Calls to move closer to the EU or even to rejoin the EU are becoming stronger from the Labour Party. The claim is that Brexit has damaged the UK economy. These claims are supported by much economic research but most of this is flawed. Because most academics oppose Brexit few economists have bothered to contest the existing research.
Although most MPs, and especially Labour MPs, opposed Brexit, few have been willing to repeat the chaotic experience of Parliament’s attempts to block Brexit in 2018-19. Strong stomachs would be needed to go through that again. The wheel has however been turning and in recent weeks a new point was reached with Rachel Reeve’s Mais speech claim that Brexit did “deep damage”, and said that she was “firing the starting gun for closer integration”. Sadiq Khan’s bold call for Labour to back rejoining the EU upped the ante further. These may be getting ahead of what Keir Starmer will support but if he goes, the flood-gates may open.
The increased confidence in arguing to rejoin is built on years of economic analysis arguing that leaving the EU has damaged the UK economy. Many attempts were made to state this case, starting even before the Referendum, and have continued ever since. These have a had a cumulative negative effect on confidence in Brexit and on voter support for Brexit. Almost all of the analyses are flawed but such is the ideological attachment of most economists to EU membership that there has been little pushback to the tsunami of anti-Brexit reports.
The rot started before the referendum with two Treasury reports in 2016 on the predicted impact of Brexit. The report on the projected short-term impact was an embarrassing fiasco with its hair-raising predictions soon proved wildly wrong. Less well remembered is that the international great and good of Nobel-prize winners and professors in economics predicted much the same on a website ‘Economists for Remain’. Not surprisingly, this was soon taken down. The Treasury’s longer-term predictions are widely regarded as more sensible, but only because few commentators understood the flawed ‘gravity model’ methodology. This report estimated the average gain from EU membership across all members and assumed part or all of these gains would be lost. If the specific gain to the UK alone had been used instead of the EU average, the predicted losses would have been only a quarter as large. In a meeting with Chancellor Sajid Javid and Treasury Secretary Rishi Sunak in 2018, colleagues and myself asked for a Commons inquiry into the Treasury’s role. This request was not accepted but they did promise not to allow the Treasury to undertake any further analyses and this promise was kept by successive Tory administrations through to 2024.
More recently, public and media attention has been focused on the OBR’s prediction that Brexit would reduce UK GDP by 4%. Few commentators seemed to know that the OBR undertook no analysis and instead took a simple average of a dozen forecasts all completed before the UK actually left the EU. The estimates of these studies diverged greatly and all of the most pessimistic studies used a flawed assumption (about the relationship between trade and productivity) which resulted in a doubling of the predicted negative impact. The other studies avoided this assumption. Both cannot have been correct, but the OBR naively took an average anyway.
Since the UK finally left the EU at the end of 2021 most studies have been so-called ‘doppelganger’ analyses. These construct a composite value of the past economic performance for a bundle of countries. The bundle is compared with the UK over a few years leading up to the 2016 referendum and also the period after 2016. Any deviation between the pre-and post-2016 periods is assumed to be due to Brexit with minimal analysis of other factors or context. Since the bundles almost always include the USA, which has undergone a major growth spurt under Trump and Biden, the hidden implication is that the comparison is mainly of the UK with the fast-growing USA. Other countries in the bundles like Greece, Hungary, Iceland or Latvia are inappropriate. There is little real basis for ascribing any post-2016 deviations to Brexit rather than to the growing economic strength of the USA.
The publication of dozens of negative studies has had a drip-drip effect on belief in Brexit but an importance threshold was tripped at the end of last year with the publication of a study by the American National Bureau of Economic Research (NBER) authored by a group headed by a Stanford professor. The American connection impressed many UK commentators including the Economist’s Britain editor and Times columnist, Emma Duncan, who described its “excellent pedigree”. In fact, it was published by a group of British economists in the non-peer-reviewed NBER Working paper series. It is a comprehensive and impressive-looking piece of work but is naïve and misleading in important respects and its conclusions are exaggerated.
