Reviews | As UK productivity plummets, Brexit promise remains unfulfilled

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Four and a half years ago, when I was in London covering Brexit, I was surprised at how many free market and free trade buffs were in favor of it. Yes, leaving the European Union meant sacrificing access to the world’s largest trading bloc, they said, but it also meant lifting Britain out of the grip of a heavy bureaucracy that was insulated from public accountability by layers of Byzantine governance. In theory, this would leave the country free to strike bigger and better trade deals and build world-class economic institutions.

This was, to be clear, not the only Brexit theory, or even the most common. Many people who voted Leave simply wanted to control the country’s borders, especially its immigration policy; they didn’t care (or thought they didn’t care) what it might cost in terms of economic growth. But “Singapore-on-Thames” was a theory on how Brexit might play out, and it was plausible, if not necessarily probable.

Four and a half years later, I’m afraid that seems even less likely.

In the meantime, Britain negotiated its exit deal with the EU, suffered through a pandemic and is now bearing the brunt of Europe’s energy crisis on top of soaring post-pandemic inflation. This has considerably complicated the urgent task facing the government: to improve British productivity to make it competitive with peer nations.

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Productivity has long been an issue for Britain. In 2015, when the Brexit referendum was just a glimmer in the eye of former Prime Minister David Cameron, Britain was already producing significantly less GDP per hour worked than Northern Europe or United States. Because trade tends to improve productivity, by allowing workers to specialize in the things they do best, Brexit pushed the trend in the wrong direction. Productivity fell by more than 1% following Brexit, a figure which the UK Office for Budget Responsibility estimates will eventually reach around 4%. In 2015, British hourly production was 15% lower than that of the United States; by 2021, the gap had widened to 20%.

In September, under new Prime Minister Liz Truss, the Conservative government presented a controversial ‘mini budget’ which offered the biggest tax cuts Britons had received since 1972, some £45billion in relief for individuals and businesses. Kwasi Kwarteng, the new Chancellor of the Exchequer, also promised reforms in childcare, immigration, agricultural productivity, business regulations, digital infrastructure and barriers to housing construction. Here, in theory, lay another opportunity for radical improvement, a sort of neo-Thatcherite program with tax cuts to attract capital and stimulate investment, and streamlined government services to remove the bottlenecks that hamper UK growth.

In practice, markets panicked at the size of the bill and the possibility of inflation rising even more than the 10.1% Britain was suffering. The government was thrown into chaos, and about a month later Truss resigned.

She had clearly misjudged her moment, and for that, many conservatives I spoke with are furious. By trying to go too far, too fast, at a time when inflation was high and the government was fiscally constrained by the fantastic sums it had spent on the pandemic, Truss gave good reforms a bad name. indispensable. The Tories speak grimly of needing years to recover before it is safe to come up with equally bold ideas – many of which are likely to go into political exile, as it now seems a safe bet that Labor will take over after the next election.

Many Tories are now looking to play the short game, finding ways to open up some regulatory cracks and other hurdles that are holding back UK growth. Chief among them is a housing crisis that makes the US situation rather manageable. At least the United States has many growing cities where finding an affordable home is relatively easy (if not as easy as it was before the pandemic).

In booming cities where Britain desperately needs housing – like London, Oxford and Cambridge – building is constrained by outdated planning rules that allow neighbors to easily block building and by greenbelts where development is tightly limited. At the same time, it is difficult to revive stagnant secondary cities without public transport to allow much more travel.

Solving these problems would allow British workers to access better jobs and employers to expand their activities, two important productivity boosters. But Britain also needs streamlined processes for building infrastructure, an education system that works for students at the bottom as well as those at the top, and greater investment.

In theory, tweaking these systems, even slightly, could go a long way toward closing Britain’s productivity gap. In practice… well, we’ll have to see.

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