finance

No-deal Brexit is the UK’s biggest economic threat, not Covid


The writer is a former UK Lord Chancellor

For some weeks, restless Conservative MPs have been asking the UK government to produce a cost-benefit analysis of the economic consequences of its Covid-19 restrictions. There has been less interest from my former colleagues in seeing analysis of another matter that will have a big impact on our economic prospects — the nature of our relationship with the EU, when the transitional arrangements come to an end on December 31.

Fortunately, the independent Office for Budget Responsibility — unsolicited by Conservative MPs or, we can assume, the government — has done this work. Its analysis should be a sobering read for anyone who cares about the UK’s future prosperity.

In March, the OBR set out its analysis of the government’s stated Brexit objective, which amounts to a very thin deal that will erect significant barriers with our most important trading partner. Reducing our ability to trade has real consequences for productivity and the cost of living. This week, the OBR has confirmed its view that the long-term, permanent drag on the UK economy, compared with continued EU membership, will be 4 per cent of gross domestic product, assuming that the negotiations go well and the substantial, practical changes involved in ending the transition period go smoothly.

To put that in context, the economic hit is more than the OBR’s estimate of the long-term damage caused by Covid-19. It completed its analysis before the initially positive news about the Oxford-AstraZeneca vaccine and assumed that a vaccine would not be rolled out until the second half of next year. In what now looks like a pessimistic scenario, the long-term economic hit is estimated at 3 per cent. If, as now seems likely, we have put the worst effects of the virus behind us by next spring, the OBR believes that the long-term economic impact of the virus will be negligible.

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Given the lack of progress in EU-UK negotiations, the OBR has considered it necessary to produce an analysis of a no-deal scenario. It shows a further, permanent deterioration in the economy of almost 2 per cent on top of the 4 per cent loss already assumed. Inevitably, this will result in higher government borrowing (by £12bn over three years), as well as the number of unemployed people being 300,000 higher than it otherwise would be next summer.

It is true to say that Covid-19 has ravaged the UK economy and will inflict more short-term harm in the months ahead. Listening to Chancellor Rishi Sunak’s statement on Wednesday, one might be forgiven in thinking that the pandemic was the only issue facing the country. However, it is clear from the OBR’s analysis that the real long-term economic threat to the UK is a hard Brexit and, especially, a no-deal Brexit. Mr Sunak might not want to confront the nation with this reality — after all, at some point he will want the support of ardent Brexiters in his party — but the OBR has done so.

This, of course, was not how it was meant to be. In 2016, Vote Leave said that “there is a European free trade zone from Iceland to the Russian border and we will be part of it”. Pro-Brexit ministers promised that an EU-UK trade deal would be one of the “easiest in history” and that we would “retain all the advantages of membership of the single market”. Boris Johnson promised the electorate last year that he had “an oven-ready deal”.

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To get any kind of deal, Mr Johnson will have to accept that if the UK departs from certain standards in social, environmental and state aid policy, access to EU markets will be reduced. This may offend the sovereignty purists but, in the real world, this is how free trade agreements work. The alternative is to have our access reduced immediately. In any event, Mr Johnson can hardly be surprised that the EU insists on being able to retaliate if the UK breaches its commitments, given that he is threatening to break commitments he made in the Northern Ireland protocol only last year.

Even if a deal is agreed, ending the transitional period in the middle of a pandemic when it is evident that the country is ill-prepared would be foolhardy. To do so without a deal would be an act of unforgivable recklessness.

Will Mr Johnson do what it takes to get a deal? This would require him to accept some inconvenient truths, be prepared to confront his increasingly frustrated Conservative party base and act decisively. These are not qualities that he has consistently displayed in his career.

As the OBR has told us, economic pain caused by a hard Brexit is inevitable. A deal that goes some way to mitigate this pain is not.



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