UK is ‘on track’ for 4% hit to economy from Brexit, OBR says

Britain’s budget watchdog said a hit to the economy from leaving the European Union is unfolding as it expected, maintaining an outlook that Brexit supporters have criticized as overly pessimistic.

The Office for Budget Responsibility on Wednesday said its long-running prediction is “broadly on track” to show a 15% fall in trade and a 4% reduction in the UK economy’s potential productivity compared to if the UK had stayed in the EU.

The institution charged with assessing Treasury policy was attacked by some right-wing lobby groups and members of Parliament for being overly downbeat on the UK’s prospects outside of the trading bloc. Brexiteers accused official forecasters of exaggerating the possible impact of a UK departure in the run-up to the vote.

However, the OBR’s analysis chimes with that of the Bank of England by showing that a long-term squeeze on the country’s economic potential from Brexit is playing out as they feared.

The budget also left the UK with its highest tax burden since 1948, at 37.1% of gross domestic product by the OBR’s estimate.

“Brexit referendum debates about a low-tax ‘Singapore-on-Thames’ seem ever more surreal,” said Ross Walker at NatWest Markets.

The OBR highlighted that trade volumes in the UK have not recovered from the pandemic by as much as other Group of Seven economies. UK trade intensity — exports plus imports as a share of GDP — was 1.7% below pre-pandemic levels by the third quarter of 2023, compared to 1.7% above pre-Covid levels in the rest of the G7.

“A decline in trade intensity plausibly lowers productivity because trade, among other channels, fosters competition and allows countries to specialize in activities where they are relatively more efficient,” said the OBR in documents released alongside the budget.

The OBR also noted that growth in UK goods trade is well below other advanced economies and 10% down on 2019 levels at the end of last year, while its services trade growth has been the strongest in the Group of Seven nations. It said this was likely due to Brexit trade barriers being largely on goods, while the UK is less reliant on the EU for its services exports. 

“Our assumptions about the impact of Brexit appear to be broadly on track and recently published studies are also broadly consistent with these estimates,” the OBR said. “We expect the total impact of Brexit to be realized several years after full implementation of these barriers.”

However, it did caution that it is still difficult to disentangle the impacts of Brexit, the pandemic and geopolitical developments.