So it looks as if the Truss mini-budget did indeed have an impact on public debate and public views about the economics of Brexit, but that this has since diminished. One reason is probably just the passage of time since the mini-budget crisis, and declining media interest in Brexit. But another may be because of the extent to which, in Conservative circles, the belief that Truss was essentially right has endured or even grown. It may not be surprising that this belief was expressed just this week by Patrick Minford (£), the ever-deluded chief economic cheerleader for Brexit and prime intellectual architect of the Truss budget. Nor is it precisely a shock that Truss herself, whose qualities do not self-evidently include that of deep introspection, should not just regard herself as blameless but in recent months have appointed herself as the standard-bearer for a ‘true Conservative’ economic policy of tax cuts and small government. But it is more surprising, given the damage she did not just to the economy but to their chances of re-election, that “so many Tories still love the failed leader”, to quote part of the headline of an insightful recent article by the Guardian’s Zoe Williams which seeks to explain Truss’s “astounding return”.

Part of Williams’ explanation relates to Brexit. She suggests that Truss and her supporters have mobilized its recurrent victimhood motif to present her as not having failed but as having been destroyed by the forces of the Blob, the Establishment – that amorphous conglomerate which, to explain Truss’s demise, has to extend even to bond market traders. This is all part of the increasingly dangerous contemporary British version of the ‘stab-in-the-back myth’ that played such an odious part in German politics after the First World War. It was on display again last week in the aftermath of Suella Braverman’s resignation.

At all events, it won’t have been lost upon Rishi Sunak that Truss’s ‘Great British Growth Rally’ upstaged him at the Tory Party’s conference, and that tax cuts are one way that he might throw some red meat to his many critics. Indeed, he even had the gall to suggest (£) that the lesson of Truss’s budget chaos lay not for the Tories but for Labour’s “dangerous” green investment plans. In any case, one of the few things known about Sunak is that he wants to be seen as an ‘instinctive tax-cutter’ and his political hero is Nigel Lawson, Thatcher’s Chancellor in the 1980s

In this way, there is now a peculiar alignment within which tax cuts are seen as symbolic both of defiance of Establishment orthodoxy and of fealty to Thatcherite orthodoxy. So it’s not surprising that Sunak and Hunt conjured some up, even if they relied on a smoke and mirrors trickery that was concisely exposed by Paul Johnson of the Institute for Fiscal Studies, and were based less on any serious economic analysis and more on a desire to lay political traps for Labour at the coming election.

Certainly the right-wing press was quick to latch on to this alignment, with both the Mail and the Telegraph carrying the identical front-page headline “Biggest tax cuts since the 1980s”. The Telegraph front page also prominently featured five pundits who it promised would provide “the best comment and analysis”. Of these, one was Allister Heath, who last year lauded Kwarteng (£) for “delivering the best budget I have ever heard a British Chancellor deliver, by a massive margin”, whilst another was none other than Kwarteng himself. Truly, the best comment and analysis anyone could imagine.

The scale of the economic damage of Brexit

Nevertheless, unlike the architects of the mini-budget, neither Sunak nor Hunt could even begin to try to pretend that the Autumn Statement was about ‘delivering Brexit’, any more than they could admit how constrained it was by the ongoing damage of Brexit, the leaden divers’ boots dragging down Britain’s economy.

Further evidence of this was provided by last week’s report from the National Institute for Economic and Social Research (NIESR), entitled Revisiting the Effects of Brexit. The first line of its conclusion is that “overall, it is certain that Brexit has had a significant effect on the British economy” [my emphasis added], and the ‘headline’ summary of that effect is that, coming up to three years after the end of the transition period, UK real GDP is between 2% and 3% lower than it would have been compared with if Brexit had not occurred, and that it is forecast to be between 5% and 6% lower than it would have been by 2035 (thus, even worse than the OBR forecast of 4%). This equates to £850 per capita and £2,300 per capita respectively. The main reasons for this are the impacts on investment, productivity, and UK-EU trade.

There are several things to say about these findings. First, they are based on modelling different scenarios and, in doing so, the impact attributed to Brexit is stripped out from the impact of other shocks, primarily those of Covid and of the Ukraine War. This also means they are based on a form of ‘counterfactual modelling’ (i.e. comparing what has actually happened so far and what is forecast to happen with what might, in other scenarios, have happened or have been forecast to happen). As such, they are, of necessity, estimates but – unlike the constant attempts by pro-Brexit economists to assess the impact of Brexit by comparing actual UK performance with actual EU, Eurozone, or individual member state performance – they do address the central relevant question: is the UK economically better off or worse off outside the EU than it would have been within the EU? By definition, this question can only be answered in counterfactual terms, and of course it is the same question as that asked in the opinion polls I referred to earlier.

