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February 4th, 2020

The implications of Brexit for the UK economy

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Estimated reading time: 5 minutes

Blog Team

February 4th, 2020

The implications of Brexit for the UK economy

0 comments | 4 shares

Estimated reading time: 5 minutes

The United Kingdom has now formally left the European Union, but what does the future hold for the British economy? Following a recent event at LSE, Gerard Lyons, Vicky Pryce and John Van Reenen took questions from LSE staff, students and members of the public on the economic impact of Brexit.

A lot of the focus on the economic impact of Brexit has been on London, but the votes for Brexit mostly came from outside of the capital. What will Brexit provide for the people who live in these areas?

Vicky Price: There was a time following the vote where people in London wanted to emphasise how different they were from the rest of the UK and how differently they voted in the referendum. There was a suggestion London should have its own immigration policy. In fact, some people have produced some papers on what can be done for London alone. In lots of big cities of course, the vote was like London and significantly different from elsewhere in the country. And I have to admit, I live in London and perhaps we didn’t quite see what was going on outside of the capital.

What is being suggested now by the government is to really reverse that and to make sure that these northern areas benefit. We’ve already seen their willingness to support the airline Flybe when it comes to regional issues. Remember, lots of people worry about state aid and say that you can’t do what they did with Flybe as members of the EU – it’s been referred to the EU in any case. But actually, you can do various things for the regions which are allowed. State aid has always been used as an excuse to avoid giving money to certain places.

But what has happened over the last ten years is that money going to the regions has been reduced very significantly. The regional development agencies (RDAs) were abolished. They were replaced by something called local enterprise partnerships (LEPs) which basically brought together various interested parties from particular areas. They didn’t quite know what they were doing necessarily, and they received very little money for quite some time. It takes a long time for that to be reversed and lots of those areas, which voted Leave, are affected by the decline in manufacturing that’s taken place. They are going to very exposed to competition, where everyone will undercut everyone else and the environment is so much more difficult.

I think because of the concerns of those regions, we are going to get some infrastructure spending happening. But the impact on those regions will be so long to materialise that it’s almost a waste of money and time. It could be interpreted as something positive, but unless there is a massive redistribution – one which really affects London very negatively – we’re just not going to see an impact in northern areas, and I think people living there will become very disillusioned.

John Van Reenen: I just want to correct one slight thing. We say people in the North voted for Brexit. Well there was a coalition for Brexit. A lot of the people who voted for it were traditional Conservatives who live in the wealthy home counties, so it’s not just those living in northern areas.

What will happen? They’re going to be worse off. People in Sunderland, for example, where the Nissan car factory is located, are likely to be worse off as more activity moves outside of those particular areas. It’s actually going to be the opposite of what those people in traditional Labour areas that voted for Brexit were backing. Those people are sadly going to be worse off thanks to Brexit.

Gerard Lyons: The Office for National Statistics covers the UK by looking at twelve regions. Out of those twelve regions, three voted Remain: Northern Ireland, Scotland and London. The other nine regions voted for Leave: Wales and the eight regions of England outside London. Those eight regions, from 1975 and the first referendum to the 2016 referendum, moved from being the most Euro-enthusiastic to the most Eurosceptic.

That issue is now starting to receive academic attention, but when one looks at it, a number of issues come to the fore. One is public spending. If you had the UK as an average of 100, Northern Ireland is at 121 – so it receives 21% per person more public spending than the UK average. Scotland is at 119, Wales and London about 118, the East of England is 91, the East Midlands is 91, the South-East of England is 90, the South-West of England is 90. So, one aspect is more spending.

Another aspect is regulation. Small and medium-sized firms basically don’t complain about particular regulations, they complain about the whole scale and monumental size of regulation. So, what one sees in say, the North-East of England, which has been mentioned, is issues like free ports are now coming more and more to the fore.

One of the big issues that comes out in the academic work is who represents citizens. When you ask people in London whether Westminster represents them, they say yes. When you ask people in the rest of England, on average they say no. Hence you have a cross-party constitutional group under Lord Salisbury that’s been set up. The whole issue is about devolution at the end of the day. Tony Travers did some excellent work for the former Mayor of London – and probably for the current one – about the London devolution agenda. And there are lots of arguments about transferring that across the country.

There’s no reason to think these regions will be poorer. If one looks at what the current Ambassador from Japan to the UK said a few months ago, apart from Honda, he was highlighting how other Japanese auto-sector firms were looking to invest more for research and development reasons into the UK. It’s quite interesting, so let’s see what happens at the end of the day.

