Brexit has wiped out £29bn in business investment and exacerbated the slowdown in UK productivity, according to a Bank of England interest rate setter.
Jonathan Haskel, an external member of the Bank’s Monetary Policy Committee, said the lack of business investment growth since the 2016 referendum was equivalent to 1.3 per cent of UK gross domestic product, or about £1000 per household.
He added that penalty would probably rise to about 2.8 per cent of GDP at the end of the BoE’s forecast period in 2026.
Haskel’s comments follow a pledge last month by UK prime minister Rishi Sunak to “grow the economy”, in part by taking advantage of post-Brexit freedoms.
Business investment is crucial to productivity growth because it can boost the value of workers’ output, which in turn enables wages to rise.
But in an interview with economics website The Overshoot, Haskel said capital spending had “flattened out” after the referendum, instead of rising as it “did in more or less every other country”.
He added that part of the UK’s recent productivity slowdown “really goes back to Brexit”, with the country in last place among G7 members for investment growth since 2016.
The Office for National Statistics last week revised up the real value of business investment over the past year compared with earlier estimates, noting growth of 4.8 per cent between the third and the fourth quarter of 2022.
As a result, business investment is now back to pre-coronavirus pandemic levels and the level reached at the time of the Brexit referendum. But it remains well below the level it would have been at had investment continued to rise at the pre-referendum rate.
This is in contrast with other countries, such as the US, where business investment rose 24 per cent in the six years to Q4 2022, according to separate official data.
The estimate for the business investment gap adds to evidence of the so-called Brexit effect on the economy. Earlier this month, the BoE estimated goods trade to be roughly 10-15 per cent below what it would have been had the UK not left the EU, which corresponds to about a 3.2 per cent hit to GDP.
The central bank also noted that trade volumes had been weaker than implied by official data since January 2021, partly owing to methodological discontinuities that led to delayed customs declarations in 2021.
Haskel said the pandemic, Brexit and the war in Ukraine had led to a “very elevated level of uncertainty” that called for a more careful approach to controlling inflation.
“I discount the medium-term forecast more than I would otherwise because there’s so much uncertainty,” he said.
Inflation, which stands at 10.5 per cent, is forecast to fall sharply this year as energy price growth slows. Nevertheless, Haskel warned that it was necessary to be “really, really careful” about “the worst outcomes for inflation”.
He said one such outcome was “a very embedded inflationary momentum, which would then carry on with putting inflation above target”.
Haskel voted to raise interest rates by half a percentage point to 4 per cent at the last MPC meeting on February 2. Despite two members voting against a change, the committee’s decision brought rates to their highest level since 2008.
The Treasury said: “We don’t recognise these figures. The government is making the most of our Brexit freedoms to grow the economy, including ambitious financial services sector reforms which will unlock over £100 billion of investment, and we are reviewing EU-derived rules in other critical growth sectors this year.”