The article wrongly claims that “Since the vote for Brexit in 2016 Q2, UK GDP has grown by less than other comparable countries”. In fact, OECD data shows that since 2016 real GDP has grown by 12.5% which is faster than France or Italy and substantially faster than Germany or Japan. Only the USA and its near neighbour Canada among G7 countries have expanded faster. The role of the USA in the NBER international comparisons is crucial. Unlike the European G7 countries and Japan the USA economy has grown since 2016 at rate more than twice as fast as the rest of the G7. Fiscal expansions under both Trump and Biden, plus the impact of cheap energy and most recently an investment boom in AI, have all allowed the USA to pull away from other major economies. Hence, any international comparison of the UK with a group of other economies including the USA, such as the G7, will show the UK lagging after 2016. It is wrong to ascribe this to Brexit. Germany, for instance, lags much further behind a G7 average since 2016 than does the UK but no one ascribes this to Brexit.
This is precisely what the NBER study does. It constructs an average of economic growth for a bundle of 33 countries including the USA, firstly for 2012-16 and then for 2016-2024. The UK’s growth record is similar to that of the average of the composite bundle in the short 2012-16 period but lags behind in the post 2016 period. Ignoring any other factors, the authors ascribe this slowdown to Brexit and estimate that by 2025 the UK economy would be 8% larger in the absence of Brexit. To put this into context, the UK economy would in this estimate have grown almost as fast as the USA since without the key advantages experienced by the US. The UK would also have grown faster than Canada and three times faster than the average of the other G7 countries. The article also estimates that employment would have been 3-4% higher despite the working-age employment rate in 2025 being at historically high levels. Employment in the UK has already grown faster than any other G7 country except for Canada (which has experienced a huge expansion of people and jobs since Covid). Employment in the UK even grew faster than in the USA since 2016, so to imagine it would have grown even faster by another 4% in the absence of Brexit hardly seems likely.
The NBER article asserts these things because the flawed techniques it uses generate these numbers. The 33 countries in the NBER composite index, or bundle, include all of the small eastern European members of the EU and many of these are fast growing due to their historically low wage levels. It also includes Greece where the economy was in freefall after the Euro crisis of 2012. The UK naturally performed much better than Greece after 2012. The UK also did better than Greece after 2016 but the advantage was less once Greece’s decline stabilized. The UK’s growth advantage over Greece thus declined after 2016 for reasons unconnected with Brexit but the NBER article’s technique automatically includes it as a positive Brexit effect.
The article also calculates Brexit losses for investment, employment and productivity. In each case the UK performance has been middling in a G7 context since 2016 but the NBER article suggests that growth could have much greater in the absence of Brexit. In the case of investment, the suggestion is that growth would have been up to 18% faster. This repeats a common fallacy. Business investment in the UK grew rapidly up to 2016 in a recovery from the huge fall during the banking crisis in 2009. In a schoolboy error, economists treat this cyclical recovery as though it were a long-term trend. They contrast the slower growth after 2016 with an extrapolation of the cyclical upswing and wrongly blame the slower post-2016 growth on Brexit. Also, the article does not use the conventional measure of productivity (GDP per hour worked) and thus misses the fact that UK productivity improved after 2016, the only G7 country other than the USA where this happened.
The NBER article has attracted noticed because alongside the conventional analysis described above it also used estimates from a large panel of UK firms where questions on expectations and exposure to the EU could be asked alongside measures of growth in output employment investment and labour productivity. A panel of 7000 firms were used to examine changes over the years from 2012 to 2024. Firms which were more exposed to the EU through sales, employees or ownership were found to have more substantial slowdowns in growth of investment and employment after the Brexit referendum compared to non-exposed firms. However, this was not the case for sales or labour productivity. Despite this, the authors undertake a complex calculation to estimate that GDP would have grown an implausible 6% faster without Brexit.
Like earlier studies, the NBER article is, to say the least, controversial but is being treated as the gospel truth in support of an EU reset which is unlikely to achieve much. This is damaging because it distracts attention away from the UK’s huge problem of historically low growth in productivity since the banking crash of 2008. It is high time that the Parties which support Brexit promote the equivalent of a Commons Select Committee investigation into the economics profession’s estimates of the impact of Brexit. On current trajectories we will waste several more years chasing the moonshine of restoring lost links with the EU. Much more important would be intensive efforts to understand and correct the so-called productivity puzzle of slow growth since 2008.
Dr Graham Gudgin CBE is Co-editor of the BriefingsforBrexit website and is research associate at the Centre for Business Research, Judge Business School, University of Cambridge.
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