Britain should forge closer trade ties with the EU if it wants to reverse the economic damage caused by Brexit, a leading think tank has warned.

The Resolution Foundation, which is seen to have views aligned with Labour, said a move towards negotiating a return to a single market for goods would be an important step forward, but the party’s manifesto expressly rules that out.

It also said the government should slow pay rises in the public sector and repeated its call to scrap the triple lock on pensions.

Economists say the hit to the economy since the 2016 Brexit referendum has been considerable, with campaign group Best for Britain claiming damage of between £180bn and £240bn so far.

The Office for Budget Responsibility has said that Brexit will cost 4 per cent of Gross Domestic Product in the long term.

The report comes amidst turmoil at the top of government, with Sir Keir Starmer’s days as prime minister widely seen as numbered. The government is under attack for many things, not least a failure to deliver good economic growth – a key pledge when Labour won power in July 2024.

The Resolution Foundation, previously led by pensions minister Torsten Bell, said: “Trade is one area where delivery has undershot ambition. There is much more to do, particularly on the UK’s relationship with the EU, where closer integration could deliver material gains. The biggest single step here would be negotiating a single market for goods.”

The report rejects plans, mooted by some candidates to replace Sir Keir, to spend more government money or raise more taxes. Former deputy Labour leader Angela Rayner has previously called for raising corporation tax on banks and scrapping the tax-free allowance on dividends from shares.

(Getty Images)

(Getty Images)

Ruth Curtice, the chief executive of the Resolution Foundation, said: “The government’s appetite for a reset is being driven by terrible election results. But the backdrop of weak growth, and the war in Iran delivering both a £550 blow to family finances and a £16 billion hit to the public finances means it is in everyone’s interest for the country to change economic gear.”

She added: “There is no plausible route to growth in Britain today that doesn’t include sounder public finances, and taking on those who oppose more trade with Europe or more homes in their backyards.”

Julian Jessop, a respected independent City economist, said: “This is mostly a good report, but the throwaway remarks on closer alignment with the EU are little more than arm-waving. The reality is that UK companies still have access to the EU’s single market on relatively favourable terms. The hit to overall trade has been far less than many had feared.”

Last week, Reform UK, whose leader Nigel Farage was one of the main drivers of Brexit, performed strongly in local elections across the country. That might suggest the public remains unconvinced about the merits of the EU.

But recent polling from Best for Britain says more than half of Britons now support rejoining the EU. More than 80 per cent of Labour, Liberal Democrat and Green party supporters favour that move.

A paper by Stanford University in February said: “The United Kingdom’s decision to withdraw from the European Union, is a rare contemporary example of a major developed economy raising trade barriers and more generally pulling back from international economic integration. “

It added: “Rather than a sudden, visible economic shock following the vote, the costs of Brexit have been gradual and cumulative.”

A report two weeks ago, also by the Resolution Foundation, found Britain has the third-highest rate of young people not in work or education among Europe’s richest countries because of rising ill-health and a failing system of benefits and job support. Only Italy and Lithuania had worse figures.