The cost of Frost

UK Policy Brexit

The cost of Frost

Commentary
Posted on: 12th March 2021
Ian Mulheirn
Executive Director for UK Policy and Chief Economist

The pugilistic Lord Frost, self-styled minister for the benefits of Brexit, rode into battle with the EU once again. In the latest brickbat across the channel, the government’s Brexit supremo told the EU to “stop sulking”. Meanwhile, on the home front, after a tax bombshell budget, NHS staff have been told the government can only afford to give them a 1% pay rise this year. It’s time we joined the dots about the cost of Brexit belligerence. 

In one of his first decisions in the new job, last Wednesday Frost unilaterally extended the grace periods on checks between Great Britain and Northern Ireland for food, parcels and more, set to expire at the end of this month. While the European Commission decides whether to take the UK to court for infringing international law (again), Frost laid out his thinking in a weekend comment piece. There is, he argues, no trade-off between the purist vision of sovereignty he seeks and the prosperity of the British people. Indeed greater sovereignty is essential to driving prosperity, since it will allow us to “set our own rules for our own benefit.”

Unfortunately for him, the Treasury disagrees. Last week the Chancellor accepted the OBR’s forecasts of a 4% reduction in national income once the full effects of Brexit are felt. Far from sovereignty driving prosperity, the government’s forecaster seems unpersuaded that the much-vaunted regulatory freedoms of Brexit will do anything to offset this macroeconomic damage. Quietly, a Vote Leave prime minister and chancellor have accepted that so-called project fear was right all along. 

The consequences for household incomes are bad, but so is the impact on the public finances. The OBR forecasts that tax receipts will hit £1,038 billion by 2025-6. But without the economic drag anchor of Brexit, revenues would have been around £42 billion higher.

Add in the £1 billion annual revenue loss from lower immigration due to tighter rules, and the risk that some of the million Europeans who left the UK in 2020 may no longer want to return to an increasingly belligerent Britain, and the true fiscal cost of Brexit each year could be higher still. These annual costs of course ignore the remaining £25 billion exit bill the UK still has to pay the EU, adding further pressure to the public finances.

Set against these costs there are some direct savings for the UK from being out of the EU. No longer paying money into the EU budget and new revenues from the UK Global Tariff will amount to around £15 billion per year by the middle of the decade – but these sums are swamped by the macroeconomic consequences of the Trade and Cooperation Agreement. Overall, the net cost of Johnson’s Brexit to the public finances will come in at almost £30 billion each year.

The stark reality of the Brexit bill, though, was eclipsed by the biggest tax-raising budget in a generation. The chancellor announced a further £29 billion of extra taxes by 2025, almost as much as Norman Lamont’s 1993 tax bombshell budget, to fill the projected fiscal hole caused by the pandemic. As a result, the tax take will rise to its highest as a proportion of GDP since the 1960s. 

Remarkably, on the government’s own forecasts, none of these taxes would have been necessary if we had remained in the EU. Last Wednesday’s tax hike was really only needed to settle the Brexit bill.

But Brexit isn’t quite settled yet, and the fiscal consequences could get a lot worse. As the commission outlines plans to take the UK to court for its violation of the Northern Ireland Protocol, there is a risk that the relationship will deteriorate further. Ultimately we could even see retaliatory tariffs imposed on UK exports to the EU. 

None of this is costless for the UK taxpayer. The OBR’s own assessment suggests that trading with the EU on WTO terms could trigger a further 2% long term hit to national income, requiring a further £20 billion of tax rises or spending cuts. That’s equivalent to almost 4p on the basic rate of income tax.

Even this estimate – the product of bloodless modelling exercises – may underestimate the long-term economic consequences. An unstable and acrimonious relationship between the UK and EU will deter inward investment and see skilled migrants leave the country in increased numbers, further shrinking tax revenues.

The government’s uncooperative approach to relations with the EU seems to be becoming a feature of government policy rather than a bug. But the consequences of this ongoing row for our living standards and public services are real. The deeper the rift, the higher the taxes we will all pay. 

As Lord Frost prepares his next salvo, we should remember that it’s our money he’s spending.

 

This article was originally published in Huff Post UK on 11 March 2021

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