Britain is still counting the cost of Brexit, 10 years after the vote

LONDON – Just before Britain’s fateful referendum on its membership to the European Union 10 years ago, the government of the day gave a stark warning. A vote to leave the bloc would lead to “an immediate and profound shock” to the economy. By a slim margin, the public voted to leave anyway.

The economic warnings were wrong, but only in their timing.

Brexit has damaged the British economy and the costs have steadily accumulated over the past decade, greatly outweighing any benefits, economists say. More visibly, Brexit has unleashed a torrent of political instability: The country will soon get its seventh prime minister since the vote on June 23, 2016, after Keir Starmer announced his resignation on June 22.

The turmoil has led to a sense of regret: In a recent poll, nearly half of Britons said that Brexit was going worse than expected, up sharply from five years ago. Another survey found that just over half would support rejoining the EU.

It is hard to be precise about the cost of Brexit, given the other hits to the British economy since the referendum, including the Covid-19 pandemic, US President Donald Trump’s tariffs and the wars in Ukraine and Iran. Here’s what to know about the economic impact, according to several recent reports.

The economy is smaller than it would have been

In 2016, Britain’s government assumed that a vote to leave would mean an immediate rupture of the country’s trade ties with the 27 other members of the EU. Instead, there were years of negotiations. Britain did not officially leave the bloc until the end of January 2020, and even then, there was an 11-month transition period. That obscured the economic effects because trading rules did not fundamentally change until 2021, 4½ years after the vote.

The pandemic, an energy crisis and other events have made it difficult for economists to untangle Brexit’s effect on the economy. But many have tried. One widely referenced study, led by Nicholas Bloom, a Stanford professor, estimated that Brexit has reduced Britain’s gross domestic product by up to 8 per cent, “with the impact accumulating gradually over time”.

While other economists quibble with that study’s methodology, broadly they agree that Britain’s economy is 4 per cent to 6 per cent smaller than it would have been if it had stayed in the EU, a substantial loss of output. That means lower tax revenues to fund government spending and a slower improvement in people’s living standards.

The Office for Budget Responsibility, Britain’s independent fiscal watchdog, believes that Brexit will reduce the country’s long-run productivity, which has lagged behind other major economies’ since the global financial crisis, by 4 per cent.

New trade deals have not made up for Brexit losses

Most of the economic cost has come from adding trade friction with the market of 450 million people on Britain’s doorstep.

A 2021 trade agreement kept tariffs mostly at zero, but it raised other barriers to trade by introducing extra paperwork, border checks and new regulations. Brexit reduced Britain’s exports of goods and services to the EU by about 12 per cent and imports from the bloc by about 16 per cent, according to the Centre for European Reform (CER), a research group.

British agriculture and food exports have been hit particularly hard, falling by nearly 30 per cent, the CER found. For some, like shellfish farmers, the additional border checks made exporting goods non-viable. Many small businesses, in particular, have curtailed their efforts to court European customers because of the added time and expense.

Britain’s trade in services has performed better. But most economists attribute this to the pandemic, when a demand spiked for services, especially those delivered online. Britain’s well-established service providers, including consultancies and legal firms, stood to benefit.

Brexit has freed Britain to sign its own trade deals, replacing agreements set by the EU. But while Britain has since signed 39 trade deals covering 72 countries, that has not made up for lost trade with the EU.

Despite the extra costs and hurdles introduced by Brexit, Europe is still Britain’s largest trading partner by far, accounting for more than 40 per cent of its trade, only marginally lower than before the referendum. In its regular forecasts for the British economy, the Office for Budget Responsibility simply assumes that new deals with non-EU countries “will not have a material impact”.

Britain’s businesses still feel the pain

One of the first and largest economic effects of the Brexit vote was a freeze in business investment as companies retrenched during the uncertainty of protracted trade negotiations and political instability.

Eventually, business investment grew again, but less vigorously than it might otherwise have, economists say. The National Institute of Economic and Social Research, an independent think-tank, said recently that Brexit-induced uncertainty has reduced long-run business investment by around 4 per cent.

Has anyone benefited?

“The professions and sectors that benefit are the consultants, lawyers and probably Customs agents,” said Anton Spisak, a senior research fellow at the CER. But overall, Brexit has had a “very negative effect” on the economy, he added.

One of the biggest effects has been on migration. Rather than lowering immigration, as many of Brexit’s supporters suggested, there has been a large influx of people from non-EU countries. They face different visa requirements and bring different skills, reshaping the labour market.

Many industries, such as hospitality, food processing, and health and social care, have been struggling with extra costs and disruptions after losing their traditional worker base.

“We’re only really in the early stages of knowing how that really profound shift in Britain immigration patterns post-Brexit will play out,” said Sarah Hall, an economic geographer at the University of Cambridge and deputy director of UK In A Changing Europe, a think-tank.

London has retained its spot as Europe’s financial centre

In 2016, the financial services sector loudly opposed Brexit, which threatened London’s role as a gateway to Europe. A decade later, London has maintained its position as Europe’s biggest financial hub.

No other European city has become the financial industry’s destination of choice, Hall said. But London has still lost substantial parts of its business, such as some stock trading to Amsterdam and asset management to Dublin.

It’s been “like a slow puncture”, Hall added. Instead of a sudden transition, there have been “a whole series of relocations and now, increasingly, new job openings that aren’t taking place in London”.

What about the next 10 years?

As the British economy struggles under stubborn inflation, a heavy debt burden and higher borrowing costs, the idea of reversing some of Brexit’s effects has grown more alluring. The front runner to become the next prime minister, Andy Burnham, has called Brexit “damaging”.

In 2025, Starmer’s government held a summit with European leaders to “reset” their relationship. But more than a year later, progress has been halting. Another summit, scheduled for July, was postponed by the Europeans after Starmer’s resignation.

While aiming for a closer relationship, the Labour Party has ruled out a return to Europe’s single market and Customs union, or allowing freedom of movement across its borders. Analysts also say there is limited interest in Brussels to renegotiate deeply with Britain.

“Quite a lot that can change in the next decade,” said Spisak of the CER. But he does not expect major changes in the next two or three years, before the next general election is due.

And so the costs will continue to add up, and the biggest one has been the hardest to quantify, Spisak said.

“The more important cost of Brexit is the opportunity cost,” he said. “That is, all the things that have not happened because of Brexit.” NYTIMES

• This article originally appeared in The New York Times.