Much of the uncertainty caused after the referendum stemmed from the fact that people who voted Leave didn’t know what kind of Brexit they were voting for. It’s still unclear what kind of Brexit the UK government will be negotiating, but it’s looking more and more like a low alignment model. What will the impact of this be after the end of 2020, particularly in terms of the impact on the price of food, wages and other things that will affect normal people?

Gerard Lyons: It was quite clear in many respects what people were voting for. Leaving the single market and leaving the customs union were mentioned so often it was unbelievable. People vote for lots of different reasons. Most of the research afterwards showed that people voted for sovereignty first, migration second, and the economy third, of which the NHS and other aspects came to the fore.

‘Clean Brexit’, which is a book I co-authored with Liam Halligan and which appeals to Remainers as well as Leavers, talks about many of these issues. At the end of the day, the UK does need to invest more. One of the issues that has been mentioned recently, and which touches on the issue of EU migrants, is the lack of investment in schools and training in the UK. Now, I imagine that the government hopes there will be more investment by firms in the skills and training of their staff in the UK as a consequence of having a points-based migration system, but we’ll see how that goes.

I think that one should be positive about the UK economy. The UK is distancing itself from the EU, but we want to have a sensible future relationship with it. But the EU, like the UK, also faces some big challenges. If you look at the last decade, it’s not just the West versus everyone else. Within the West, the United States has grown at a rapid pace compared to western Europe. Western Europe, including the UK, needs to reposition itself in the changing, growing, global economy. And if we get the incentives right and we start to invest more, then that will start to address some of the concerns people have raised.

John Van Reenen: I think it’s a valid question to ask when people were voting in the 2016 referendum whether they were fully aware of the ramifications of the things that they were voting for. Leading Brexiteers, like Daniel Hannan, were saying that there was no chance of leaving the single market. Leaving the single market and leaving the customs union were not on the ballot paper. And it would only have taken a small percentage of people to move the other way if they thought what was really on offer was this hardest of the hard Brexit which Boris Johnson is pushing for.

I think it’s absolutely outrageous: the attack on democracy from suspending parliament, which had to be overruled by the Supreme Court, the unending litany of lies that we had to put up with during the referendum – and not just the lies, but the contempt which we were treated with as the lies continued. Just as the prime minister lied when he was a journalist and has continued to lie about things that have come out of Brussels. I think we have to realise what we’re up against here. Brexit is just the vanguard of a general assault against reason and facts – things that I’m afraid we’ll have to fight very hard for over the next 5-10 years under the attacks of the Brexiteers.

There is a view that people were fully aware – the rational voter, as it’s sometimes called in economics. People knew there was going to be a cost to voting for Brexit and they paid their money. They wanted to get greater sovereignty, and that’s what we’re doing. That’s a view and it happens to be totally wrong. If you look at opinion polls of what Leave voters said, they thought they would be better off or at least no worse off after Brexit. So, it wasn’t like they knew, as Arron Banks has said, that £10,000 would be a small price to pay for Brexit – which is all very well if you’re a multi-millionaire like him, but not so good if you’re a car worker in Sunderland. Most Leave voters were not taking the view that they were going to have some more sovereignty in return for an economic cost. That’s just factually incorrect.

I respect people who say they would pay a cost for sovereignty, but sovereignty is not a binary thing. The European Union, like many other international organisations, is like a club. We join that club, we pay a membership fee, and we give up some sovereignty in return for both greater prosperity and a chance to deal with the kind of global problems that we’re all facing. Global problems like climate change, the consequences of different types of new technologies, and the real risk of military conflict – which is what Europe had to suffer from for centuries.

We really are in this kind of battle right now. I’m particularly sad, as many people are, with what’s happening with Brexit. But what we have to do is look forward to resisting what’s been happening around us and to try and fight against that assault on truth and reason that Brexit represents.

Vicky Price: There is not enough clarity about where we’re going to end up and therefore what the implications for the economy will be. Right now, as we know, there is a big argument about whether we will impose tariffs against cars coming from the EU if they insist on having access to our fishing rights, which of course can’t be particularly useful for the car industry looking forward, in terms of investing. Although Gerard has suggested that they all want to invest more, the reality is that lots of manufacturing and investment intentions have already been announced and they are mostly for leaving the UK. They’ve stopped plans that they intended to start, they’re moving these projects back to Japan and so on.

