According to a Bank of England interest rates setter, Brexit has decimated PS29bn of business investment and exacerbated UK productivity slowdown.
Jonathan Haskel is an external member to the Bank’s Monetary Policy Committee. He said that the absence of investment growth in business since 2016 was equivalent to 1.3 percent of UK gross domestic products, or approximately PS1,000 per household.
He said that the penalty would likely rise to around 2.8% of GDP by the end of 2026’s BoE forecast period.
These comments are in response to Rishi Sunak’s pledge last month that the UK prime minister would “grow” the economy, partly by taking advantage post-Brexit liberties.
Because it increases the output of workers, business investment is critical to productivity growth. This in turn allows wages to rise.
In an interview with The Overshoot economics website, Haskel stated that capital spending has “flattened out” since the referendum instead of increasing as it did in “more or less every other nation”.He said that the UK’s recent productivity decline “really goes back at Brexit”. The country is currently in the last place of G7 member countries for investment growth, since 2016.
Last week, the Office for National Statistics revised the real value of business investments over the past year in comparison to earlier estimates. It noted a growth of 4.8 percent between the third quarter and fourth quarters of 2022.
Business investment has returned to levels pre-coronavirus and at the time of Brexit. It is still well below what it would have been if investment had increased at the pre-referendum pace.
This contrasts with other countries like the US where business investment rose 24% in the six-year period ending in 2022, according separate data.
The estimates for the gap in business investment add to the evidence of the so-called Brexit impact on the economy. The BoE had earlier this month estimated that goods trade would be around 10-15% lower if the UK left the EU. This corresponds to a 3.2% hit to GDP.
The central bank noted that trade volumes were lower than expected by official data since January 2021. This was partly due to methodological discontinuities, which led to delayed declarations of customs in 2021.
Haskel stated that the pandemic, EU and war in Ukraine had created a “very high level of uncertainty” which required a more cautious approach to controlling inflation.
He said, “I don’t believe in the medium-term forecast because there is so much uncertainty.”
As energy prices slow down, inflation, currently at 10.5 percent, will likely fall sharply in the coming year. Haskel cautioned that it was important to be careful about the “worst outcomes” for inflation.
He stated that one outcome of such outcomes was “a very embedded inflationary momentum”, which would then continue to put inflation above target.
At the February 2nd MPC meeting, Haskel voted for a half-point increase in interest rates to 4%. The committee’s decision raised rates to their highest levels since 2008, despite two members voting against it.
The Treasury stated that they didn’t recognize these numbers. The government is fully using the Brexit freedoms it has to grow the economy. This includes ambitious reforms in the financial services sector that will unlock more than PS100bn in investment. We are also reviewing EU-derived rules in critical growth sectors this calendar.