UK autumn statement: How much is Brexit to blame for the budget 'black hole'?

Fake 350 million pound notes bearing the face of then Prime Minister Boris Johnson, placed by anti-Brexit protesters outside the Houses of Parliament in London, Jan. 7, 2020. - Copyright AP Photo/Matt Dunham- Matt Dunham

By Alasdair Sandford

Published on 17/11/2022 - 07:13•Updated 08:15

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As Britain's Chancellor tries to plug a €63 billion gap in the public finances, calls are growing among businesses for the UK to rejoin the EU's single market.

Britain's finance minister warned of "horrible decisions" in the run-up to today's (Thursday) budget "autumn statement" when he seeks to redress the country's dire financial straits.

Jeremy Hunt has admitted there will be spending cuts and that "we're all going to be paying a bit more tax" to offset an estimated fiscal hole of some £55 billion (€63 billion).

The UK is not alone in having to confront the aftermath of the coronavirus pandemic, a supply crunch, soaring inflation and rising interest rates, not to mention Russia's war against Ukraine which has brought sky-high energy prices.

It did suffer the aggravating impact of Liz Truss' disastrous fiscal experiment.

But many economists say Brexit has worsened the country's finances to a far greater extent and will continue to do so.

'Half of fiscal hole down to Brexit'

"Around half of the fiscal hole, and the political instability that comes with that, is down to Brexit," John Springford of the Centre for European Reform said on Twitter in October, in an exchange on the relationship of the UK's EU membership to its economic performance.

In a CER report in June, he commented on a £29 billion (€33.2 billion) package of tax rises announced earlier in the year by Rishi Sunak, then finance minister -- up "to their highest share of GDP since the 1960s", he said.

"These tax rises would not have been needed if the UK had stayed in the EU (or in the single market and customs union)," Springford argued.

He quoted an official estimate by the Office for Budget Responsibility (OBR) from March 2021, forecasting that Brexit will reduce the UK's long-term productivity by 4%.

"Overall, the net cost of (Boris) Johnson’s Brexit to the public finances will come in at almost £30 billion (€34.2 billion) each year," Ian Mulheirn of the Tony Blair Institute for Global Change wrote in an article the same month. He also concluded that "none of these taxes would have been necessary if we had remained in the EU".

Mulheirn cited lower tax income, revenue loss from an immigration clampdown, and the UK's EU annual exit bill of £25 billion (€29.7 billion) as reasons for "the economic drag anchor of Brexit".

Springford attributed a shortfall in the UK's GDP and goods trade performance compared to other advanced economies as being "down to Brexit, not Covid", and identified "a clear Brexit effect" on the country's "flatlining" investment. "The jury is still out on services trade," he added.

Trade 'bound up in red tape'

"Growth, growth and growth," Britain's short-lived prime minister Liz Truss listed as her priorities. But there is a growing bank of evidence that a significant barrier to that objective is Brexit itself.

Numerous studies have documented a decline in trade between the UK and the European Union, its biggest trading partner, since the UK left the bloc.

The British wine industry is one sector that has been significantly impacted. Many companies struggle to import wine across the English Channel from the continent, due to extra bureaucracy and costs.

Independent wine merchants Lant Street Wine say they try to import "interesting wines from small quality producers" for sale in the UK market. But whereas once it took a matter of days for a delivery, now it can take months.

"There are so many businesses out there who are really struggling. Every day it annoys us," company director Ben Wilcock told Luke Hanrahan for Euronews' recent report.

Britain's voluntary exit from the EU's single market and customs union -- and the bareboned nature of the Brexit trade deal negotiated by Boris Johnson -- erected a plethora of non-tariff barriers such as customs declarations, rules of origin checks, regulatory controls and health checks.

"Brexit is tearing the union apart and destroying our largest manufacturing sector -- food and farming," says the campaign group Save British Food -- which also goes by the name Save British Farming.

