The Bigger Failure of Brexit Was Everything Else We Stopped Talking About

Neither interpretation is entirely convincing. I have spent the last decade largely avoiding the subject of Brexit in these columns. Not because I don’t have strong views, and could not observe the emerging economic damage, but that other failings of UK economic governance over the same period were more significant.

Ten years on, the evidence is now sufficiently mature to draw some conclusions. The first is that Brexit has damaged the UK economy. The second is that the damage, while real, has become a convenient explanation for a far broader set of policy failures that had little or nothing to do with the UK’s membership of the EU.

The temptation to attribute Britain’s disappointing economic performance to a single political event is understandable. It is also intellectually lazy.

There is little doubt that leaving the EU imposed economic costs. The most immediate came through the value of the Pound. The sharp depreciation that followed the 2016 referendum represented a deterioration in Britain’s terms of trade and translated rapidly into higher import prices. In the two year that followed the Brexit vote import prices rose by more than 11%. For households, it meant weaker purchasing power for their incomes. For businesses reliant on imported inputs, it meant higher production costs.

The effect was visible in inflation long before the energy crisis and pandemic distorted the economic landscape. Britain became poorer not because factories closed overnight or investment vanished, but because the same income bought less from the rest of the world.

Trade was the second casualty. While the COVID-19 pandemic makes precise attribution difficult, the broad direction of travel is clear. Having broadly matched the trade performance of comparable advanced economies before Brexit, Britain has subsequently underperformed – albeit modestly. Leaving a customs union and single market inevitably introduced friction. Friction raises costs. Higher costs reduced trade intensity.

A third consequence has received less attention. Britain’s public equity market has endured a prolonged valuation discount relative to international peers. Some of this reflects sector composition; London simply has fewer technology companies than centres like New York and Shanghai. But not all of it. Investor perceptions matter. The Brexit Referendum introduced a persistent uncertainty premium into UK assets that has yet to disappear.

The result has been a higher cost of capital and weaker business investment than would otherwise have occurred. Taken together, these effects are meaningful. I estimate that Brexit has reduced Britain’s economic output by around 2.5 per cent relative to where it might otherwise have been. That is a hardly trivial £75bn/year. Yet it is also considerably lower than some of the more dramatic estimates that have entered public debate.

Recent studies suggesting losses of 6 to 8 per cent of GDP implicitly require Britain to have matched something close to the performance of the United States over the past decade. That stretches credibility. America has benefited over the same period from an energy revolution, a technology boom, extraordinary fiscal expansion and increasingly dispersed wealth effects generated by the world’s most valuable stock market. Constructing a counterfactual Britain that replicates those advantages tells us more about the limitations of economic modelling than about Brexit itself.

The more interesting question is not whether Brexit imposed costs. It did. The question is whether Brexit explains most of Britain’s current economic malaise. The answer is no.

Indeed, the greatest tragedy of Brexit may not be the direct economic damage it caused but the political bandwidth it consumed.

For nearly a decade, Westminster’s attention was monopolised by withdrawal agreements, parliamentary rebellions, leadership contests and constitutional arguments. During that period, Britain’s underlying growth model continued to deteriorate largely unnoticed.

Consider labour costs.

Britain has experienced one of the fastest increases in unit labour costs among major advanced economies. The National Living Wage, higher employer pension contributions and repeated increases in employment-related costs have all been pursued with understandable objectives. Better pay and greater workplace security are politically attractive goals.

Yet economics rarely offers free lunches. Higher labour costs inevitably influence hiring decisions. Recent weakness in youth employment and subdued labour market participation suggest that policymakers may have underestimated those trade-offs.

Then there is energy.

The UK now has some of the highest industrial electricity prices in the developed world with recently released data showing UK electricity averaging twice the level of EU-27 countries. This is a remarkable position for a country attempting to improve productivity, attract manufacturing investment and accelerate economic growth.
Energy costs are not a peripheral issue. They are a fundamental input into almost every productive activity. A nation that chooses to make energy materially more expensive than its competitors should not be surprised when investment goes elsewhere. The current government are amplifying the mistakes of the last one.

Brexit did not create this energy market problem. It merely distracted attention from it.

The same is true of capital allocation.

British pension funds and institutional investors have spent decades reducing their exposure to domestic assets. In the early 1990s, roughly 40 per cent of institutional equity holdings were invested in UK companies. Today that figure has fallen to less than 5 per cent.

This is one of the most extraordinary and underappreciated developments in modern British economic policy. A country that persistently exports its savings while complaining about insufficient domestic investment is engaged in a form of economic self-sabotage. The resulting shortage of patient capital affects everything from public market valuations to lending conditions for growing businesses. Away from the public markets, bank lending to the real economy has fallen to a thirty-year low. Again, Brexit accelerated the trend. It did not initiate it.

Finally, there is housing.

For almost fifty years Britain has built homes at half the rate of comparable developed economies. Planning restrictions, regulatory complexity and political resistance to development have constrained supply and inflated costs. While some have attempted to link construction shortages to post-Brexit labour availability, the longer-term data tell a different story. Britain’s housing deficit predates the referendum by generations.

The common thread linking labour, energy, capital and housing is that all are supply-side constraints. All reduce the economy’s productive capacity. All contribute to inflationary pressure. And all were ultimately sovereign policy choices.

That is why the Brexit debate often feels oddly incomplete. Both sides tend to overstate the significance of the Referendum while understating the importance of domestic policymaking.

The UK economy today suffers from expensive energy, expensive labour, scarce capital and constrained land supply. These factors are not peripheral to growth; they are growth.

Had Britain remained in the European Union while maintaining exactly the same policies in these areas, the economic outcome would still have been disappointing. Better, certainly. But disappointing nonetheless.

None of this is an argument against improving relations with Europe. Reducing trade frictions, improving regulatory cooperation and encouraging cross-border investment are sensible objectives. The Government is right to pursue them. But policymakers should avoid the comforting illusion that a closer relationship with Brussels will solve Britain’s deeper problems.

Brexit was damaging. The evidence supports that conclusion.

Yet the larger economic failure of the past decade was not leaving the European Union. It was allowing a single political event to consume so much attention that we neglected the far more important task of fixing the domestic barriers to growth that were entirely within our control.
History may ultimately judge Brexit as a costly mistake. But it will judge the decade-long failure to address Britain’s self-inflicted economic constraints as the greater one.