The Brexit effect: how leaving the EU hit the UK | FT Film
The "mini" Budget was really the culmination of the economic policies that have been put in place since the Brexit vote. A very particular idea of sovereignty over economic good sense. We couldn't ship anything to the EU, nothing.
It's bordering on disastrous. The Brexiteers haven't really formulated a cogent case as to why Brexit is going to deliver a dividend. There is a political conspiracy of silence around the effects of Brexit. It spans the government, it spans the Labour Party.
Make Brexit work. The UK's decision to leave the European Union is an act of economic self-harm. In terms of prices, investment, and in terms of trade, we're seeing negative effects, not a pandemic effect, not an energy crisis effect. These are very clearly Brexit effects. When the UK voted to leave the European Union in 2016, it seemed like a simple decision between leaving and staying. What we've ended up with, through many years of back and forth, has been pretty much the hardest, least aligned version of Brexit that you could get.
We're not part of the European single market. We're not part of the customs union. We just have a very bare bones free trade agreement. And the costs of that have become clear over time.
Of course, those have been masked by the Covid-19 pandemic, which shut down economies all over the world. And then the crisis in Ukraine, which has scrambled global energy markets, helped to drive inflation. But we're just now starting to see the Brexit effect coming through and it's not particularly pretty. Let June the 23rd go down in our history as our Independence Day. We've got our country back. We see it, first of all, in terms of the original vote to leave the EU.
That sent the pound down about 10 per cent against our trading partners, and that makes imports more expensive. It also makes your exports more competitive. But in this case, our exports didn't budge. They didn't go up at all, but our import prices went up, and that raised inflation by about 2 per cent to 3 per cent.
So that simply made people poorer. When it's been calculated that the immediate cost of that was about 870 pounds per household. I'm Dani Loughran. I'm the Managing Director of Aston Chemicals, a speciality chemical distributor for the personal care industry. Well, our freight costs went up. Everything that's costed in dollars around the world became more expensive if you're paying in sterling, and that was caused by Brexit.
For many years, the Brexit side of the debate felt they won the argument because there hadn't been much absolute panic in markets. In the recent "mini" Budget, Kwasi Kwarteng really spooked the markets. Sterling absolutely plummeted, then subsequently recovered a bit.
But more serious was what's happened to government borrowing costs, because the financial markets have taken the view that the Budget was effectively reckless. You remember the statement we've had enough of experts. The "mini" Budget was really the culmination of the economic policies that have been put in place since the Brexit vote. Brexit's proponents refused to even discuss the idea that Brexit's a factor in the UK's performance. Brexit opponents, or Remainers, want to pin everything on Brexit. The truth is inevitably somewhere in between.
But to say that Brexit isn't a factor in what you're seeing in the UK performance is silly. Of course, it is. We're starting to see a very interesting pattern emerging, comparing Britain with the performance of other advanced economies. After the pandemic, there was a trade recovery by all the other G7 countries and Britain's trade recovery has been more or less flat. So the UK fell behind in its trade intensity. One of the other things you can measure is the drop off in the number of trade relationships between smaller companies in the UK and their foreign counterparts.
And that's important because it tells you something about trade patterns, but also tells you something about the way that smaller companies in the UK used to grow by gradually expanding their business, selling stuff into the European single market, and that's simply not happening anymore. The LSE has calculated that the number of relationships between the UK and the EU fell by about a third in the first six months after the Trade and Cooperation Agreement came into force. The Resolution Foundation has calculated that the long run hit to wages will be 470 pounds per person.
Brexit has increased bureaucracy. Many small businesses have really struggled to get to grips with that. I'm Kiran Tawadey. Hampstead is an organic tea company. We import tea from all over the world and sell it all over the world. We were told that we would have the most amazing deal.
We're going to get our sovereignty and we were going to keep all the advantages of being in the EU. As a business, we were dumb enough to believe that. Come January last year, we got an order from Italy, we shipped it, as normal, thinking there'll be a little bit of paperwork and we'll figure it out. And it sat for 12 weeks in different customs' houses. So the reality was very different. I'm Rob.
I'm Vicky. And we co-founded Little Star Jewellery in 2017 as a husband and wife team. The plan was always to establish the brand in the UK first, and then Ireland, onwards to France, onwards to Germany. The whole question of Brexit didn't really come into my thought much because at no point did I think it would be as complicated for businesses to grow and to develop.