The NIESR model is, however, a different to another kind of counterfactual model, the widely-quoted ‘doppelgänger’ produced by John Springford of the Centre for European Reform (CER) and, in fact, it suggests that Brexit has not been as damaging as the CER model estimates. Thus the last iteration of the CER doppelgänger showed UK GDP to be 5.5% lower than it would have been by June 2022, whereas NIESR shows it to be 2.5% lower by 2023.* It should go without saying that either figure may be right, or that the true figure may be even higher than the highest estimate, or lower than the lowest estimate, but for the time being, at least, these are the best estimates available. It should also go without saying that, on any of these estimates, it represents a huge economic hit. To get a sense of its magnitude, consider that in 2019-2020 (i.e. before the pandemic created big distortions in public finances), the UK spent 1.9% of GDP on defence, 4.2% on education and 5.8% on pensioner benefits.

It's important to understand two things about the NIESR, CER and OBR estimates. One is that people sometimes wrongly think – and, when that happens, Brexiters suddenly become sticklers for analytical rigour – that these are estimates of absolute falls in GDP. They are not, they are estimates of lost growth in GDP that would otherwise have occurred. In that sense they are about a kind of invisible immiseration, the loss of what might have been. The second is that people sometimes think – and Brexiters collude in this when they talk about the Brexit impact as being one of ‘temporary adjustment’ – that what is being estimated is a one-off event. It is not. Rather, each year, every year, actual GDP is lower than it would otherwise be, with the gap between what is and what might have been gradually increasing. In that sense they are about a kind of compound invisible immiseration.

It's also important to repeat that all these studies do seek to strip out Brexit from other effects, and in doing so they recognize that the UK economy – including the specific issues of trade performance and productivity – faces many challenges other than Brexit, including some that pre-dated Brexit. This matters when reading, for example, another recent report, this time from the Boston Consulting Group (BCG) about UK trade performance and policy. For this report, whilst making many good points about the non-Brexit challenges, still finds it necessary to repeatedly make the strawman claim that “most commentary” ascribes the challenges facing UK trade to the single factor of Brexit. In fact, it is hard to think of a single serious commentator on trade or economics who does this, and, manifestly, the NIESR, OBR and CER do not.

The issue about the economic studies is simply that, as the BCG report itself states in relation to trade, although without attempting to quantify it, “Brexit has undoubtedly had a significant impact”. Quantification is useful in estimating the extent of that impact but, fundamentally, the point is that whatever other factors are in play, in a world where economic growth is hard to find, Britain, uniquely, has chosen to make it significantly harder by the addition of Brexit to these other factors. For another way to contextualize the magnitude of estimates of lost GDP growth, such as the NIESR figure of 2.5% for 2023, is to compare them with the latest OBR forecasts of what GDP growth will be: 0.6% (2023), 0.7% (2024), 1.4% (2025).

The bitter legacy of Brexit for SMEs

The BCG report also rightly highlights that the impact of Brexit has varied between sectors, identifying pharmaceutical and automotive industries as amongst those where Brexit “is likely to have been a major factor in reducing trade”. Perhaps the most important distinction to be drawn is between large and very large businesses, on the one hand, and small and medium-sized enterprises (SMEs) on the other. The reasons are fairly obvious. Larger firms had the resources to plan for and implement the changes that Brexit brought, and were often more likely to already be familiar with procedures for trading outside the single market.

There has been ample survey evidence of how hard SMEs have been hit by Brexit, and the negative impact on specific sectors and businesses has been assiduously chronicled by Peter Foster of the Financial Times, most recently in his report on the cosmetics and beauty sector (£), itself partly based on a study conducted by Oxford Economics for the British Beauty Council. Amongst other things, Foster’s report spells out that the impact of Brexit is an ongoing one, not simply a ‘shock’ to which firms ‘adjust’ – although, in some cases, it has been just that, with the adjustment being to cease trading with the EU or to cease business altogether. Yet Hunt, despite emphasizing the need to support small businesses, had nothing to say about this.

The particular impact on SMEs is sometimes acknowledged by Brexiters, such as in the recent Institute of Economic Affairs report by pro-Brexit economist Catherine McBride (aptly described by Professor Gerhard Schnyder as “a truly fascinating piece of post-truth economics”, this is what Badenoch based her critique of the OBR forecast on). But they typically downplay its significance on the basis that, precisely because they are small, the aggregate economic effect of that impact is small.

This is misguided in two ways. One is that although big firms may be better placed to deal with Brexit this doesn’t mean, as McBride blithely puts it, that they “can easily absorb any additional costs”. It is rather that, as Allianz Trade’s Head of Economic Research recently said, Brexit has “become a structural hurdle for UK exports” (the same is true of imports, and will become even more so if the latest promise to introduce UK-EU import controls next January is kept). Many big firms may indeed ‘absorb’ these costs, but they are still real, impacting on competitiveness, prices, employment, tax base or any number of other things. But it is also misguided because of the particular economic, social, communal and, indeed, emotional and psychological costs of Brexit’s impact on SMEs.

