Britain’s economic future will be decided at home

by Alan Wheatley | 07.11.2016

The intense focus on the post-Brexit trade relationship with the EU misses a crucial point: the UK’s economic prosperity depends on it raising its game in areas such as education, over which Brussels has no say.

UK living standards are 8-10% higher than they would have been if the country had not joined the EU in 1973, according to Prof Nicholas Crafts of Warwick University.

It’s therefore reasonable to assume, that all other things being equal, national income will gradually fall by a similar order of magnitude if the UK leaves the single market and customs union in a ‘hard Brexit’, sacrificing free trade in order to control immigration.

The Treasury’s central-case forecast is that GDP could be 6.2% lower in 2030 than if we remain in the EU. Even with a free trade agreement with the EU, the UK’s services exports could drop 60%, and exports of goods by 35%, the NIESR estimates.

All of which makes it important to lay the foundation for a more innovative, productive economy.

Hard Brexiters argue a bonfire of red tape is all that is needed to unleash Britain’s dynamism: scrap bankers’ bonuses, egregious farm subsidies and the working time directive, and watch the economy boom.

But if the dead hand of Brussels is holding us back, why is labour productivity – the ultimate key to living standards – more than 30% higher in France and Germany than in the UK? After all, we are subject to the same rules and regulations.

The answer is to be found at home. The UK falls short because governments of all stripes have failed to invest sufficiently down the years in areas critical for a high-performance economy. Here are five:

  • Education. In the OECD’s international Pisa rankings, the UK comes 23rd out of 40 for reading and 26th for mathematics. Sir Michael Wilshaw, chief inspector of British schools, marked their performance as a ‘mediocre’ 6.5 out of 10.
  • Skills. The UK has more people with low skills than the EU average, ranking 20th out of 32 OECD nations; and 36% of the adult population have only intermediate skills, placing the UK 25th.
  • Research and development. The UK spends less on R&D as a share of GDP than the EU or OECD average.
  • Infrastructure. Britain has spent less on infrastructure in the past three decades compared to other OECD countries. Look no further than how long it has taken to build Crossrail and the interminable disputes over the site of a new London airport runway.
  • Housing. The UK has been building little over half the 250,000 homes a year needed to prevent spiralling property prices and a shortage of affordable homes, factors that badly hobble labour mobility. Fierce planning restrictions, and a slump in new-home building by local councils, kept on a tight leash by Whitehall, are among the main causes.

The UK is storing up trouble in other important areas, too. Demand for health care from an ageing population is rising steadily, yet spending on health as a share of GDP has been falling and is now below the OECD average.

Addressing these shortcomings will not guarantee a smooth economic ride after we leave the EU. Prime Minister Theresa May also needs to keep the door open for skilled workers and researchers and retain as much access to the single market for the UK as possible. But Britain’s post-EU economic fortunes will be determined primarily on the home front.

A version of this article was first published by Chatham House

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    Edited by Yojana Sharma

    2 Responses to “Britain’s economic future will be decided at home”

    • AM travelling The Netherlands at the moment and find an increasing disinterest in the U.K. And a continued membership of the EU or their access to the market here. Same in Germany. How about they keep the U.K. talking and at the end of the two years pull the chain? By then the U.K. Has lost quite some economic clout and gets shorn of any rights such as passporting, whilst banks and high-end manufacturing decide the EU is the better place to be. Never mind high-end education. Can’t have been what “the people” voted for.