That’s an issue and of course it affects the types of people who are going to be employed. Obviously, there’s less demand for particular types of skills. The question of increased training is interesting. According to the latest CBI measure of business optimism, which looks forward, there is an intent to invest more in plants and machinery than they had done before – remember it was negative before – but their training and retraining expenditure is the same – in other words negative. There’s no indication at present that businesses intend to train people to replace all of those who perhaps are not going to be coming in from the EU.

If you look at the migration policy at present, it really makes very little sense. Net migration from the EU is now at its lowest level in over ten years. That of course affects the skill levels we discussed earlier. Whereas migration from outside the EU – people of course who have lots of skills and lots to contribute but are generally less employed than those from the EU – has risen very significantly. This is an area we control where we have complete sovereignty and yet we allow the migration level to be incredibly high.

That gives me optimism and the optimism is this: if you can’t control what you’ve been able to control in the past, what makes you think you’re going to control the things you were not controlling in the past? Instead of being doomed in this area, I think we’re going to be flooded, if anyone wants to come, by all those Europeans who find it a great opportunity to come here. But of course, they may decide not to come because those opportunities might just not be here. And that’s the real worry that I have.

Overall, in terms of business readiness, the truth is that the big firms have been able to adjust already. Even though they had no great certainty, they spent a lot of money and relocated various things – they may not have relocated lots of people, but any increase in investment has happened outside the UK, in the financial sector as well. And for those who still want to come, the demands are already beginning – firms are saying if you want us here, it’s going to cost you. Who’s going to pay for this? The taxpayer of course. That has not been included in whatever people were told. People haven’t been told about what huge costs there may be for taxpayers.

Let’s say that the ‘Singapore on the Thames’ model is implemented. How can we square this with Ursula von der Leyen’s recent statement that there should be zero tariffs, zero quotas and zero dumping?

Vicky Price: The interesting thing is that quite a lot of people have been talking about a ‘Singapore on the Thames’, but if you look at what the regulator in the UK is saying, the Head of the Prudential Regulation Authority has just issued a statement saying that actually our banks are regulated in too lax a way and that if we really think we’re going to make life easier for banks, it will be quite the opposite: we’re going to regulate more strongly.

A ‘Singapore on the Thames’ isn’t going to happen on the banking side. I would be absolutely astonished if we suddenly eased our regulatory framework, although of course Mark Carney, the Governor of Bank of England, has said when we leave, we certainly don’t want to be regulated by Europe. So far, we haven’t been regulated by Europe and we’ve resisted all sorts of things, we have mutual recognition so whatever we had done was being accepted because we were members of the EU, and there were frequent discussions and so on.

If you look at all the other aspects, the idea that you can reduce regulation in one area, when you’re really dependent quite considerably on trade with the EU, is difficult. While you’re trying to negotiate with one possible trading partner (e.g. the United States) and you’re not very clear what kind of regulation you’re going to have with another possible trading partner, first of all you can’t negotiate in any sensible way until all that’s sorted out, and second, you just won’t get the concessions you want if you start dumping – in other words reducing your own regulations in order to compete, which the EU simply isn’t going to accept. What you can do, is play around with the words. Boris Johnson is very good at that and he’s probably going to find some sort of way of saying that we’ve conceded completely, but actually we haven’t conceded at all. I’m sincerely hoping that suddenly some sort of logic and rationality will creep into our politics.

Of course, you continue to trade, but the question is on what terms – and those we don’t know. What has happened already is there’s been a little bit of insuring of supply chains and so on, but only a very small amount, so there’s still going to be a huge amount of uncertainty about how you can do various things. And that’s going to lead to the bounce back that we’re seeing right now being very short-lived unless we have some serious certainty.

Gerard Lyons: I think the answer to the trade-offs associated with the Singapore model is that the government needs to make clear what its vision is. I think it needs to do that sooner rather than later. The data shows that 8% of UK firms sell directly into the single market. They account for 12% of UK GDP. They’re big firms, but a vast bulk of firms do not sell into the single market and that’s even allowing for supply chains. So, there are different issues at play here.

I don’t think there’s necessarily a trade-off. Supply side policy is important, fiscal policy is important, but monetary and financial policy is also important. They all will play their weight in the future. Obviously, politics is going to play a big role. Leo Varadkar has made the important point that the UK had in his view thought it was dealing with individual nations rather than the Commission. The UK needs to get that aspect of its next stage right.

