Analysis
‘Disaster’ is right: Brexit is a self-inflicted
wound that cuts dangerously deep
Phillip
Inman
Economics
Editor
Quitting the EU has stalled business investment,
making us reliant on workers who are now scarce. Hence rising wages, high
inflation and increased interest rates. Result? A looming recession
Sun 12 Feb
2023 10.00 GMT
Whenever
Andrew Bailey, the governor of the Bank of England, talks about the economy, he
is forced to mention the toll taken by Brexit.
Business
leaders, initially reluctant to criticise the Tory decision to quit the EU,
have begun to find their voice. Most recently, leading City figure Guy Hands
called Brexit a “complete disaster” and a “bunch of total lies” that has harmed
large parts of the economy.
Maybe,
given the mounting evidence, it is unsurprising that business leaders,
ministers and the shadow Labour team are meeting in secret to discuss how they
can turn the situation around.
On Friday,
the government was hit by the latest blow. AstraZeneca, the pharmaceutical firm
lauded for providing its Covid-19 vaccine at cost to the UK and
developing-world countries, said it would make Ireland the location of a new
factory once destined to nestle near its existing UK manufacturing centres in
north-west England. Before Brexit, the UK’s pharma industry benefited from £2bn
of EU research funding. No longer.
Brexit has chased away many of the big foreign firms
that once used the UK as a base
In a report
earlier this month, Bailey said the impact of leaving the EU’s single market
and customs union was being felt more acutely on the UK’s trade than first
estimated. As recently as November, the central bank believed some of the
administrative hold-ups at the border and the unwillingness of exporters to
overcome the mountain of paperwork and extra costs they face to send goods to
the EU would have faded by now. It has not.
The Office
for National Statistics said the gap between UK exports and imports grew by
£2.4bn to £26.8bn, making it clear the shortfall was “driven by lower exports
of both goods and services”.
Another
significant measure of the economy’s health – business investment – has also
suffered. It stalled after the 2016 referendum and remained flat until late
2019, when it fell off a cliff. Friday’s official figures for the year to
December 2022 showed the level of funding for new equipment, machinery and IT
systems had almost, but not quite, recovered the lost ground.
The Office
for Budget Responsibility, which will provide forecasts that underpin Jeremy
Hunt’s budget in March, is likely to say that this struggle to encourage
investment is one of the government’s biggest problems when calculating how
much money the private sector can generate over the rest of the decade.
Without
investment, firms continue to rely on legions of workers to carry out tasks
rather than the latest equipment, a problem when so many skilled people have
taken early retirement or returned to their homeland following Brexit. The
shortage of workers in the UK is cited by the central bank as the main reason
for rising wages and the potential for inflation to stay high for longer than
it would otherwise.
This threat
of a long inflationary period is the main justification for interest-rate
increases – and high interest rates are one of the main reasons the UK is
likely to experience a recession this year.
Investment
should make the workplace more productive, making firms more profitable and
bigger, better taxpayers. Brexit has chased away many of the big foreign firms
that once used the UK as a base inside the single market and discouraged
domestic firms from expanding EU trade. As self-inflicted disasters go, it
ranks as one of the worst in modern economic history.
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