There is a hypothesis that I have set out before in these columns and now might be a good time to revisit it. The hypothesis is a simple one. Labour would fight the 2024 general election saying as little as possible about Brexit and its consequences but, having secured victory, the pressure would build for a more ambitious policy of moving closer to Europe. By the time we got to the next election in 2028 or 2029, I argued, Brexit would once again be a major issue.
I was reminded of this when the governor of the Bank of England, Andrew Bailey, used his Mansion House speech last week to point out rather tentatively that “the changing trade relationship with the EU has weighed on the level of potential supply” and that “we must be alert to and welcome opportunities to rebuild relations” with the EU while “while respecting the decision of the British people”.
At one level, Bailey’s comments are a statement of the bleeding obvious. Brexit involved erecting trade barriers with our most important trading partner and it should come as no surprise that trade in goods with the EU is now well below where we would have expected it to have been but for Brexit. Reducing those barriers would help increase trade and, with it, our economic growth.
At another level, however, it is a sign that it is now easier to talk about the economic costs of Brexit when, for some time, the topic appeared to be off-limits for public officials. Once the costs are acknowledged, we quickly move on to the question of what is going to be done about it. “Rebuild relations,” says Bailey. But what does that mean?
In her Mansion House speech, Rachel Reeves also addressed the issue, but more by specifying what it does not mean. “We will not be reversing Brexit or re-entering the single market or customs union but we must reset our relationship,” she told the audience. Presumably, what this means in practice is a veterinary agreement, in which the UK agrees to align with EU sanitary and phytosanitary rules. There is much to be said for doing this, but it is hard to believe that this will be the last word on rebuilding or resetting UK/EU relations. The economic impact is just too small.
The context for this is disappointing economic growth. The most recent Office for National Statistics numbers, published last week, show that the UK economy grew by just 0.1 per cent in the third quarter of this year, slower than the previous quarter (0.5 per cent) and below market expectations. This might just be a blip but for a government that came to office promising to prioritise growth – and which badly needs higher growth to ensure that its fiscal calculations add up – that should be a cause for concern. The Office for Budget Responsibility (OBR)’s forecasts for GDP and living standards growth over the parliament are far from reassuring for a government with a large majority but vulnerable to a relatively small swing against it. The OBR’s central scenario suggests that Labour will fight the next election with an underwhelming economic record.
It might also be the case that the OBR’s forecasts turn out to be optimistic. At the beginning of the last parliament, the OBR was in no position to predict the Covid pandemic or Russia’s invasion of Ukraine. A further unforeseeable economic shock could make matters worse. There are also the foreseeable economic shocks. Economists disagree about the scale of the damage that Donald Trump’s tariffs policy may inflict on the UK, but it is hard to see how this will be good news.
All of this must leave the government wondering whether there is more that can be done to accelerate economic growth. At the election, planning reform did much of the heavy lifting in explaining where growth would come from but in office there is little sign that the reforms will deliver a substantial boost to housebuilding, particularly in London where extra housing would make the biggest difference to GDP. Something more is needed.
The obvious move would be to reset our relations with Europe, going well beyond the government’s agenda. Ministers reject the suggestion because it would breach Labour’s manifesto commitments. Perhaps a Trump-precipitated trade war might give them a chance to reconsider, but the likelihood is that it is a line that will survive the parliament.
But after that? The argument that a party cannot do something because it promised not to is all very well but it does not justify repeating the promise. If Labour is looking for a distinctive economic message at the next election it may well embrace a new stance on Brexit. Give it another four years and demographic changes will make the electorate more receptive to the idea, while the Liberal Democrats have moved to support rejoining the customs union and the single market. They might offer an alternative choice for pro-European Labour voters, increasing the pressure on the party to shift its position.
This is, of course, still very speculative. But the governor of the Bank of England’s intervention is evidence that the economic damage caused by Brexit cannot be ignored. By the time we get to the next election, any political party that is serious about growth will have to address it.
[See also: How expensive are workers’ rights?]
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