Remember, when we were part of the single market, you could throw a box of tea or a packet of bangers into the back of a van in Birmingham and just drive it to Barcelona, or Bonn, or Brussels without let or hindrance. Now you can't do that. The reality was January to June, we couldn't ship anything to the EU, nothing. It's 27 countries, they all have different borders, they all have different rules.
And we were treated as a third country. And we just had to suck it up. Come May, I decided I needed to do something. I said, what if I set up my own entity in Europe and made that the master distributor for our company and for our products. And rather than sending small consignments at a time, which were very costly, and complicated, and time-hungry, and resource-hungry why not just do one big consignment every so often. Clear customs, all those formalities, VAT once, and then distribute out of the warehouse to all of your clients in the European Union.
That means less business taking place in the UK and more business taking place in the European Union. It became just unviable for us to continue to export from the UK and use the UK as our European distribution hub. Lorries would sit there for days on end. So we moved our entire European business to Poland.
That immediately halved the amount of product coming through this warehouse. We are now using fewer freight partners in the UK, more in Germany and Poland, paying our customs duties to EU countries. We're employing fewer people in the UK and more in Poland. It's a reduction in money that we are paying to the UK economy.
We were lucky that we were able to do that. We've got some agents in France. We're doing really well in the Netherlands and in Spain. All of that has just disappeared. We lost so much business overnight with Holland, but it doesn't mean that we have enough business already established that we'd go and set up an office in Amsterdam. It's not viable for a business of our size of two people.
Getting the product to customers in the European Union would have been 2 days, has now become 21 days. The only angle for us around that is to do deals with distributors, but those people work on between 30 per cent and 35 per cent margins. We're left with virtually nothing or we let the business go. We got a Dutch sales agent who opened over 30 doors in the space of two months, was over 30 customers have become 2 because only 2 of them can actually be bothered with the implications of what they've got to do to get stock from us.
It's just too much of a headache. That is the long-term danger for the British economy. That smaller companies that used to expand by starting to move into European markets, which was very easy to do before 2016, will simply just not do that. We were just upsetting all our customers. One of them actually said to us, we don't want to deal with the UK anymore when we can find equal products from within the EU. So I'm really sorry.
It was a tough conversation. We went to a trade show. No European customers came to the UK pavilion.
And we overheard one of them saying, there's no point going there. With Brexit, we don't even know what's going to happen. So there's no point trying to build new alliances with British suppliers.
The damage from non-tariff barriers is it puts the UK behind a wall. The European Union, 27 countries, that have one set of rules for the movement of goods, people, capital, and labour. It's broadly more cost, more aggro, more uncertainty, more delays, less efficiency. In some cases, a sort of unequal playing field with competitors overseas. A French company will buy from Germany because they'll probably be able to get the same product easier and without any of the extra costs that we're having to apply to get it out of the UK.
We design all of the range here, and then we send it out to manufacturers in Thailand and Hong Kong. We have a tariff for it coming into the UK, then have to pay another tariff when we're sending out of the UK, because it's not produced in the UK. The EU is very bureaucratic. Before that we were within the bureaucracy and now we're outside of it. The whole story about EU red tape making things more difficult for businesses from our perspective is a complete lie.
Since 2016, business investment has been growing in all other G7 countries, but not in the UK. You can see that for a very long time business investment was an upward curve in the UK, but since 2016 in particular and the Brexit vote, it's been plateauing. And the government's been trying to rectify this. It's been throwing lots of money at it. They've introduced something called the superdeduction, where you get huge allowances if you invest in capital and innovation, but it hasn't really shifted the dial. And really worrying for the future of our economy because in the end, investment drives the capital and the ability for economies to grow into the future.
And some people are saying, I mean, Brexit's not the only thing by any stretch of the imagination, but something is going on. There might be a small effect that the UK is a more service sector driven economy than others. But France is just as much of a service sector economy as the UK.
Germany, big manufacturing economy, isn't that much more of a manufacturing economy than the UK. And in every other country, we've seen much more business investment. This is the Brexit effect.
People don't know the direction of the UK economy. Inevitably business investment doesn't grow as strongly. We've seen in all areas, in prices, in terms of investment, and in terms of trade, we're seeing negative effects due to Brexit, which we can now pinpoint as a Brexit effect, not a pandemic effect, not an energy crisis effect.
