Argument

Britain Can’t Afford to Keep Talking About Brexit

The never-ending conversation about leaving the EU has stalled all other progress on economic policy.

Prime Minister Theresa May at a plant machinery manufacturing firm on June 1, 2017 in Guisborough, United Kingdom.
Prime Minister Theresa May at a plant machinery manufacturing firm on June 1, 2017 in Guisborough, United Kingdom. Ian Forsyth/Getty Images

The recently extended Brexit delay has temporarily averted a harmful “no deal” scenario and handed Britain more time to find a consensus. But it isn’t cause for celebration. It only prolongs a paralysis in necessary economic decision-making, which is already taking its toll.

Heated disagreements about the nature of Brexit, both within the ruling Conservative and opposition Labour parties, have been the sticking points at the heart of a long maelstrom in British politics. It has meant the U.K. executive, legislature, civil service, and media have all become increasingly absorbed by the Brexit process—leaving little oxygen to address the socio-economic grievances that played a role in the June 2016 referendum outcome to leave the European Union in the first place.

Demographic analyses reflect how that vote partly served as a proxy for a confluence of unchecked economic wounds, including weak wage growth, poor social mobility, and vast regional imbalances. Indeed, the poorest households and groups that were left behind by growth in Britain’s globalized financial and research centers—typically those people in rural, coastal, and post-industrial areas—generally voted in higher numbers to leave. Yet with the U.K. Parliament in a state of flux ever since and delays to Brexit, the lack of political focus threatens only to exacerbate these economic challenges.

Prime Minister Theresa May’s economic platform at the 2017 elections pledged major investment in infrastructure, skills, research and development, a strengthening of local institutions to drive prosperity in towns and cities, and free trade deals with markets around the world, among other things. That agenda has stalled with all-consuming Brexit negotiations becoming stuck on Britain’s departure terms.

Since agreeing a draft withdrawal agreement and political declaration on the future relationship with the EU in November 2018, May has been unsuccessful in passing it through Parliament on three attempts already this year. With members of Parliament unable to agree on a compromise before Britain’s initially proposed exit date on March 29, it was eventually agreed with the EU that the departure date would be extended to October to allow further deliberation.

While this tumultuous start to 2019 has brought the country’s Parliament into a deadlock, it has been a crescendo to a turbulent three years since the referendum. In that time, the U.K. triggered Article 50, setting off the two-year negotiation process; May called an early election, which saw the ruling Conservative Party lose its majority and enter a power share with Northern Ireland’s Democratic Unionist Party; and there have been 10 cabinet minister resignations, while 11 MPs recently left the ruling and opposition parties to create a new political party.

In effect, the day-to-day business of government has been stymied. After a decade of austerity, major decisions on taxation and expenditure—including a spending review this year—remain limited by the need to keep fiscal headroom for various Brexit scenarios. Meanwhile, attempts to get domestic legislation moving, including reforms for stretched public services like health and social care, have been thwarted by civil servants being redeployed to focus on EU exit issues, key ministers being occupied by the Brexit debate, and the churn in personnel.

The immediate costs of political uncertainty since the referendum have been high. Some estimates suggest that the U.K. may have lost up to $1 billion per week, or around 2 percent of GDP overall, relative to a status quo scenario. The loss of business confidence in the economy, and the need for contingency planning, has been a key driver. Some car manufacturers are putting plans on hold, banks are relocating jobs (though less than previously forecast), and some multinationals are shifting their European headquarters onto the continent. The audit firm EY estimates that financial services firms are moving around $1.2 trillion in assets from the U.K. to Europe.

Britain has however confounded expectations of a recession following the referendum. In fact, unemployment recently reached a 44-year low, and the U.K. economy even grew faster than Germany’s and Italy’s in the final quarter of last year, as the eurozone weakened. But the near-term resilience belies the mounting strains of uncertainty and structural challenges facing its economy.

With firms in the U.K. cutting investment for a fourth straight quarter at the end of 2018, and R&D spending also stagnating, the drive to generate the productivity growth needed to push up wages and living standards across the country has become even harder. Yet the opportunity cost of the tumultuous and elongated process of Brexit so far is also likely to be just as significant for Britain’s future. It dropped out of the world’s top five economies in 2017 and is soon set to be overtaken by India.

In November 2017, the government unveiled its long-awaited industrial strategy, designed to drive growth across the country, support skills, and develop infrastructure. Long-term strategies like this are difficult to implement at the best of times, and in the current circumstances the plan is still struggling to gain traction. The north-south economic gap has widened since the referendum; the U.K. is the only large advanced economy expected to see a decline in productivity growth this year; and real wages, while growing, remain below pre-crisis levels.

The ongoing uncertainty risks blighting Britain’s image, influence, and competitiveness. Furthermore, with the distraction, some of the underlying grievances that existed before the referendum will still exist when the U.K. does finally leave the EU. With the next phase of negotiations—on the actual future trading partnership with the bloc—potentially even more arduous, British politics may continue to be held back from grappling with the country’s socio-economic challenges for a while. Indeed, more than 60 percent of Brits believe economic prospects will stay the same, or worsen, in the next five years, according to the 2019 Edelman Trust Barometer.

The Brexit process has thrown up parallel questions relevant for domestic issues, including how to redesign regional funding, which currently largely comes from the EU, to manage geographical imbalances and how potential new freedoms outside the bloc can be used to spur growth and nurture strengths in financial services and enterprise. In an ideal world, these considerations, and the wider introspective moment afforded by Brexit, would have factored into the national debate. But it’s been virtually impossible to discuss, let alone plan, a vision for the nation’s economy.

For most businesses, politicians, and indeed anyone forced to take a professional interest, the sheer weight of Brexit has hunched shoulders and forced eyes to be cast down to the ground, tentatively trying to find the next small step forward. If your eyes on the floor, they aren’t scanning the horizon. We need a resolution to this phase of Brexit, not just to resolve the short-term issue but so that we can start to think about the long term again.

Tej Parikh is a senior economist at the Institute of Directors.

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