Brexit will be partly blamed by the UK’s fiscal watchdog for the gaping hole in the public finances at next month’s Budget, according to government officials, as the once taboo “B-word” returns to the political debate.
The Office for Budget Responsibility will next month downgrade its UK productivity growth estimates and identify Brexit and Covid-19 among the contributory factors, said officials briefed on the independent forecaster’s thinking.
The OBR productivity downgrade will represent a significant part of the overall shortfall that UK chancellor Rachel Reeves has said she will fill through tax and spending cuts.
“The OBR will say clearly that Brexit had a bigger effect on the British economy than they expected, along with Covid,” said one government official. The OBR declined to comment.
A 0.2 percentage point markdown in the OBR’s productivity forecast would cost about £18bn a year.
Andrew Bailey, Bank of England governor, weighed into the debate in Washington on Saturday when he said the economic impact of Brexit would be negative “for the foreseeable future” although in the longer term there should be “a positive, albeit partial, counterbalance”.
Although the OBR’s productivity forecasts have long been seen as too optimistic and the body will look at a wide range of reasons for Britain’s sluggish growth, the mention of Brexit throws up a political opportunity and potential pitfalls for Reeves.
Reeves last week told Sky News: “There is no doubting that the impact of Brexit is severe and long-lasting.”
The 2016 vote for Britain to leave the EU has become an almost taboo subject for many politicians in recent years.
At last year’s general election, the issue was little mentioned. Labour wanted to win back Leave voters, while the Conservatives did not want to talk about a project that had fallen into disrepute with the electorate.
Even Nigel Farage, the chief architect of Brexit as leader of the UK Independence party before he later went on to lead Reform UK, has shied away from relitigating the Brexit arguments.
For Reeves and Sir Keir Starmer, prime minister, Brexit is a convenient, if only partial, excuse as to why the chancellor will have to raise taxes in her November 26 Budget, allowing them to blame Farage and pro-Brexit Tories.
The public might be susceptible to the argument, with a YouGov survey in June showing that only 31 per cent thought Britain was right to leave the EU, against 56 per cent who said it was the wrong choice.
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Meanwhile, a separate YouGov poll found that only 23 per cent thought Brexit had been good for the economy, while 65 per cent said the impact of Britain leaving the European trading block had been negative.
However, a strategy of reopening a Brexit blame game is not without risks. Labour officials admit that many voters want to move on, while disillusioned Leave voters do not want to be told they were wrong.
“This isn’t a big strategy to revisit Brexit,” insisted a Starmer ally.
Another Labour official said criticism was being levelled against the “hard Brexit” negotiated by former Tory premier Boris Johnson, not the 2016 Leave decision in itself.
Starmer’s allies also admit that convincing voters the Budget, which could see Reeves having to find around £30bn in total, is somebody else’s fault is a big challenge.
One ally said: “The OBR productivity downgrade is a backward-looking process, concerning the capacity of the economy, and the Tories were in power for the last 14 years. But that is a hard argument to land. It hasn’t reached the public yet.”
The Conservatives have argued that Reeves is having to raise taxes because of decisions she has made in office, including hitting businesses with a £25bn national insurance increase and abandoning a plan to cut £5bn from the welfare budget.
Reform UK said: “Labour can try any excuse they like, but they can’t escape the reality that ‘Rachel from accounts’ has the UK economy flatlining.”
Meanwhile, another risk for Labour is that if Reeves and Starmer put too much blame on Brexit for the country’s economic woes, it will invite the question of why they are only taking limited steps to repair the damage.
Starmer negotiated with the EU a deal that would smooth trade in food products and a “youth mobility scheme” but he stopped short of the Liberal Democrats’ demand that he should negotiate a new “bespoke” customs union, let alone return to the single market or EU itself.
Ever since the June 2016 EU referendum, the OBR has been incorporating assumptions about the impact of Brexit on trade, productivity, investment and migration into its regular forecasts.
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The OBR currently estimates that the trade deal that came into effect in January 2021 will reduce long-run productivity by 4 per cent relative to remaining in the EU. That reflects the impact of the extra non-tariff barriers that are standing in the way of EU-UK trade.
The last time the OBR pushed through a big cut to its trend productivity outlook, in November 2017, it said the revision was not driven by a detailed re-evaluation of Brexit’s likely impact.
Instead, it was a response to the “repeated tendency throughout the post-crisis period for productivity growth to disappoint relative to expectations”.
Michael Saunders, an adviser at Oxford Economics and former member of the BoE’s rates committee, said the OBR may conclude in its review that Brexit is part of the “general story” of weak productivity.
“You can say the shortfall relative to the pre-financial crisis trend is partly due to Brexit,” he said. It would only be a driver of the downgrade itself if the OBR has uncovered a new channel by which Brexit is dragging on the economy, however.
The timing of the OBR downgrade has provoked deep frustration within the chancellor’s team, given it comes only months after the Treasury set out its three-year departmental spending plans, and a year after a £40bn tax-raising Budget that was meant to put the public finances on a solid footing.
