During the referendum campaign, the economic calculus was becoming clear: Brexit would threaten economic decline, job losses, and a cost-of-living increase in the UK. When Theresa May decided the UK would leave the EU after the advisory referendum, and stubbornly inscribed her immoveable red lines into the UK negotiating strategy, effectively prizing the UK out of the single market, many across the political spectrum could foresee what would become inevitable.
In the intervening years, we had a government that forced on the country a Brexit treaty that imposed high trade barriers on the UK economy, then a pandemic that ground many aspects of the world economy to a halt, followed by a war in Ukraine that has rapidly inflated commodity prices on top of an increasingly desperate humanitarian crisis.
Factors that affect economic performance
All of these events alone can be drivers of inflation, and inflation is the key factor affecting the cost of living; if the value of the pound in your pocket falls, your ability to pay your bills and feed your family is diminished accordingly.
If you believe those who pushed Brexit through, Britain’s economic performance including inflation is all the fault of exogenous factors. It’s all Covid, it’s all the war; nothing to do with Brexit.
Jacob Rees-Mogg, when interviewed by LBC on 22 July, stated that the cost-of-living crisis has “very little to do with Brexit”. He also stated on Newsnight that Brexit “is allowing us to do things that have eased the cost-of-living crisis”. Assuming that was the case (it isn’t), this defensive bluster strives to hide the truth that inflationary factors are not mutually exclusive.
Actual economist and former Bank of England policymaker Adam Posen disagrees with Rees-Mogg, stating 80% of the reason the UK has the highest inflation in the G7 is due to Brexit (CPI of 10.1% at time of writing – and increasing month on month). A study by UK in a Changing Europe found that prior to the war in Ukraine, Brexit had already led to a 6% increase in UK food prices.
Tariffs due to Brexit
The inevitable Brexit effects on trade are easier to illustrate, although still willingly obscured by the government. The Brexit treaty did not impose direct tariffs (taxes on imports), but it created tariffs on some goods which did not qualify for tariff-free access under rules of origin regulations (an EU product made from a certain proportion of non-EU inputs outside the treaty, for example).
These goods coming into the UK now cost more. More so, being outside the customs union means even goods not subject to tariffs have to be checked, and checks cost time and money. This is a non-tariff barrier cost, which will be passed on to the consumer, although for now goods are being waived through customs without inspection as the government are well aware of the impact this will have on supply chains.
Non-tariff barriers: red tape
Non-tariff barriers, colloquially known as ‘red tape’, are a greater problem than tariffs. The single market provided for a single framework of regulation, which meant goods did not need to be checked for quality or safety when crossing internal borders. This allowed for incredible efficiency in trade.
A business in Pendle could order a component from Pisa as easily as a widget from Peterborough, and it could be here in no time. Efficiency means cost savings, and cost savings means cheaper products for the consumer. Less efficiency means goods now cost more, as recently confirmed by parliament’s public accounts committee.
An interesting example of Brexit red tape is in the chemicals industry, which is of key importance in manufacturing, water treatment and food preservation. The UK now has to set up its own regulator which is estimated to cost £2bn simply to get to a point of registering all required chemicals for use in the UK, whereas British business only had to spend £500mn over the past decade to be compliant to sell from the UK market into 27 other countries. This is simply the cost of duplication, to stand still.
Who pays? Ultimately the consumer.
Supply shortages due to Brexit
But the damage runs deeper and at a more personal level. The attitudes that drove Brexit, drove many EU citizens to leave the UK, despite the option of taking up settled status. Leaving the single market removed freedom of movement rights, creating barriers for EU citizens seeking to work and settle in the UK. This (aside from the cultural deficit) means fewer people picking fruit (reducing the supply of products available) and fewer people driving HGVs (reducing the supply of goods carried).
This principle is spread across industries. Lower supply of goods means higher prices for consumers. Any subsequent demand for higher pay to poach workers simply leaves a gap in the next industry, higher pay is passed on to consumers, and inflation eats away at nominal pay to leave real pay falling.
The government would have you believe that Covid stands apart from Brexit, but it doesn’t. The mishandling of Covid reduced our labour supply through causing more deaths, short-term sickness, and long-term sickness (long Covid) than there had to be.
Just one example was Boris Johnson’s trip to India, pleading for a post-Brexit trade deal. While India was being ravaged by a new Covid strain, Johnson refused to add India to the travel red list so as not to offend the Indian Government, meanwhile adding objectively safer countries to the list. The result was that he allowed the Indian variant to spread through the UK, condemning tens of thousands of workers (and others) to death and sickness. Truck drivers were one example of those who suffered, with the resulting empty shelves and increased prices.