These are very clearly Brexit effects. Plainly there's been a huge impact on the British economy caused by the Covid pandemic. Equally the supply chain effects of the Ukraine war, particularly on the energy price. It would be ludicrous to claim that problems facing the British economy are exclusively down to Brexit, but what you can do is to draw a comparison between Britain and other countries.
We see the UK pretty close to the bottom of the league table in terms of the forecast for economic growth, particularly in 2023. So the UK essentially sees no growth at all. And the only country that was worse than the UK was sanctioned Russia. You can explore the gap between the UK's performance, which has uniquely suffered Brexit, and the performance of other economies that have not.
The UK government would argue that's something to do with the bungee jump effect of the pandemic where Britain went down, then came back up more quickly, and now things are settling down again. I think it's really easy for the government to try and push the Brexit effect under the carpet and blame everything onto Covid, and now everything onto Ukraine. I can see it in the figures and in the way that our business is operating that we were really hit badly by Brexit last year. We've put measures in place that are detrimental to the British economy unfortunately, but will help us. The Office for Budget Responsibility thinks that ultimately Brexit will cause the UK to be 4 per cent worse off. It's about 100bn pounds a year that the economy is not producing 40bn pounds of tax revenues or so.
We are poorer because we're not getting that economic growth that we otherwise would have done. The Brexiteer notion of a Brexit dividend is often based around the idea that the UK can have a nimbler economy. It can deregulate. The difficulty is, when you deregulate, you create a separate regulatory system.
The chemical industry spent 500mn pounds over a decade registering their chemicals in the European Union, which gave them access to the British market and 27 other countries. They're now having to re-register all of those chemicals for a separate UK register at a cost now estimated by the government at 2bn pounds. So what we've essentially done is ask industry to spend billions of pounds duplicating a regime that already existed in the EU. And because we want to be sovereign, we want to be different, we're building our own. But that is just cost. I don't understand anyone who says that deregulation is going to be a benefit to industry.
From my industry's point of view, it is nothing but extra costs, bureaucracy, and work for no advantage whatsoever. It's a British business. After we've left, the EU has faced a recruitment crisis. Areas like construction, hospitality, social care, agriculture.
Again, you can argue till you're blue in the face about how much of that is Brexit, how many people left because of Brexit, or how much of that was because of Covid. Some people would argue that's for the better, that we've cut off that supply of cheap European Union labour that was able to come across to work in the UK under free movement. The idea eventually is that companies will invest more in machinery and other ways to enhance productivity to compensate. But it's certainly caused some disruption in the short-term.
And the idea that the government was putting forward last year that this was all part of the plan to develop a high-skilled, high-wage economy was problematic at the time and is problematic today. So the end of free movement means that the economy is reshaped. For some industries, like hospitality and construction, or soft fruit growing, that creates a painful period of adjustment because those industries were predicated on the idea that there would be free movement. But ultimately that's a political choice. We don't have to have a soft fruit industry. We had one as a result of free movement.
We now have to decide if we want one going forward. The long running row over Northern Ireland, creating a border in the Irish Sea to avoid the north-south border returning on the island of Ireland has poisoned EU-UK relations. The EU is using us as a negotiating chip and saying that Britain can't join the Horizon Science Research Project, which is worth 95bn euros, hugely important to British scientists and British universities. But it's blocked because the British government is trying unilaterally to rip up its obligations in Northern Ireland. While we have that attitude still in place, I think it's very difficult to see our trading relationships improve.
The discussion about Northern Ireland and its future trading relationship was one of the things that bedevilled the negotiations about Brexit. Everybody knew it was going to be a problem, but we did the deal anyway. We voted for Brexit. We signed a so-called Northern Ireland Protocol, which Boris Johnson and Lord David Frost, the former Brexit minister who negotiated the Northern Ireland Protocol, spent the last several years trashing.
I seem to think it's become of some surprise that the European Court of Justice applies EU rules to Northern Ireland when they have agreed that Northern Ireland should remain as part of the EU single market for goods. The one thing I say about the Northern Protocol is that it's given Northern Ireland's an incredible trading position in Europe. It's the only place in the whole of Europe, which has one foot in the UK single market and another foot in the European Union single market. It's an unwelcome fact for Brexiteers that Northern Ireland has become an economic success story and booming, certainly in terms of inward investment. One of the reasons it's doing well is because it has a place in the European single market for goods.
