It’s now official: Brexit will hurt the economy for a long time | Jonathan Gates


Oe are used to hearing apocalyptic descriptions of the impact of the Covid-19 pandemic on the UK economy: ‘the biggest fall in economic output since 1709’, was the verdict from the Office for National Statistics there at eight months.

Yet the Office for Budget Responsibility, in its budget report on Wednesday, estimates that the long-term impact of Brexit will be more than twice as great as that of Covid. He thinks Brexit will reduce UK productivity, and therefore GDP per capita, by 4%, while Covid’s impact on GDP will be just 2%, with a slightly lower impact on GDP per capita.

This shouldn’t be surprising. The fall in production in 2020 was both inevitable and desirable – it was, in economic terms, not so different from an extended holiday. Much like a vacation, we have chosen to shut down large parts of the economy. The difference was that it was out of necessity — to save lives — rather than choice, but the consequences aren’t that different. The economy has contracted, and by a lot.

Holidays do not reduce the productive capacity of the economy. If a factory closes for a month, the machines are still there when it reopens. Likewise, when the workers return, they still know how to do their job. The virus does not destroy factories, roads, buildings or software, and while its human toll has been terrible, the impact on the size or composition of the working-age population will be relatively small in macroeconomic terms.

So the concern was not the huge short-term drop in GDP. It was that the temporary closures would cause permanent damage to the economy. The greater risk was that, as in the 1980s, we would allow mass unemployment to take root or viable businesses to fail.

But, thanks to the furlough scheme and other business support measures, we appear to have avoided that risk in the UK and elsewhere. Indeed, US GDP – boosted by Joe Biden’s stimulus plan – has already exceeded its pre-crisis level. The UK is not that far behind, although still well below the pre-crisis trend.

Indeed, the most obvious near-term economic problem in most advanced economies are now supply bottlenecks and labor market mismatches as economies reopen, driving up wages and salaries. shortages of certain goods. But if it will – as the OBR also says – reduce both growth and, via inflation, real wages, it will be mostly temporary.

The OBR is not entirely optimistic – it still thinks that Covid will push some people out of the labor force permanently, through early retirement or potentially long Covid, and that there will be a lasting impact on productivity. But things could have been much worse.

On the other hand, Brexit is, by nature, a long-term problem. Just as it took decades for the UK to see the full benefits of EU membership, we will still be discussing the economic impacts of Brexit long after I retire.

The direction of these impacts is uncontroversial. The principle that increasing barriers to trade and labor mobility between two major trading partners will reduce trade and migration, and that this will, in general, reduce economic well-being on both sides – but especially for the smaller partner – is not really in question. While politicians were quick to argue that somehow new trade barriers wouldn’t make much of a difference, or that trade with our closest and most important trading partner could easily to be replaced by trade with the rest of the world, no credible economic analysis endorsed such claims.

The OBR’s estimate of the 4% impact on the UK economy is also not vastly different from that of independent economists – we in the UK in a changing Europe estimate it at a just under 6%.

But crucially, these estimates (and others) predate Brexit. The news, then, is that the OBR has looked closely at the evidence to date of the real impact of Brexit. His conclusion, briefly, is: “so far, so bad”. In other words, the UK’s trade performance this year is in line with its initial estimate that UK exports and imports would fall by 15%.

Indeed, in some respects the data so far looks even worse than this – UK exports have already fallen about as much from pre-pandemic levels, while advanced economies as a whole have seen their exchanges increase. And, again in common with outside analysts, the OBR sees no evidence that trade deals with third countries, or any of Brexit’s other putative economic benefits, will significantly offset this.

No model includes everything. OBR is no exception. He failed to take into account the damage done to education during the pandemic, especially for the poorest children. Here, the government’s failure to fund a serious catch-up program could leave permanent scars – both economic and social. And, on the other hand, a more liberal migration system towards non-European migrants could, in principle, offset some of the damage of Brexit.

But so far it looks like, from an economic point of view, Covid is for Christmas, while Brexit is for life.


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