Brexit Blamed for £20 Billion Productivity Decline in the UK

The impact of Brexit on the UK economy has come into sharper focus, with experts attributing a £20 billion productivity shortfall to the country’s departure from the European Union. Rob Rooney, a former top executive at Morgan Stanley, emphasized that cities like Frankfurt, Madrid, Milan, and Paris are thriving at London’s expense. His observations are echoed by numerous financial institutions that have relocated operations and assets to various EU cities since the referendum in 2016.

In total, more than 440 City firms have moved nearly £1 trillion in assets, representing about 10% of the UK’s banking system. This migration has been driven by the need to maintain access to EU markets, which has become increasingly important post-Brexit. Rooney notes that many of his colleagues have relocated to vibrant financial hubs across Europe, contributing to their economic growth while London’s financial sector has struggled.

As the UK government prepares for its budget announcement in November, the economic implications of Brexit are at the forefront of political discussions. Rachel Reeves, the Shadow Chancellor, has attributed the ongoing weakness in the UK’s economic growth to the 2016 decision to leave the EU. She highlighted that recent forecasts from the Office for Budget Responsibility (OBR) indicate a significant downgrade in productivity expectations, partly due to Brexit.

The OBR reportedly projects a potential £40 billion shortfall against the government’s fiscal targets, attributing this to disappointing productivity growth. The organization has long maintained overly optimistic forecasts, but recent data show productivity growth in the UK has stagnated, growing just 1.5% since 2019. This is concerning, especially given that productivity is a key driver of economic growth and living standards.

The long-term impact of Brexit on productivity is expected to be significant, with an estimate suggesting a potential reduction of about 4% compared to a scenario where the UK remained in the EU. Since the end of the transition period in December 2020, UK exports have lagged behind the G7 average, with notable declines in sectors such as automotive, chemicals, and pharmaceuticals.

While services exports have somewhat outperformed, the finance sector has seen a notable decline in its market share. According to government analysis, Britain’s share of the global finance market has dropped to 15% from 21% in 2010. John Springford, an associate fellow at the Centre for European Reform, pointed out that the UK, given its size and reputation in finance, should have performed better than its peers.

The City of London, once a powerhouse for productivity growth, has seen its growth rates plummet. Although London remains productive, its relative performance has weakened compared to other EU financial hubs. This trend has raised concerns about the future of London as a financial center. William Wright, managing director of the New Financial think tank, noted that while the City appears prosperous, it could have been even stronger without the adverse effects of Brexit.

The fragmentation of the financial services sector due to Brexit has led to inefficiencies. Major banks, including Barclays and Bank of America, have moved substantial assets and operations to EU cities, which complicates their operations and increases compliance costs. Such shifts not only affect the banks but also have broader implications for the UK’s tax revenue and economic performance.

Reeves has indicated that addressing the UK’s productivity challenges could lead to increased tax revenues and improved wages for workers. She has proposed reforming planning regulations and reducing business red tape as part of her strategy. However, linking productivity issues directly to Brexit poses challenges for Labour, especially as the party has resisted calls to rejoin the EU single market or customs union.

As the government navigates these complex issues, Reeves remains optimistic about the potential for policies to enhance productivity. She believes that building closer ties with the EU could stimulate growth, despite the political ramifications this may entail. The Chancellor’s commitment to reviving the City involves reducing regulatory burdens and enhancing competitiveness.

However, there are concerns about the sustainability of the City’s productivity growth, with many economists warning that previous success was built on risky financial practices. Additionally, there are fears that the concentration of financial services in London may exacerbate regional inequalities in the UK.

Rob Rooney, who now leads a financial technology firm called Hyperlayer, emphasizes the need for the UK to harness its innovative potential. Recently, Hyperlayer raised £30 million in funding, reflecting a positive trend for fintech in the country. Nevertheless, the challenge remains to retain these startups in the UK rather than allowing them to migrate to larger, more established markets like the United States.

In conclusion, the interplay between Brexit and the UK’s productivity crisis underscores the urgent need for effective economic strategies. As the government prepares to address these issues, the focus will remain on how to reverse the current trends and secure a prosperous future for the UK economy.