Brexit costs government £40 billion a year in lost tax revenue

The impact of Brexit is being felt, ITV News' business and economics editor Joel Hills reports.

2022 was supposed to be a year of recovery. Instead, we find ourselves in December, staring into the eyes of another recession. The war in Ukraine has brought us here, that’s unambiguously clear. The Russian invasion unleashed a surge in the price of energy which has trampled on the spending power of households and the profits of businesses. But in the background, the impact of Brexit is also being felt.

The evidence increasingly shows that our decision to leave the European Union has lifted the price of imported goods, flattened business investment and damaged trade. The government’s own forecaster, the Office for Budget Responsibility (OBR), considers Brexit to be an economic “shock” but separating Brexit’s impact from that of Covid and the war in Ukraine is tricky.

A graph captures the Brexit shortfall.

Since 2018, John Springford at the Centre for European Reform (CER) has been modelling the economic performance of a UK that remained in the EU - using data from countries like the US, Germany, New Zealand, Norway and Australia, whose performance was similar to the UK’s before Brexit. The difference in performance between his “doppelgänger UK economy” and the real thing is stark. Mr Springford’s latest update estimates that Brexit reduced Britain’s GDP by 5.5% by the second quarter of 2022. Put another way, between April and June economic output was £33 billion lower than it would have been had the UK voted to stay in the EU, costing the government around £12 billion in lost tax revenues. In the year to the end of June 2022, Mr Springford estimates the tax loss at around £40 billion.

'I think we can be pretty clear that the hit from Brexit is significant,' Mr Springford says

“There can be no doubt that the UK economy is significantly smaller as a result of Brexit,” Mr Springford says.

“In March 2022, when he was chancellor, Rishi Sunak tacitly accepted the OBR’s projection that the economy would be around 4% smaller, and as a result raised tax by £46 billion to ensure public services would be funded.

"According to my analysis, almost all of those tax rises wouldn’t have been needed if Britain had remained in the EU.” Mr Springford’s doppelgänger model suggests Brexit has had other negative impacts, lowering both business investment and goods trade. Although, trade in services is largely the same.

A chart captures the flattening of business investment since Brexit.

“I’m reasonably confident in the [GDP] number,” Springford insists.

“There are always errors around estimates so we shouldn’t say it’s absolute gospel but we are comparing the UK to lots of other countries who have similar economies to the UK and they are not seeing the slowdown we have seen in the UK”. The UK voted to leave the EU in 2016 and officially left on 31st January 2020. Boris Johnson’s Conservative government decided to take the UK out of both the EU single market and the EU’s Customs Union and negotiated a fairly standard trade agreement with basic access for goods. The government prioritised greater sovereignty, including the right to diverge from EU regulations and to set its own rules. Springford’s analysis suggests this political freedom was won at great economic cost.

Mr Springford urges the government to be transparent about the 'negative' impact of Brexit

“All reputable forecasters and analysts pretty much agree that Brexit has had a negative impact on the British economy,” Mr Springford says. “It was a consequence of the decision that the government took that they wanted to take back as much control as possible and they were going to sacrifice some economic activity as a result of that and it’s best for the government to be open and straightforward about that decision”. Last week the government set out a series of post-Brexit changes, designed to make the City more competitive against its global rivals. The “Edinburgh” reforms were presented as having been made possible by the (genuine) regulatory freedom leaving the EU secured.

Analysts also say trade in goods has dropped sharply.

Responding to Mr Springford’s conclusions, an HM Treasury spokesperson said: “We do not recognise this analysis. The UK had the fastest growth in the G7 last year and the IMF has forecast the same in 2022. “We are taking full advantage of the opportunities of Brexit, for example through reforming EU-derived rules for insurers to unlock £100billion into infrastructure over the next decade, and by setting a skills-based migration policy which suits the UK’s needs. “The government is determined to drive growth by tackling inflation, investing in infrastructure and innovation, and getting our people back to work.”