How would the UK be doing if it were still in the EU and the Brexit referendum had never happened?

In our series examining life after Brexit, Sean O’Grady takes a closer look at the economic fallout

In the next couple of years the UK may suffer the worst recession of all the G7 countries (Getty/iStock)

Not that it’s the most important consequence of the pandemic or the war in Ukraine, but these successive financial shocks, as large and unusual as they are, have made the impact of Brexit on the economy extremely hard to ascertain.

Indeed, in terms of what passes for public debate on the issue, they have effectively destroyed the potential for rational argument. On balance, these inadvertent alibis for inflation and the coming recession tend to favour the pro-Brexit, Leave side of the argument. It’s the status quo, now – and anything that seems detrimental can be attributed to Vladimir Putin, or the Coronavirus and its after-effects.

Sometimes that will be true: the spike in gas, electricity and food costs globally is indeed largely down to the disruption caused by Putin’s war. The UK’s vastly inflated national debt has a lot to do with the costs of the Covid furlough scheme. Cars and electronic goods are in shorter supply, and their prices are higher, because of a severe shortage of semiconductors from China and Taiwan.

So a good deal of the sort of stats that get kicked around on social media don’t really tell us much. The UK had the fastest-growing economy in the G7 this year – based on change over the most recent 12 months of data – in part because it fell further during the pandemic. This was due not just to the UK having a large hospitality sector, but also to the additional, unique problems caused for exporters by Brexit.

In the next couple of years, the UK may suffer the worst recession of all the G7 countries – which is probably more to do with Brexit, but certainly not exclusively. Inflation is higher in Germany than in the UK, but that is because Germany has been so dependent on Russian energy compared with the UK.

Britain has very low unemployment – the lowest since 1974 – but the flip side of that comes in labour shortages, strikes and higher wage bills. Interest rates on the UK debt are higher than they might be, which is more to do with the lingering effect of the Truss-Kwarteng dash for growth than with Brexit (as such). Economics is a tricky business even at the most stable of times – and these times are not stable.

The best way to analyse Brexit is not necessarily to compare the UK with other countries, or even with past British trends pre-Brexit: there are too many different special circumstances surrounding these comparisons for them to provide anything more than some toothless debating points.

If economic growth was higher in the mostly benign economic environment of the New Labour years (and it was) – well, so what? Those were very different times, when, for example, the web was starting to revolutionise business, and China was powering into the global economy. No longer true.

The best approach is actually to go hypothetical. You have to try to ask yourself how the UK would be doing if it were still in the EU, and either the referendum had never happened or we’d voted Remain.

So, for example, if food inflation is higher in the EU than the UK, that may be down to differentials in energy, fertiliser and transport costs. But UK food-price inflation might be rather lower if the additional costs of doing business with the EU post-Brexit hadn’t been imposed. One model estimates that these have added around £6bn to UK food bills in the two years to the end of 2021. In terms of inflation, Brexit is estimated to have increased it by 6 per cent over the two-year period, ie 3 per cent per annum. Such inflation hits poorest households hardest, of course.

The further away from the 2016 referendum we get, the more hazardous such exercises become; but given that the end of the bulk of the transition to full Brexit was only completed on 1 January this year, it’s still possible to have an idea.

Fortunately, lots of clever economists have created “doppelganger” models of the UK economy to tease out the effects of Brexit – and they are all negative. The one undertaken by the independent-but-official Office for Budget Responsibility predicts a 4 per cent drop in UK productivity, which basically equates to a 4 per cent drop in GDP. That, in turn, amounts to a real-terms 4 per cent cut in your living standards on average – and you can do the maths on that.

If you lose your job, your loss will be closer to 100 per cent. If you have bargaining power, then your reduction in earnings might be lower, or, if you’re in a shortage occupation, your wages might edge ahead. Nonetheless, it’s bad news for most, and also for public services.

Others are more pessimistic still. The Centre for European Research (CER), for example, puts the loss in national income at a chunky 5.2 per cent. That’s output and money lost every single year – say, £125bn a year. If we had held on to those funds, we would not have needed the squeeze in the autumn statement.

According to the CER, investment is 13.7 per cent lower than it would have been if the UK had stayed in the EU. This matters a lot for the long term, because investment in new technology, new processes and working practices increases productivity, and productivity is the basis for a sustained increase in real-terms wages and living standards.

Without such investment, Britain will gradually become less competitive – and poorer. It is a pernicious downward cycle, and disturbingly reminiscent of what happened during the 1970s.

As the CER concludes: “A smaller economy means higher taxes are needed to fund public services and welfare. The Office for Budget Responsibility forecasts that the scarring effects of Brexit will be larger than those of Covid. Our own estimates are in accord with that view.”

Brexit isn’t rocket science, though it is economic science. Everything in the models and forecasts accords with common sense. Adding trade barriers adds costs, and makes exporting more difficult. Some sectors, such as Scottish shellfish, have lost significant markets because of port delays.

If you end the free movement of European workers and there’s also an exodus, a labour and skills shortage is virtually guaranteed. If you lose easy access to the EU single market, you’ll see less investment, both home-grown and from abroad. It doesn’t matter what corporation tax rates are if you can’t sell your goods and services into the nearest (huge) marketplace. And so on.

In fairness, if the Brexit deal had done all that was promised, it might have benefited the UK in the long term. Advantageous free-trade deals with large and/or fast-growing economies such as America, China, Brazil, India and Russia might have ameliorated the loss of EU trade.

But they have not as yet materialised – and the prospect, in some cases, looks remote (though a deal with India may arrive soon). The net positive impact of the new trade deals with Japan, Australia, New Zealand and others is negligible.

A radical cut to UK tariffs would have produced a one-off cut to “imported” inflation. If the EU trade deal had allowed the UK to shred labour and environmental rules, then costs might be lower and growth higher – albeit at a cost to workers’ rights and the net zero targets.

But now, “Brexit means Brexit” – and Brexit actually means not what we would like it to mean, but the hard reality of the UK-EU withdrawal agreement, the Northern Ireland protocol, and the trade and cooperation agreement, with its “level playing field” clauses.

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The “Festival of Brexit” was a symbolically costly flop. The real monuments to Brexit are all around us – but are largely invisible. They are the office buildings that didn’t get built, the car factory extensions that were cancelled, the phantom lorries full of UK exports that might have been pounding down the M6 and the M1 on their way to Dover.

You can’t see the damage Brexit has done, but you will surely feel it at the supermarket till, in your tax demand, and in your payslip.

So that is why it is imperative that, under one government or another, the UK moves closer once more to the single market, and that in due course it contemplates rejoining the European Union.

That, of course, is some distance in the future, and the terms of entry would still need to be advantageous – especially in relation to joining the single currency (the euro). But Keir Starmer is foolish to deny that leaving the EU single market has made little difference to growth, or that rejoining the single market would give the British economy an immediate boost. Some things are economic truths that are politically unpalatable, but that doesn’t stop them being true.