Predictions of £40bn hit to public finances from Brexit ‘correct'

Times

3 hours ago

Brexit has blown a £40 billion tax hole in the public finances, according to a forecasting audit that finds that the Office for Budget Responsibility's projections on the impact of leaving the EU have broadly materialised.
On the ninth anniversary of the leave vote, the OBR's estimate of a 4 per cent loss in the UK's long-run productivity has been borne out by declining investment and trade volumes, according to John Springford, an associate fellow at the Centre for European Reform.
The 4 per cent productivity loss translates to an approximate £40 billion tax loss for the exchequer between 2019 and 2024, a period in which the government raised taxes by £100 billion. 'A large chunk of [the tax rises] would not have been necessary if the UK had voted to remain in the EU or chosen a softer form of Brexit,' Springford said.
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The figures underscore the growth and fiscal implications of leaving the EU at a time when the government is desperate to revive productivity and repair the public finances. In May this year Labour agreed a deal with Brussels to align UK food regulations with the bloc — a breakthrough that will have limited economic effects but could signal the path to closer regulatory alignment that will make trade in goods and services easier for UK firms.
The OBR's estimate, which has been criticised by pro-Brexit economists, was derived from an average of independent forecasters' whose calculations ranged from a productivity hit of about 1 per cent to 10 per cent. The watchdog said the full impact of leaving the EU would be felt over the course of 15 years and estimated a drop of 15 per cent in trade volumes, compared with if the UK had stayed in the bloc.
Springford, whose findings were published by the Constitution Society and the Federal Trust, tested the OBR's projections and found the consensus view 'has been borne out'. Springford has also devised a method to calculate the impact of Brexit, which compares the UK's economic outcomes with similar economies since 2016, and found a growth impact of around 5 per cent of GDP, similar to the OBR's figure.
Springford said it was 'undeniable' that Brexit had hurt the UK's economic growth prospects and its trade volumes. 'The question is about the magnitude of the effect and we remain a little in the dark because it is incredibly difficult to isolate the Brexit effect,' he said, citing factors such as the pandemic, which complicate how to judge whether trade and investment was lower simply as a result of the UK leaving the single market and customs union.
The leave vote in June 2016 led to a prolonged period of negotiation about the UK's new economic and trade relationship with the EU. Britain formally exited the bloc in January 2020, with a trade and co-operation agreement that included a zero tariff on most goods but British businesses lost access to the single market and the UK was no longer part of the EU's trade deals with the rest of the world.
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The research found that the Brexit effect was most clear in the 'unambiguous stagnation in investment since 2016.' Estimates from Springford and economists including Jonathan Haskel, a former Bank of England rate-setter, calculate an investment gap of 10 per cent if the UK had stayed in the EU.
Sectors where the Brexit impact was most pronounced include the auto industry, where the share of exports made up by cars has dropped more sharply than in France, Germany, Italy, Spain and the US since 2019. Exports of financial services, which have grown since Brexit, haven't expanded as fast as peer economies after 2020, when UK-based firms lost their access to the single market.