Dr Emmanuel Igwe is lead economist at the Prosperity Institute.
Just six months after the UK-EU summit that produced the ‘Common Understanding’ that launched Britain’s EU ‘Reset’ agenda, Brussels is pressing Britain to pay into its budget for the first time since leaving the bloc. Today marks the official start to negotiations for the Prime Minister’s much-hyped ‘Brexit Reset’.
Headline proposals from the EU would include access to the Security Access For Europe (SAFE) defence loan scheme which is expected to increase Britain’s contribution to the scheme by 35 percent following an EU Reset—up to €6.5bn. This does not include an “admission fee” of more than €150m.
Such demands demonstrate why Britain was right to leave the EU, and blaming Brexit for the country’s economic malaise is a convenient distraction from the Chancellor’s policy failures. This has been the Chancellor’s strategy lately. Teetering over a ‘fiscal black hole’ of her own making – reckless spending commitments, impotence over necessary spending cuts, bloated public sector pay rises, and the largest peacetime tax burden since 1993 – she has blamed Britain’s economic woes on austerity, Liz Truss’ ill-famed mini-Budget, and Brexit. This forms the perfect trifecta of convenient scapegoats, but the latter deserves deeper examination.
In a recent attempt to distance herself for the country current economic quagmire, the Chancellor made a ‘pre-budget’ speech where she expounded on this narrative of external constraints limiting growth. In it, she attributed poor productivity gains to years of underinvestment in infrastructure. This followed an address she made at an IMF meeting last month where she claimed that “The UK’s productivity challenge has been compounded by the way in which the UK left the European Union”. She buttressed this point by citing the Office for Budget Responsibility’s contested calculation that Brexit would reduce Britain’s long-term GDP by 4 percent.
This figure, often cited by Remainers, deserves more scrutiny than it currently receives. First, the figure rests on the assumption that trade intensity is strongly correlated with productivity – an argument the OBR itself warned against in 2018. Businesses do not forget what they know and become less productive simply because trade relationships change. As the OBR noted, the relationship between trade intensity and productivity depends on innovation, competitive advantage and investment, not simply on the impact of border restrictions on trade. Moreover, Britain’s declining productivity today is reflective of record lows in business confidence following the last budget release, highest inflation rate in the G7, and a GDP per capita that is less than half the average of advanced economies.
Second, consider the counterfactual. Remaining in the EU would have kept Britain as the second-largest contributor to an often-errant EU budget. Following the 2024 audit, the European Council of Auditors issued an “adverse opinion on EU budget expenditure”. This error was conjectured to affect €115.7bn (68.9 percent) of high-risk spending; raising crucial questions about whether budgets are allocated according to rules. Such errors are not new: 2023 audits also reported an error level of 5.6 percent.
Had Britain remained in the EU, it would have been required to contribute £88bn to EU coffers – an amount that dwarfs the purported 2024 ‘fiscal hole’ of £22bn by a factor of 4. In addition to EU debt servicing measures, liabilities from COVID-19, and future EU obligations, the total expected contribution from the UK between 2021 and 2024 has been estimated to be £220bn. This would have increased our budget allocation by 6.4 percent over that period.
Noticeably absent from Reeves’ address were Brexit’s economic benefits. Since officially leaving the EU in 2021, Britain has signed 73 bilateral Free Trade Agreements (FTAs), encompassing trade worth £800bn. Accession to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) means that Britain now trades with a bloc valued at £12 trillion, potentially adding £2bn to Britain’s GDP every year. Britain has also regained control over its regulatory policy in areas such as finance, biotechnology, artificial intelligence, and digital services – areas that will define British and global prosperity in this century.
As argued in my recent co-authored paper A Road to Nowhere: Why the UK-EU Reset is Not the Answer, realignment with the EU is not economic pragmatism; it is the thin end of a familiar wedge. Each concession sets a precedent, leading to Britain being bound by EU rules without any representation or voting power – and Britain will be compelled to pay for the ‘privilege’. We would be sacrificing a strong hand just to satisfy the illusion of being dealt in.
Alongside the effects on national sovereignty is the reality of the EU economy today. With a GDP per capita roughly half that of the United States, the EU’s economy is best described as sclerotic. In the last quarter, Britain’s GDP expanded by over 3 times (0.3 percent) the pace of the Eurozone’s (0.1 percent). Germany is facing deindustrialisation as energy prices push manufacturers away to the US and Asia, while France’s debt palaver makes Britain’s look mild. Why would Britain latch itself to this sinking ship?
The answer has more to do with ideology than economic reality. There remains a cadre of politicians still wounded by Brexit. Their worldview is steeped in the notion that international organisations such as the EU are the pinnacle of sound governance, transcending the flaws that plague domestic politics. We remember Keir Starmer’s comment that he prefers Davos to Westminster because “Westminster is too constrained”. In essence, they cannot accept that British people could dare to choose independence and economic dynamism over bureaucratic conformity and financial decline.
In reality, Rachel Reeves wants us to forget that our economic mess is one largely of her own making.
Britain’s public finances are in disarray because of her exorbitant spending. Instead of a prudent approach to spending cuts, the Chancellor instead finds new ways to raise taxes to fill a fiscal hole she has dug herself. She is now widely expected to freeze tax thresholds until 2028/29. These taxes are not raised for productive means; it is all to prop up unfunded public sector pay deals and a welfare system which Labour backbenchers refuse to reform. Reeves’ failure to rein in PIP and child benefit alone will cost taxpayers £8.5bn, as Kemi Badenoch pointed out today. Reeves’ stop-start approach to taxation and welfare policy has stifled private investment and eroded business confidence. It is little wonder that the OBR has downgraded Britain’s productivity expectations for reasons that precede Britain’s exit from the EU by decades.
Blaming Brexit does nothing to fix these problems; it only provides a veneer of intellectual rigour that covers the imposition of EU constraints that will further stifle productivity. Our economic challenges are not caused by our trade relations with the EU. They are a result of self-imposed taxes and unproductive government borrowing and spending choices.
