Rachel Reeves called for honesty as to the state of the public finances and conducted a public sector audit. There is a “black hole” of £22bn. When and how it arose have been debated. The debate on how to fix it has only just begun.
The need for the UK public to understand the reality of the UK economy and the need for growth has moved centre stage. Why? Because we need growth to ‘fix Britain’ – to improve the socio-economic wellbeing of the country and to fund public services at acceptable tax levels. However, no one dares mention the ‘B’ word, and subsequently what to do and how to do it is proving difficult.
There now appears little debate that the impact of Brexit on the economy has been negative. Most forecasters expect the impact to get worse rather than better in future. The news cycle as to both the financial cost and negative impact of Brexit is validated by all our own personal experiences. With public sentiment significantly moving towards Brexit being a mistake, what is surprising is the lack of candour as to:
- The true scale of the cost impact in terms of Gross Domestic Product (GDP) and tax receipts and therefore on public finances to date
- The scale of the opportunity in fixing Brexit
- The current lack of investor confidence in the UK economy.
In simple terms, if the Conservative government had chosen not to Brexit, or at least not in the hard way it did so, it is arguable that the country could have afforded the ‘Truss-economics’ tax give-away of late 2022.
More importantly, it presents a challenge for this new Government: to get the growth they need to fund future public services and manage the nation’s tax burden, post-election ‘fixing Brexit’ must be centre stage for all political parties. Fixing Brexit could enable this new Government to fund many socially beneficial policies – such as lifting the two-child benefit cap, or not removing the winter fuel credit, for example.
Looking back – GDP, growth and the Brexit impact
Over the course of the last few years, forecasters and commentators considered the impact of Brexit on GDP, talking in percentage terms, but never talking about what this meant in terms of taxes received or lost and the impact on UK debt.
During the Brexit referendum period, there were numerous forecasts that estimated the impact of Brexit; in the majority these were all negative. None were positive.
Some forecasts suggested UK GDP could be reduced by as much as 10% over the long term (2030 or so). Recently:
- The Tony Blair Institute for Global Change estimated in Feb 2023 that the impact could already be 5.5%.
- This year (Feb 2024) Goldman Sachs estimated the impact was already at 5%.
Many other leading think tanks have similar analysis and commentary.
But what does this mean? Let us use the Goldman Sachs’ estimate and assume that the impact has slowly grown since the Brexit referendum in 2016, so increasing at 0.7% a year over seven years. This means that in the seven years since the Brexit vote, the UK has missed out on GDP worth some £434bn.
Over that period, assuming an average ‘tax-take to GDP’ rate in the UK, (the OECD estimates this to be c.35%), the Government missed out on tax revenues of around £150bn. In 2023 alone, on a GDP shortfall of £115bn, the Government missed out on £40bn of taxes – and that level of loss is set to continue and grow.
Think what could have been achieved with an additional £150bn during the last seven years; the Truss tax giveaway could have been fully funded with room to spare; full funding would have been available for the 40 hospitals in the New Hospital programme; even HS2 or Sizewell C. The Conservatives would have entered the 2024 election with a growing economy, not living with the failings of a Brexit economy.
Now it is quite possible that Goldman Sachs have over-estimated the impact on GDP to date, and its impact has not been smooth, as above – but even if it was halved or only started from 2021, then we still get to a loss in GDP of some £217bn, and a total loss in tax revenue of £75bn, and once again running at a rate of £40bn a year.
The Labour Government – fixing Brexit, funds growth and public services
The OBR and OECD forecast that the tax-take as percentage of UK GDP will rise to 37.1% by 2028/29, with GDP growth forecast in 2024 to be 0.4% and 1% in 2025.
The £22bn black hole has led the new Labour Government to suggest the need for higher taxes and further austerity with cuts to public services or more borrowing.
However, no one is talking openly about the alternative – fixing Brexit. Fixing Brexit would help deliver increased growth, and that growth could support £40bn a year in taxes, worth £200bn (potentially more) over the next five years of this parliament.
This Government now needs to conduct an audit on Brexit: the negative impact on our economy is clear, and once we understand where we are, we could move on to quickly fixing it to fund the public services that we need. Without doing so, our vital public services will fail, the NHS will fail.
Investors lack confidence in the UK
As the link between poor economic growth and its impact on taxes and public finances is little appreciated, so is the issue of confidence in a country and its economy by investors, both domestic and international. The lack of confidence in the UK economy is self-evident by comparative analysis of international stock market indices.
Most stock market indices are historically reflective of the country domain from which they came, and the companies listed on the relevant stock exchanges. In the UK, the FTSE 100 is reflective of UK domiciled businesses with a very international outlook, whilst the FTSE 250 is more domestically orientated.
Looking back, it does not take much comparison to show how badly the two main UK indices have been performing over the last five years, as shown in the table below. In simple terms, if you invested your pension in a FTSE 250 tracker over the last five years, your return was between 0% – 8%. If you had invested in a tracker based on the Dutch AEX, your return would have been 60% – 67%. Which returns would you prefer?
At a macro-economic level with stock market indices being forward looking, reflecting investors’ views and confidence about future expectations of country and company performance, this shows just how far the UK is lagging behind. Investors will always put their money where they consider they will see the best returns.
Only by changing the outlook for the UK economy will investor confidence return, and that requires the new Government to face up to the issue of fixing Brexit. A £200bn prize is too great not to pursue, as is the risk – politically and economically – of failing to do so. Investors will judge a new Government quickly and will turn away if found lacking, as will the public at the ballot box.
CLICK HERE TO DONATE TO OUR CROWDFUNDER
HELP US BECOME STRONGER SO THAT WE CAN CONTINUE TO DELIVER POWERFUL CITIZEN JOURNALISM!
