No one in Britain knew how to mark the tenth anniversary of Brexit. And while British politics still seem to be grappling with its consequences, including the regicidal instincts it unleashed in our parliamentary parties, the Brexit debate remains as contentious as it is muddled. Incoming Prime Minister Andy Burnham is being urged to join the EU in some quarters after winning a by-election in which he was forced to oppose a Eurosceptic in tribute to the memory of the referendum. And part of the problem is that contemporary political discourse tends to reward simplistic partisan narratives, which invariably lean toward single-cause explanations. An answer to the question “Whatever happened to the United Kingdom?” will struggle to embrace the notion that Brexit was just an extra bump in the curve: strong but following a clear trend.
Burnham was on to something when he introduced Brexit with austerity, privatization and deindustrialisation as “Britain’s four horsemen of the apocalypseClearly, Britain’s regret – a stylized fact no longer widely refuted – is overblown. But it can be tricky to disentangle each rider from the larger story of political-economic decline. A closer look at some of its cardinal symptoms, however, helps to clarify Brexit’s role within it.
The most prominent feature of the British economy after the Great Financial Crisis is what might be called “Britain’s Little Valley of Tears”, a gaping hole in real wages that opens up after the financial crisis and only closes around 2020, 12 years later. Today, the wage level stands just 2 percent above its 2008 base. If it were allowed to return more quickly to the pre-crisis trend, it would likely be about a third higher. The reason it wasn’t much has to do with one of the most remarkable policy mistakes in modern economic history.
The austerity program adopted by Cameron and Osborne was, by any standard, one of the most intense in modern history. It hit where it hurts most, in the form of long-term cuts to public spending on infrastructure, welfare spending and state capacity. What really set it apart was that it was unstrengthened: Britain’s public finances were generally healthy, its borrowing costs were low and sterling not under pressure. It is hardly surprising that, in 2022, ten of the 15 poorest regions in North West Europe were in Britain.
The result of the referendum is inseparable from this debacle. First, as research by economist Thiemo Fetzer and others has suggested, austerity, by exacerbating regional disparities, created a reservoir of protest voting that the referendum could mobilize. Crucially, however, both austerity and Brexit were driven by the same impulses: both were reactions to an ongoing crisis and shaped by how the ruling elite interpreted the underlying causes. The fiscal cuts were ultimately a poorly disguised attempt to permanently reduce the state’s footprint, particularly in welfare provision, based on the false notion that it was curbing competition and economic dynamism.
It is even less clear which problems Brexit was intended to address. What is clear, however, is that it was not just the result of an internal party squabble over issues of sovereignty and immigration; it was also motivated by an idea of economic renewal. The EU’s regulatory apparatus was deemed “hostile to creativity, growth and progress”, as Michael Gove put it. in his word a few months before the vote. Nigel Lawson suggested that an exit would free the UK economy from “excessive European regulation” and “restore the conditions for a flexible economy”. The “left’s” most coherent case for Brexit instead saw Europe’s neoliberal constraints as obstacles to Britain’s industrial revival.
Brexit, like the Trumpian slide into protectionism, was a politically misdiagnosis: better to blame the country’s trade relations than to admit that the blame lies with the national growth model. After all, it had served some people quite well. One of these men, Lawson, never missed a chance to be on the wrong side of history: as Chancellor in the 1980s, he had already been at the forefront of an effort to address fears of national decline by prescribing the wrong treatment. The choice to bet the house on private finance and provision of public goods has proven to be a pivotal point.
We have to throw down notion that healthy productivity growth figures before the financial crisis meant that this bet was paying dividends. As Andy Haldane, former chief economist of the Bank of England, has arguedmuch of this growth was in fact illusory, fueled by excessive, uncompensated risk-taking and debt accumulation in the financial sector. And as the financial sector grew in size, credit growth was channeled largely into mortgage lending, hungry industrial finance, and entrepreneurial ventures, while firms began to increasingly direct their surpluses away from productive activity and into the accumulation of more profitable and less risky financial assets. Meanwhile, the privatization of public providers in “demand-inelastic” sectors, where quasi-monopolies mean that customers cannot actually switch providers – such as energy, water, housing, transport, care – has fueled rent extraction.
This transformation brought about what John Maynard Keynes described as “the extraordinary evil”, namely “the destruction of the incentive to invest”. Productive investment is what drives growth in the long run. A country that wants to raise living standards while ensuring it can sustainably service its national debt must maintain adequate levels of capital formation—that is, investment in the things with which the economy creates more things: equipment, buildings, intellectual property, etc.
In the UK, the structural floor for this dynamic is extremely low and has been for decades. As a share of its domestic output, private and public investment has been lower than in any EU economy throughout the 21st century. Only long-stagnant Italy, battered by the euro crisis, dipped below for a short period. Arguably, no rich country struggles more to invest and build. Low levels of wages and investment and a failure to deliver key goods are the main symptoms of the UK’s malaise. And they are related: why invest in expanding your capacity if consumer demand growth is muted, and why invest in labor-saving (read: productivity-enhancing) technologies if labor cost growth is weak? And, given low productivity growth, how can wage increases be justified?
Brexit is not responsible for this dynamic. But she intersects with him in a devastating and measurable way. Investments, increasing after 2010, stagnate after the vote. On a narrower scale, perhaps the clearest indicator of whether or not the stock of private capital is growing (net private non-financial investment), Britain is still below its levels before the referendum ten years later. Wages, too, had risen in previous years: austerity eased, oil prices and the rise in sterling all conspired to push real wage growth back close to its pre-2008 trend. This trend too petered out halfway through 2016. If austerity killed the recovery from the crisis, Brexit killed the recovery from austerity.
A proper accounting therefore sees Brexit as an aggravating factor, another act of self-inflicted national impoverishment that has made the country more isolated and less important on the world stage. While losses cannot be recovered, it is worth asking whether they can be cut. Should a future Labor government led by Andy Burnham spend political capital on EU reunification?
Like one paper published on June 18 by Center for European Reforms makes it abundantly clear: almost every sector in the British economy has seen its trade reduced since the split was made official in 2020. But eliminating the tariff border – ie rejoining the customs union – would do little to correct this picture. The only credible path is rejoining the single market, which would require re-submission to the European regulatory framework.
This would plausibly include the free movement of goods, but also, depending on what form new membership of the single market would take, of services and people. Anything short of wholesale reunification in the EU and making budget contributions seems unlikely to be accepted, but the actual production of member states. The political ramifications of following this path would be incendiary, and a large part of the civil service’s capacity would be devoted to it.
Unlike his immediate predecessor, Burnham will take over at No 10 with a coherent economic transformation plan. The intellectual scaffolding for Manchesterism on a national scale is widely believed to owe much to him work from progressive think tank Common Wealth. At the heart is the notion that Britain’s lack of productive investment in core sectors is structural rather than cyclical, and that the binding constraint is not planning, regulation or the supply of savings, but the cost of capital under private ownership.
This is the real deal. Why waste time and effort on what is ultimately a sideshow? This is how Brexit should be understood. A act of economic vandalismfor sure. But one that resembles spray-painted graffiti on a dilapidated wall of a long-closed factory. Rather than being the cause of the disease, it simply completed the ruins of the effect.
(Further reading: How to trivialize Brexit)
