The economic costs of Brexit

The decision to leave the European Union (EU) in 2016 has had profound and wide-ranging economic consequences for the United Kingdom. While the promise of new freedoms and opportunities was a key driver for the Leave campaign, the reality in 2024 paints a different picture, one of significant economic costs and persistent challenges.

One of the most obvious casualties of Brexit is the UK’s trade relationship with the EU. A study by Aston University Business School found that exports of goods from the UK to the EU have plummeted by 27% between 2021 and 2023, and imported goods have decreased by 32% compared to a scenario where the UK remained in the EU. Similar figures were found in a report by the London School of Economics (LSE), which concluded that UK worldwide goods exports and imports fell by 6.4% and 3.1% respectively between 2020 and 2022, compared to what would have been expected had the UK remained in the EU. These trade declines have translated into a £27 billion hit to exports and a £20 billion reduction in imports in 2022, translating to devastating impacts on small businesses in particular.

By 2020, the UK’s real GDP was more than 3% below what it would have been had the UK remained in the EU

The problem extends further than trade volume and tariff revenue; it is also about the tangle of new rules and requirements that make exporting to the EU a more complex and costly endeavour. As one business owner described, they used to be able to easily ship products to the EU by Royal Mail, but after Brexit, faced ‘a grinding halt’ due to new red tape and regulations. They now face ‘huge amounts of extra costs because of the added administration’ and the Office for Budget Responsibility (OBR) has stated that the increase in non-tariff barriers on UK-EU trade acts as an additional impediment to the exploitation of comparative advantage.

Regarding investment, the UK has also taken a hit, with estimates claiming that investment is perhaps 10% lower than it would have been without Brexit. Furthermore, the OECD has estimated declines in trade openness and business sector research (R&D) will reduce total factor productivity (TFP) across the projected decade since Brexit. This decline can be attributed to the uncertainty that has become a hallmark of the post-Brexit era, causing businesses to be more hesitant about investing in the UK. The loss of access to the EU single market has reduced the attractiveness of the UK as a destination for foreign direct investment (FDI), further impacting innovation and productivity.

The drop in investment and trade has, inevitably, had a knock-on effect on productivity, with a negative impact on UK GDP of between 2-3%. This is supported by OECD figures, which suggest that by 2020, the UK’s real GDP was more than 3% below what it would have been had the UK remained in the EU.

Brexit has also had significant political consequences, leading to uncertainty and instability. The need to forge new trade deals with both EU and non-EU countries has been a lengthy and complex process, with the UK struggling to replicate the benefits of the EU’s single market and customs union.

The fall in trade, investment, and productivity has translated into slower economic growth and reduced opportunities

Furthermore, the UK has seen a shift in immigration patterns. While net immigration from the EU has decreased, immigration from outside the EU has risen, driven by a more liberal post-Brexit system and refugee flows, which has resulted in new stress and adjustments in the labour market. Of note, recent polling suggests that 54% of Leave voters may now accept free movement for EU citizens in the UK in exchange for single market access while among all UK voters that figure rises to 68%.

The overall economic impact of Brexit, which is projected to reduce GPD by 5% by 2030, has impacted the lives of ordinary people within the country. The fall in trade, investment, and productivity has translated into slower economic growth and reduced opportunities. Increased costs for goods and services, as well as supply chain disruptions, have put pressure on living standards. This contrasts with claims during the Leave campaign that argued that Brexit could lead to lower prices for products. The political uncertainty generated by Brexit has also affected consumer and business confidence, making planning difficult.

While the economic data indicates significant costs associated with Brexit, some potential benefits have been identified, and new policies have been introduced. The ability of the UK to set its own tariffs and regulations has been cited as an opportunity to potentially reduce prices and benefit specific businesses. However, the UK already had low regulations in network industries compared with many other countries while it was part of the EU. Additionally, the UK is now also free to set its own immigration policies, although it is difficult to directly link immigration policies to economic benefits. Additionally, the UK has been actively pursuing new trade deals with countries outside the EU, aiming to diversify its trade relationships, though a number of deals have been found to simply replicate those already in place through the EU or have been shown to have little material impact on the economy. The government has also implemented measures to support businesses adapting to new trading conditions, although there are reports that some small businesses have simply stopped trading with the EU due to red tape.

The economic impact of Brexit is still unfolding and subject to ongoing analysis and assessment. Various factors continue to influence the UK’s economic performance including global events, supply chain issues, and domestic policy choices. The UK is currently navigating a period of economic adjustment, which includes shifts in trade patterns, investment flows, and labour market dynamics. The Office for Budget Responsibility, amongst other organisations, continues to monitor the economic impact of Brexit and adjust its forecasts as new data emerges. The UK public also continues to re-evaluate the impact of Brexit and its relationship with the EU, with recent polling data showing that there is widespread support for a closer relationship with the bloc.