"Trade is bound up in so much red tape. It couldn’t be worse for us. There’s two things, yes you’re selfish, you’re a business. But also I tend to look at it for the whole country and I’m really concerned for food security, food stocks and food supply," the group's chair Liz Webster told Euronews.

A report by Ireland's Economic and Social Research Institute (ESRI) in October compared UK-EU trade to a "scenario in which Brexit had not occurred". It calculated that goods trade from the UK to the EU was 16% down on what it would have been, while trade from the EU to the UK had suffered a fall of 20%.

Trade had recovered since early 2021, the report said, but "well below the levels that would have been expected if it had performed on a comparable level with other trade partners". Across the EU, "Brexit has led to a significant decline in trade with the UK in almost all cases although by varying magnitudes", it found.

The report's findings echo those of several other studies Euronews has highlighted, see for example here and here.

Meanwhile, evidence suggests the UK's financial sector has been dented too, illustrated by reports that Paris has overtaken London as Europe's biggest stock exchange.

"A smaller economy means higher taxes are needed to fund public services and welfare," the CER report noted in June, agreeing with the OBR's "forecasts that the scarring effects of Brexit will be larger than those of Covid".

Labour shortages 'crippling economy'

"A desperate lack of workers is inflating wages and stopping firms growing," said Tony Danker, Director-General of the UK's main employers' body the Confederation of British Industry, as the CBI called on the government to "make tough political choices" to boost the flagging economy.

Among other measures, its statement on November 14 recommended "using existing flexibility in the immigration system" to help firms find workers. It wants an update to the list of sectors recognised as having shortages and greater flexibility concerning visas.

Many employers have made similar appeals, in vain. "We have to take a different approach to economically-productive migration," the head of the Next retail chain, Lord Simon Wolfson, said recently.

Although he backed the UK's departure from the EU, he complained that "in respect of immigration, it's definitely not the Brexit that I wanted", calling for controlled migration that benefits rather than cripples the economy.

A report by the Peterson Institute for International Economics in May blamed the UK's higher inflation rate, compared to its European peers, on Brexit -- with the impact on migration a leading factor.

"By ending the free movement of EU migrant workers to the UK, the UK government has unilaterally cut the labour supply and its elasticity," it said.

Growing calls to rejoin EU single market

The trickle is yet to become a flood, but calls are growing among British businesses for the country to rejoin -- if not the EU itself -- then the bloc's single market. Many are frustrated front-line politicians appear unwilling to debate the matter.

"I'm stood here, staggered that they’re not having this conversation right now," wine merchant Ben Wilcock told Euronews. "We need to have honest conversations about the customs union and the single market."

"The quick solution is to free up our trade by getting back in the single market as quickly as possible," said Liz Webster of Save British Food.

"It was the biggest lie of them all: that we could replace the economic upside of being part of the most advanced free-trade zone in the world. No independent trade deal can replace its economic upside. It is time to face up to this as a country," wrote Jürgen Maier, vice-chair of the Northern Powerhouse Partnership and an ex-CEO of Siemens UK, in an article for the Guardian in October, calling on Rishi Sunak to take the UK back into the EU's single market and customs union.

Others who have made the call include London mayor Sadiq Khan, the Liberal Democrats, and Conservative MP Tobias Ellwood, a former minister.

A survey published in October by the Tony Blair Institute for Global Change found strongly negative views of Brexit's impact among the British public. Many wanted closer ties between the UK and the EU.

However, its findings on the single market are unlikely to increase the pressure on the British government coming from business.

"Only a third of the public think that the UK should seek membership of the EU single market at the minimum," the report said.

Nor is there significant political momentum for such a move. The main opposition Labour Party has ruled out rejoining the single market, leader Sir Keir Starmer instead promising to "Make Brexit Work".

Many critics say the UK's failure to face up to the damage being done by Brexit to the economy means underlying problems are not being addressed.

"British politicians may find it difficult to ignore the central role of Brexit in the UK’s economic problems for much longer," concluded John Springford of the Centre for European Reform in his report.

That was in June. But as Jeremy Hunt prepares to deliver his autumn statement, there is little sign of any change.

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