Those costs are well-illustrated in Foster’s reports, including the one on the beauty industry, which also illustrates the micro-level equivalent of the counterfactual issue in the aggregate modelling. For, as he says of Apothecary 17, a small Doncaster-based maker of male personal grooming products, the issue is not so much that it has adjusted to now being a domestically focused business, it is the ‘counterfactual’ that it might otherwise have continued to expand as an international business. That in turn has implications for the people it might have employed, the foreign currency it might have earned, the taxes it might have paid, and its resilience in the event of a domestic downturn.

There are numerous similar examples highlighted in Brexit and Businesses: In their own words, a recent European Movement (EM) report in which, along with survey results, individual SME owners and managers explain what Brexit has meant for them. Issues include not just the new complexities of trade and regulatory change, but labour shortages. Here, too, it is important to understand how SMEs often struggle more than large businesses because, although net migration figures remain at similar levels to before Brexit, the costs and bureaucracy of hiring workers from overseas are far greater than was the case under freedom of movement of people within the EU. Moreover, sectors like hospitality which are more likely to need workers who don’t qualify for visas are also more likely to have large numbers of small firms within them.

Sometimes, the profiles in the EM report are painful to read, as with that of Carol, who ran a niche bridal lingerie business in Devon. The last line is “Brexit was the final nail in the coffin of the business” (p. 12). Or that of Darren, who ran a specialist motorsport vehicle engineering firm in Cornwall and Essex. His profile concludes “our business is finished” (p. 17). These are affecting, personal stories of individual dreams shattered, whilst at the same time implicitly telling of damage to whole families and to local communities, often in ‘left-behind areas’.

It is ironic to think how fervently Tory politicians used to, and still sometimes do, declaim themselves to be the party of entrepreneurs, and to insist that small businesses were the bedrock of the British economy, and yet they presided over Brexit. Ironic, too, how so many Brexiters claimed that it was only ‘big Business’ that felt threatened by Brexit, and what mattered were the true, British, salt of the earth, small businesses, and yet now dismiss the effects on SMEs as all but irrelevant because big Business has been more able to weather the Brexit storm.

Britain limps on

Back, then, to this week’s Autumn Statement, when it was clear, though again not surprising, that the Labour Party are as taciturn as the government about the damage of Brexit. Thus Shadow Chancellor Rachel Reeves’ response speech made no mention of it at all. As if it were the seedy uncle who has to be tolerated at family get-togethers, everyone is too embarrassed to comment on the dubiously-stained mac, the off-colour jokes and the whisky-fumed breath that Brexit brings to the parties.

For the Tories, the embarrassment is the result of having been the architects of Brexit. For Labour, it is because, otherwise, they would be forced to explain why they don’t propose to seek to reverse it, even to the extent of seeking single market membership. The political reasons for that, both domestic and as regards the EU, are understandable and, in my view, justifiable. But, whether justifiable or not, they don’t change the basic fact that the country is accepting – or being forced to accept – that, year after year, it is going to get poorer and poorer than it would otherwise have been.

I’ve argued before that, even so, Labour’s post-Brexit policy is a real, if limited, alternative to that of the Tories. But no-one should think, and Labour shouldn’t pretend, that the accommodations that are possible within the Trade and Cooperation Agreement (TCA) framework will make much economic difference. Equally, as Michel Barnier has said in a recent interview (£), there’s no prospect of the EU re-visiting the basic architecture of the TCA. Yet, although Reeves made no mention of it, other Labour politicians, such as Shadow Business Secretary Jonathan Reynolds [approximately 10 minutes in], are including changes to the TCA as one of the ways a Labour government would boost growth.

And so Britain is set to limp on, if not the sick man of Europe then, at least, the only one who has shot himself in the foot. Sunak talks of making tough “long-term decisions for a brighter future”, and in his recent conference speech Keir Starmer said that under Labour “Britain will get its future back”, but the truth is that by far the biggest long-term decision of recent times was made in 2016. It wasn’t a ‘tough’ decision: it was made glibly, carelessly, almost casually. But its consequences are certainly tough, and not at all bright. What that bland and, to some, obscure little word ‘counterfactual’ in the economic estimates means is that each year those consequences will get tougher as Britain pays the growing price of a foregone future.

 

 

*The basic difference between the models, as I (a non-economist) understand it, is that the NIESR model compares UK actual and forecasted performance since Brexit with a UK counterfactual scenario in which Brexit had not happened, whereas Springford’s CER doppelgänger compares UK actual and forecasted performance since Brexit with the actual and forecasted performance of a weighted basket of economies which pre-Brexit were comparable to the UK and so is taken to be the counterfactual scenario for the UK had Brexit not happened. Springford has commented on Bluesky on how the NIESR model differs from his, and on some of the advantages and disadvantages of each. Springford’s model has been criticised by some pro-Brexit economists, and he has responded to, and rejected, their critique. Separately, Professor Jonathan Portes of King’s College London has argued that not only is their critique theoretically flawed but that their preferred model actually yields similar results to Springford’s doppelgänger.