It's exactly the same trading position with the European Union that the whole of the UK had until a couple of years ago. There is a political conspiracy of silence around Brexit and the effects of Brexit. It spans the government, it spans the Labour Party in particular. It's very hard to separate out the effects of Covid and the effects of Brexit. The governor of the Bank of England doesn't want to talk about it.
It's become a kind of taboo around this whole subject. We absolutely need an honest debate about the economic effects of Brexit. Once you had a government, of whichever party willing to look at the facts, then they could start saying it looks as if Brexit has hurt us.
It's making you poorer. This is what our evidence suggests. The evidence will say that, by the way. And then once you say that to the public and keep repeating it, you can start opening the debate. Politically, the truth is neither party can be honest about Brexit.
The Tory Party doesn't want to be honest that the actual choice that Brexit presents is between being a rule-taker, between subjugation, like Norway, and self-harm, which is all the economic damage that comes from walling yourself off from your nearest and biggest market. And the Labour Party doesn't want to talk about Brexit because it reminds voters why they voted Tory. The Labour Party, as the Tory's frame it, tried to block Brexit. This is still a live rail in British politics. People don't want to go anywhere near Brexit. It's divided the country.
It's divided communities. It's divided families. But in a way, that shields us from a debate, which we should be having, about how we can make Brexit functioning in a way which doesn't distort the economy.
People who speak out against Brexit are often decried as Re-moaners or Re-maniacs. We're all being asked to accept something which in 2015 was only the official policy of the UK Independence Party. Conservative Party, the Labour Party, the Liberal Democrats, Greens, trade unions, the CBI, the whole of British political and civic society believe Britain was better off inside the European Union. And yet we are all being told we have to pay allegiance.
This is a new national policy. I expected there to be a one year down the road recap what went wrong, and what was right, and how we can fix it, but we haven't seen that. It would be really good to hear what other people's experiences have been. There might be some good news stories, I don't know. I haven't heard any.
I find it hard to think of anyone who said, this has been brilliant for my business. Some businesses will win as a result of Brexit. Businesses that can produce products for the UK market that are now too complicated or too difficult to import from the EU. That doesn't necessarily mean that the UK economy is winning. EU-based companies have gained some of our contracts. The EU freight companies that are gaining our freight business, that isn't in the UK anymore, they're all doing quite well.
The people in Poland that we've had to employ in warehouses rather than people in the UK, they're doing quite well. In theory, the city of London is a place where the UK being able to make its own rules should be important. This is our sector that we're the best at, that we know the most about. We were responsible for a lot of rule making while we were within the EU.
To date, we haven't seen the results of that. The predictions of doom for the city of London were always overdone. Big institutions, in particular, spent time actually quite early on in the process Brexit proofing their operations so that they could operate legally whatever the outcome was. What we've seen since then I think is a slow drip where business and people get relocated to other places where it makes more sense for them to be.
The city was the natural place to do financial business in Europe and Brexit introduced a question mark into that. We weren't given enough information. We weren't told what Brexit would actually look like. The losers will be some of the younger people who voted against Brexit. If you look at the age profile of people who voted for leave, there's a vote amongst the older members of the population. The younger generation will start to discuss this topic.
They can't travel easily anymore. They need a nomad visa if they want to work in Europe. They can no longer invest in Europe easily.
And with the geopolitical situation on a knife-edge, it would be nice to be a part of a bigger group. And I feel sorry that we aren't for the next generation. Don't watch people who are not rich Remainers.
Will Britain leave the EU on time? Sure. You certainly hear conservatives who say that if you can't demonstrate the benefits of Brexit by the next election, you're going to be in serious trouble. And so you have the creation of jobs like Brexit Opportunities Minister. Leaving the European Union is the most fantastic opportunity for the United Kingdom. The benefits of Brexit are always just around the corner.
If this happened six years ago, by now, somebody in government, given the fact this is a Brexiteer government, should have identified what the benefits are. The Brexiteers haven't really formulated a cogent case as to why walling the UK off from its largest market on its doorstep will lead to a better economy. When the government unleashed its Brexit opportunities document, what was the number one item? That you were going to have a crown stamp back on your pint pot in the English pub. The Vote Leave side presented a very optimistic view of what the British economy would look like after Brexit, including a massive series of deregulation, Britain buccaneering around the world, striking trade deals around the world.
