UCL Institute for Global Prosperity


The Brexiteers’ ‘bitter medicine’ will widen our prosperity gulf

8 February 2017

This article is an expanded version of an entry to the Financial Times Future of Britain project, which was shortlisted as one of the 25 best pieces out of more than 800 submissions.


Written for the Financial Times Future of Britain Project

If the Brexit vote tells us anything, it is surely this: that despite being ‘the fifth largest economy’ in raw GDP terms, many people do not feel prosperous.

Britain has preferred to paper over the cracks of widening inequality and social unease in recent decades by hiding behind ostensibly high output-per-capita statistics inflated by City salaries. Last June, the simmering volcano of resentment exploded in the most spectacular fashion.

Theresa May’s landmark speech last month brought an end to months of speculation over what Brexit actually means. Britain will leave the European single market, because staying would be akin to “not leaving the EU at all". She also claimed this would mean pushing for the “freest possible trade".

These details have delighted hard Brexiteers, who claim that only by leaving the single market and customs union can Britain slash the dreaded ‘Brussels red tape’ and strike trade agreements with everywhere from Australia to Zambia, transforming us into some sort of giant Singapore.

The Chancellor Philip Hammond gave hints as to what this would mean in practice. Faced with the prospect of limited or no access to the European single market, Hammond did not dismiss the prospect of the UK becoming “the tax haven of Europe”, instead warning in a German newspaper interview that, if tariff-free trade could not be negotiated, the UK could abandon European socio-economic norms and morph into “something different”.

This opens up the prospect of the UK making laws as accommodating as possible for multinationals and the assets of the global elite. It means a more deregulated economy, with workers’ rights and protections such as the Working Time Directive and paid parental leave scrapped or curtailed, combined with free trade deals and subsidy removal leaving key sectors at the mercy of competition from lower-wage economies globally. With London’s financial sector already being wooed by continental suitors, drastic cuts to corporation tax have also been mooted to keep highly mobile sectors domiciled here.

Many hard Brexiteers will regard this package as the bitter medicine the UK economy must swallow in order to thrive.

Inevitably, however, it is those who have lost out from globalisation who will be the losers in this scenario – the low-skilled, low-wage workers who were also statistically far more likely to vote leave.

For a start, we will have to kiss goodbye to European structural fund investment - worth £1.8bn per year and funnelled into the post-industrial cities in the North of England and the Welsh valleys. But that is dwarfed by the loss of European Investment Bank (EIB) money for infrastructure projects, which has totalled £5.6billion in the past year alone.

And a cut to business taxes will inevitably hurt the public finances and, by implication, services such as the NHS and education.

Money alone, however, doesn’t explain the UK’s vast disparities in prosperity. A startling recent report from the Legatum Institute found just 34 of the UK’s 138 urban areas are delivering notably more prosperity than their wealth would suggest.

Quality of life measures – factors such as health, education level and a sense of opportunity within reach – provide a fuller picture of whether a local area is delivering a “prosperity surplus”.

And while our urban areas are the drivers of our economy, nine out of 10 UK cities (57 out of 63) perform below the European city average on productivity, dragged down by poor skills and a high proportion of poorly-paid services jobs. So post-Brexit, Britain stands at a crossroads: we can either go further down the road of a low-skill, low-wage, more insecure ‘gig’ economy. Or we can invest in the drivers of social mobility and sustainable growth based around high-value sectors. The government’s recently announced industrial strategy green paper makes some positive noises around this, but the detail is woolly. There’s a danger it becomes a propping-up exercise for politically important sectors like finance and automotive, rather than a thought-through solution that invests in people to drive economic adaptability.

International comparisons show that the most prosperous countries are those that put their money where their mouth is when it comes to these foundations of wellbeing. Norway – regularly at the top of international league tables – spends 7.4% of GDP on education, compared to our 4.3%.

And Germany, often held up as a paragon of industrial success, has taken a markedly different path to the Anglo-Saxon economies to develop its competitive, export-led economy and deliver an enviable budget surplus for its government to spend on high-quality public services for its citizens. Its approach is the conscious product of decades of public-private collaborations on applied R&D to support innovation and a dual model of vocational education to sustain a highly trained workforce.

To truly thrive outside the EU, Britain must avoid a slash and burn approach that will further entrench the divisions that led us here and send us into a spiral of economic hardscrabble. But as Theresa May’s government cosies up to the unpredictable and volatile Trump administration in the hope of securing a free trade ‘deal’ set to primarily benefit the US, the signs suggest that our inability to learn or read the runes correctly could cost us dearly.