His mishandling of Covid contributed to the increased cost of labour through reducing and constraining the labour force, and so the prices of the goods and services produced had to rise.
‘People left because of Covid’ we are told by members of the government – and that’s partly true, but they were leaving before the pandemic and they haven’t returned, as they no longer have freedom of movement. The government has admitted as much in its repeated attempts to beg foreign workers to come back. It hasn’t worked, as in the run up to Christmas 2021, only 300 applications were received following the government’s drive to entice EU HGV drivers back to the UK to combat empty supermarket shelves.
Worse still, as a result of the issue, a proposed ‘Brexit Bonus’ by former transport secretary Grant Shapps would allow members of the public to drive HGVs of up to 7.5 tons without a further licence. Increased road danger – a trade-off to rein back the cost of living.
But the war in Ukraine…
The government would have you believe that the impacts of the war in Ukraine stand apart from Brexit. The breadbasket of Europe being under sustained attack will obviously impact world food prices. Sanctioning Russia, a huge provider of Europe’s energy supply will obviously impact world energy prices.
However, the UK imports food and fuel by using sterling to buy denominations of dollars and euros. Think about oil, which is priced in dollars on the international market. To purchase a barrel (or a million barrels) a UK buyer must exchange their sterling for dollars, before using their dollars to buy and import the oil.
As we know from our leisure travel, the amount of foreign currency sterling can buy varies constantly, so the amount of foreign currency you receive per, say £100, varies with the relative strength of the currencies. If sterling loses value, it buys fewer dollars. To buy the same amount of dollars, we must use more sterling – we are poorer.
As the value of the pound has dropped drastically since the announcement of the referendum, more sterling is needed to buy any imports we need. Importers pass this cost on to consumers.
The result – inequality
The world is suffering from mounting inflation because of a perfect storm of international issues. The UK is suffering more than any of its competitors due to ideologically narrow choices which have effectively self-sanctioned the UK economy.
These choices have consequences: reduction in domestic supply of labour, goods, and services; an increase in domestic prices as a result of the constrained supply; damaging the safety valve of migration. The government failed to anticipate the impact of Covid and the Ukraine war, but it did have the agency to mitigate those costs through ameliorating or delaying a headlong rush into Brexit when the pandemic was already upon us.
The perennial truth is the poor suffer the most. High inflation tends to affect basic necessities more than luxuries, and this bout is no exception. The poor must spend a greater proportion of their income on food and fuel than the wealthy and they have less disposable income or savings as a buffer. Double-digit inflation simply cannot be absorbed by people at the lower end of the wealth scale.
One tool used to combat inflation is monetary policy – the adjustment of interest rates, whereby inflation is targeted by increasing interest rates, encouraging saving and constraining spending. This pulls demand from the economy, reducing prices. This may well work in times of prosperity, where we face ‘demand-pull’ inflation as consumers have high levels of disposable income chasing products and services constrained by capacity of production – but we are not there.
We are in times of cost-push inflation, where prices are rising due to supply issues such as a constrained labour and energy market, and self-imposed non-tariff barriers on imported components. Consumers are not chasing up prices with disposable income they no longer have. Output is stagnating yet inflation is soaring, a phenomenon known as ‘stagflation’.
Interest rates are going up regardless, squeezing the middle with mortgages, as well as the poor. Squeeze the middle classes and discretionary spending dries up, further pulling demand and growth from the economy. Higher rates acting on already low demand without solving supply issues exacerbated by Brexit is not a solution to stagflation, which the UK is suffering to a greater extent than all other major competitors.
What will Truss do to address this?
It really didn’t need to be so bad, but will those in power now do anything about it? Liz Truss – the new prime minister – is proposing to bring in anti-union laws to take away the rights of working people trying to mitigate the damage by pressing for a pay-rise, an approach said by general secretary of the RMT, Mick Lynch, to be “the biggest attack on trade union and civil rights since labour unions were legalised in 1871”.
She is also proposing to spark a trade war with our most important trade partner – the EU – by triggering Article 16 of the Northern Ireland protocol, on a path to ripping up the protocol altogether. A legitimate response by the EU could be to introduce direct tariffs on UK exports, or dissolve the UK/EU trade deal completely. Higher costs to consumers just when we don’t need it.
The current indicators are not great.