There have been some trade deals, but they've mainly been with countries that Britain already had a trade deal with through the European Union. Australia really is the only one exception to that. Signing a free trade agreement with New Zealand or Australia has ups and downs of the UK economy, and is probably very, very marginally positive.
But it's nothing like losing a free trade agreement and losing the frictionless trade you had with your biggest trading partner that's only 20 miles away across the channel. We lose 4 per cent of our GDP by Brexit. We gain 0.08 per cent by the government's own estimate through this trade deal with Australia. All the attempts to lay out exactly what a Brexit dividend looks like have thus far been totally unconvincing and that's on the trade agreement front, on the regulatory front, or the deregulatory front. The best case scenario is that a Brexit dividend is lots and lots of little changes that in aggregate add up to something meaningful.
There's no sort of great idea that is out there at the moment. When the Brexiters said, oh, Brexit will unleash Britain's global potential, that made me very annoyed because we weren't sitting on our laurels just easily selling into France. Everyone was already doing that.
We were already trading with the whole of the rest of the world. Making things more difficult for us to sell into the EU did not make anything easier. Boo.
Brexit. We have heard Project Fear again and again, on and on it goes, but that all the aspects of Project Fear so far have been wrong. We were promised a punishment budget, that never happened. We were promised an increase of unemployment by 800,000 by voting to leave, that did not happen.
Remainers did themselves no service by claiming that immediately after a Brexit vote that Britain's economy would crash into recession and millions of people would be unemployed. I mean, that hasn't happened, and probably was never going to happen. The Project Fear tag was very effective from the Leave campaign and lasts to this day.
I think the trouble is that Brexit is boring, and detailed, and wonky, it was hard to talk about that wonky detail around trading arrangements, and customs unions, and paperwork in a political campaign. Get Brexit Done, it was one of the most effective election slogans you've seen. We didn't even start to dig into those questions until after the vote was finished. The type of Brexit we decided to pursue was economically the most harmful. There was always a spectrum of economic impact versus ability to make our own choices around things like regulation.
The European Union is not a superpower in the way that the United States is a superpower, but it is a regulatory and trading superpower. Collectively, it's the world's largest market and it harmonised all of its rules to allow everybody to trade more freely. And it forced other countries and trading blocs to follow EU rules in many ways. We can no longer blame European rule makers for decisions and policies that we don't like or outcomes that we don't like in our own economy. With sovereignty comes a degree of ownership. I think we can conclude, one, that Brexit was an act of economic self-harm.
Two, that the losers will be the nation as a whole, but also some of the poorest people, because ultimately, we are poorer as a nation. That hurts more vulnerable people more. Third, I think something from economics we can say is that we can't run referendums on very simple economic slogans, and it's dangerous to try and weaponise economics. Brexit is a slow puncture.
It's not a car crash. So that doesn't mean that Brexit creates an unemployment crisis in the UK, but it may mean that over time, UK workers find themselves in less productive jobs and that makes the economy smaller than it otherwise would have been. It makes wages lower than they otherwise would have been. The slow puncture analogy has been right from 2016, but I think the "mini" Budget is that first sign that if we push things too far, not only are you going to begin to hear much more of an audible hiss, but you might even have a blowout.
It's bordering on disastrous. I don't think there's any real public awareness of this. Even if we go and visit my mum for a weekend and talk to her about the difficulties we face, she'll go, oh, really? I thought we had a deal. Nothing's ever in the news about it.
Nobody else seems to be voicing any concerns, apart from maybe you on Twitter. Brexit wasn't all about the economy. It was about stopping the free movement of people. It was about repatriating a sense of agency into the UK economy. The trouble was the Brexiteers and those who sold it were not honest about the trade-offs and the costs of that, which actually, economically, outweighed the benefits.
It is legitimate to have a discussion about national sovereignty and taking back control. You could have had that argument, but you have to accept that there will be some economic impact. The trouble was Boris Johnson famously adopted a cakist approach, to have your cake and eat it. Cakism, or cherry-picking, as Michel Barnier used to call it, this idea that you could retain all the access you wanted to the EU single market and still be free to go off on what you might call your buccaneering Brexit. It was that Cakism that was slowly but surely exploded by the process of negotiating with the EU. And we're still paying the price of that, really, because people have never been prepared to accept or identify the trade-offs and then start talking about what you can do about it.
2022-10-22 03:26