But the UK has lots of things to trade off and is in a strong position, not just on defence. Of the 28 EU countries, the only one that meets the two international commitments of defence spending of 2% of GDP and 0.7% of GDP on international aid is the UK. The UK has a very strong global appeal, and we need to start getting that vision and message out. I just want to say on the CBI survey, it did swing a lot – it was a 43% swing, the biggest swing in recent history. There are things that are improving, though I agree that we need to spend more on training and skills.

As a final point, I would say in 1975, the country had a referendum. What was interesting is the day after, those people who were on the losing side – some of whom were members of the Labour government at the time – accepted the result and said, look we voted to go in, we didn’t agree with it, but we’re going to fight for what’s best for the UK. I find it quite amazing that people accuse Brexiteers, whoever they are, of being anti-democratic. We had the biggest vote in our democratic history in 2016. The last three years we’ve had a political crisis – you can decide who is to blame for that in your own mind, but it has not been helped by the failure of people to accept the result. I think after leaving the political structures of the EU, I would hope that people are sensible and start arguing collectively for what’s best for the UK rather than continuing to try and refight the referendum over and over again.

John Van Reenen: One of the delusions of the Brexiteers is that somehow the solution is going to be mass deregulation in the United Kingdom and that we’re being held back by onerous regulations. If you look at what the OECD or other organisations say, the UK is a very lightly regulated country, as we have had the freedom to be as a member of the European Union. For example, our labour regulations are among the lightest in the EU. The idea that this bonfire of regulations is going to somehow light up the economy is a total fantasy.

On trade deals, again it’s another kind of delusion of grandeur. When we sit down to do a deal with the United States, we are in a much weaker bargaining position than we would be in the European Union. The EU is the biggest single market on earth: $19 trillion, half a billion people. The UK is much smaller – it’s like I’m asking someone to go on a date and the other guy is five times as good looking as me. Who’s going to have the most success? It’s not going to be, I’m afraid. And that’s similar to what will happen when the UK sits down with other very large countries. We’re in a much weaker bargaining position and the deals we’re going to get with these countries are going to be very much worse than they would have been had we stayed in the European Union and taken advantage of the deals the EU is doing with other countries.

Finally, let me say on a personal note, my father died twenty years ago – he was a political refugee from South Africa, who came over with his father. After that, having to leave the European Union is probably the saddest time in my life. On the statement that it was the biggest vote, we’re the biggest population we’ve ever been, so of course it was the biggest vote – it’s like saying there’s a record amount of spending, well of course there is because we’re the biggest economy we’ve ever been. It’s absolutely fatuous: 25% of the population voted for Brexit and 30% of the eligible population voted for Brexit. For rupturing the relationship we’ve had with the European Union for half a century.

It was a moral and democratic obligation to give us a chance to vote on the reality of the options in front of us, and this has been denied to us as a people. That’s a profoundly undemocratic act and I weep for the country for not having had that. I’m sorry, but from my personal perspective, there’s going to be no ‘Kumbaya’ moment. We are, as I said, in the resistance against a post-truth type of society, where reality, facts and reason are denigrated, and democracy is undermined. I’m not going to give up the fight against that, my daughter is not going to give up the fight against that, and her children are not going to give up the fight against that. We will be resisting the forces which are trying to undermine democracy and reason for as long we are alive.

The above article is an edited transcript of a Q&A which took place following an event at LSE on 27 January. All questions were asked by members of the audience. A podcast of the event is available here.

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Note: This article gives the views of the speakers, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: Steve Eason (CC BY-NC 2.0)

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About the speakers

Gerard Lyons
Gerard Lyons (@DrGerardLyons) is a leading international economist. He is chief economic strategist at challenger wealth manager Netwealth and on the Board of Bank of China (UK), and is on a number of advisory boards, including Vivid Economics, Warwick Business School and the Grantham Institute on Climate Change and the Environment at LSE and Imperial.

Vicky Pryce
Vicky Pryce (@realVickyPryce) is Chief Economic Adviser, Centre for Economics and Business Research and an alumna of the London School of Economics and Political Science. Her new book is Women vs Capitalism: Why We Can’t Have It All in a Free Market Economy.

John Van Reenen
John Van Reenen (@johnvanreenen) is Ronald Coase Chair in Economics and Professor in Economics, Department of Economics, LSE.

About the author

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Posted In: Brexit | featured | Gerard Lyons | John van Reenen | LSE Comment | Politics | Vicky Pryce

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