They say that bad news comes in threes, though that seems an understatement of the number of disasters that seem to befall Rishi Sunak in every week of his lacklustre premiership. Yet in the span of a few days, three things have landed the prime minister in what might be his worst crisis yet.
Sunak entered the middle of February buoyed by Labour discomfort over its green U-turn and its botched handling of remarks made by its candidate for the Rochdale by-election. When inflation dodged an expected rise to remain static at 4%, he was caught on camera telling members of his business council that the economy had turned a corner. But just when the PM thought he was out, failure pulled him back in.
Britain officially entered a recession, limiting Jeremy Hunt’s options for the budget on March 6. Then Keir Starmer scored convincing victories in a pair of by-elections. But the third piece of bad news may be the most disastrous of all. This was the investment bank Goldman Sachs’s verdict on the damage Brexit is doing to the UK economy.
The part played by Goldman’s in the financial crisis of 2007-08 is well known. Yet it survived, and now thrives again by making lots of money for its clients. It does this by producing hard-nosed, well-respected research. It took a cold, realistic look at the economic consequences of Brexit and pronounced them to be dire in a research note titled “The Structural and Cyclical Costs of Brexit”.
It did this in the same way others have done – creating a doppelgänger of the UK economy based on what it would have looked like had we not voted Leave in 2016. This doppelgänger is created from a mix of economic performances of several countries, fine-tuned so it closely matches the UK. You then measure its performance against that of Brexit Britain – and see which one comes out on top.
The team at Goldman Sachs found that “the UK economy has notably underperformed other advanced economies since the EU referendum in June 2016. UK real GDP per capita has barely risen above pre-Covid levels and now stands 4% above the mid-2016 level. This compares with 8% for the Euro area and 15% for the US.” It added that the “UK has seen higher inflation over this period, with UK consumer prices up 31% since mid-2016 compared with 27% in the US and 24% in the Euro area.”
In short, much lower growth and slightly higher inflation than our major competitors – a desperate performance, given that the Brexiteers were promising us a new golden age of economic growth. Yet this overall conclusion was even more depressing: “UK GDP is 5.5% lower than that of the doppelgänger. Investment is 11% lower; goods trade 7% lower; and services trade is around the same.” This is damning stuff, and very similar to other quality research in this area. A far from comprehensive list includes:
• The government’s own independent financial watchdog, the Office for Budget Responsibility, found Brexit would cost the UK economy 4%;
• The London School of Economics’ Centre for Economic Performance calculated that Brexit would cost the UK 5.5% of its economy;
• The National Institute of Economic and Social Research determined that Brexit would cost 5-6% of GDP.
All pretty much in the same ballpark.
Like Goldman’s, all three of these organisations have done their own research, much of it peer-reviewed. They have explained their assumptions, calculations and conclusions. Several have used very similar well-proven models, but independently of each other, and they have all come to almost identical conclusions: Brexit is going to make, or has already, the British economy 5% smaller than it would have been if we had stayed in the EU.
The evidence is now overwhelming. It comes from nearly every reputable source, international organisations, foreign governments, eminent economists, well-regarded economic institutes, the government’s own financial watchdog and international banks.
Through Brexit, the UK government has declared a trade war on itself, placed huge barriers in the way of its economy and businesses, and then watched the damage mount up while doing next to nothing to help. Its dwindling band of happy-go-lucky ideologues cannot see what is in front of their eyes and ignore almost all of what industry, business, independent research and its own experts tell them.
The Tories have time to change the manager – again – before the next election, but if the pattern of play does not change too, does it really matter?
While Sunak was suffering, the business secretary, Kemi Badenoch – his likely successor – had her department declare that she was off to negotiate new memorandums of understanding (MOUs) with independent US states, such as Oregon. That this is the best news they can muster says it all. MOUs are worthless pieces of paper. We will get a cheap photo op and a gratingly, economically illiterate speech from Badenoch and then the whole thing will be filed away and forgotten.
The tax revenue from a 5% larger economy would be another £40bn or more a year. Its absence is why the 2p cut in income tax, the end of inheritance tax and other Tory dreams were always a bad idea, something that Hunt seems to have belatedly come to terms with.
In fact, no matter what he pulls out of the hat on March 6, overall taxes will continue to rise, because to raise the same amount of cash from a smaller-than-expected economy means higher taxes.
Goldman Sachs throws us just one small bone of comfort at the end of its note. It hints that a new Labour government might be able to face reality, reopen some talks, ameliorate some of the worst aspects of Brexit and reduce the damage.
It’s not much, but it is a lot more than Oregon.
