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Politicians need to start “the hard grind” of tackling the problems Brexit has created for UK businesses, Professor Novy tells the London Assembly

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Politicians need to start “the hard grind” of tackling the problems Brexit has created for UK businesses, Professor Novy tells the London Assembly

CAGE Impact Director Professor Dennis Novy has given evidence to members of the London Assembly on the impact of Brexit on the London economy, at the invitation of the Assembly’s Economy CommitteeLink opens in a new window.

He presented data on the economic costs of Brexit and the problems created for businesses of all sizes by customs checks and regulatory divergence. Responding to members’ questions he reminded the committee that the UK had given up a position of significant influence in shaping EU trade policy, going back to Margaret Thatcher’s premiership and Peter Mandelson’s contribution as EU Trade Commissioner, and also pointed out the “uncomfortable” fact that the UK is not one of the countries which accepts the highest number of immigrants, a fact sometimes overlooked in public debate.

Professor Novy was one of five invited experts giving evidence and taking questions from the members of the Economy Committee in City Hall on 11 January 2024. The meeting was also webcast live.

The Economy Committee scrutinises the work of the Mayor relating to economic development, wealth creation, social development, culture, sport and tourism in the capital. It also examines the Mayor’s role as chair of the London Economic Action Partnership (LEAP).

The Committee held the hearing in order to better understand the impact that leaving the EU has had on London’s economy to date, including asking whether sufficient time has elapsed to understand this impact and whether it is possible to separate the impact of Brexit from other challenges such as the pandemic and Russia’s full-scale invasion of Ukraine.

Addressing these topics, Professor Novy told the committee: “Brexit has been a very expensive policy adventure for the UK economy. The impact on UK GDP is something in the range of 3 - 4 per cent. Where does that impact come from? The biggest issue is increased costs for consumers - higher prices and inflation.

“Higher prices have come about because imported products have become more expensive thanks to currency depreciation and also to customs checks. The UK imports a great deal of its food and clothing and UK households have seen a permanent increase of around £900 to £1000 per year on their bills as a consequence.

“Since Brexit we have had further increases in inflation especially for food items. These increases are unique to the UK and are mainly a result of customs checks and red tape.

“We have seen decrease in investment from foreign companies, who do not see the UK as attractive as it was prior to Brexit. And we have seen UK companies set up subsidiaries in the EU, such as easyJet, which has set up a subsidiary in Austria in order to continue flying within the EU. And we should mention uncertainly - businesses do not like uncertainty and that has had an impact on investment.

“We have also seen some evidence of lower wage growth. Businesses of all sizes have seen higher input costs and that reduces the spending available for wages and training, while smaller companies are really feeling the burden of customs checks. Some of these small companies would have grown to be big but that pipeline has now been disrupted. Some small companies have stopped trading with the EU entirely.

“Can we identify the effects of Brexit separately to other challenges such as COVID? My answer would be yes, because COVID19 is not something that uniquely happened to the UK. It happened to other European economies as well and we can tease out the differences. The overall headline is clear - Brexit has been very expensive for the UK economy and that also extends to the London economy.”

A key question which Prof Novy said is still being investigated is the impact of Brexit on global supply chains. He explained that manufacturing has moved a long way from parts or raw materials being imported and made into a finished product: “We now have intermediate inputs which cross borders multiple times and what we don’t know yet is whether the damage in UK trading relationships with EU countries has had a knock-on effect on trade relationships with the rest of the world. Is the UK still seen as a reliable and trustworthy partner? This is a big open question, and we need better data to understand it.”

Highlighting the main challenge in considering the impact of Brexit generally and on the London economy specifically, Prof Novy explained to the committee that it is very difficult to access fine-detailed UK data, which means it is not straightforward to separate the impact on UK and London businesses. He said it is “incredibly hard” for researchers to get access to UK data, and “that really needs to change.”

Characterising the current impact of Brexit on businesses as a “bleeding wound - not a gushing wound but a small wound,” Professor Novy called on politicians to focus on two things - the issue of regulatory divergence, and trade in services. He said: “Politics has been dominated by the Trade and Cooperation Agreement which will be reviewed in 2026. That is a bit of a red herring as it will be a voluntary review with not necessarily a hard meaning. The real risk to the UK economy is what is happening every day, and that is regulatory divergence. For all sorts of industries - food, toys, chemicals - the gap is growing and this divergence is a huge problem for British business. In some cases British companies have to fulfil duplicate regulations, and this really has to stop.”

In his closing remarks Professor Novy encouraged policy-makers to focus on “the art of the possible” and to work in a cross-party way to develop a strategy that reflects the strengths of the UK and the London economy, particularly a cohesive strategy for trade in services. He recommended “more predictability, less uncertainty,” urged politicians to “stop doing foolish things” and called for action to “tackle regulatory divergence” saying: “I wish politicians strength and courage to do this in a way that takes voters with them.”

Dennis Novy at London Assembly Committee

Reflecting on the experience, he said: “It is the right thing for the London Assembly to look into the economic effects of Brexit and to ask about the research evidence. This is a policy issue of paramount importance for London businesses and London employees, and the Brexit experience can teach us about a possible future strategy for the UK economy, for example how the UK can design helpful regulation and how we can promote the export of services to foreign markets.”

  • Watch the webcast hereLink opens in a new window
  • Three research papers by Professor Novy were relevant for his evidence, and he reported results from these papers:
    1. Brexit and UK inflation (published in International Economic Review)
    2. Brexit and UK foreign direct investment (published in European Economic Review)
    3. The export of services driven by large cities such as London and Paris (CEPR Discussion Paper)