Coronavirus frees UK’s Rishi Sunak from a Brexit budget

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LONDON — Brexit might have triggered a recession in normal times but the pandemic means we’ll never know. 

The British chancellor, Rishi Sunak, laid out his second budget on Wednesday as the U.K.’s fiscal hole yawns far beyond predictions for Brexit carnage, with the ratio of debt to GDP forecast to peak at 109 percent by 2022-23 — far higher than the 84.6 percent it stood at in April last year

Put simply, COVID-19 is a big enough economic hole to hide Brexit in, according to economists. It’s also hard to determine which scars will last longest in the economy: those of lockdown or those of the change in trade with the EU. At least for now, the impact of Brexit appears to be a series of smaller cuts, compared to the pandemic’s swift and sudden blow. 

“We’re running into the problem of the counterfactual: what would have happened anyway? How much of that disruption to trade was COVID, what was Brexit, and how much is short-term or temporary?” said Julian Jessop, an independent economist. 

The U.K.’s Office for Budget Responsibility — which provides independent assessments of the country’s economic finances — estimates that productivity growth, the measure that determines how much output labor generates, will be 4 percent lower in the long run compared to staying in the EU. It’s largely down to less trade in services, and technological advances mean this is hard to measure.

Trade in goods, which is more readily quantified, shows a 0.5 percent hit to GDP growth in the first quarter of 2021 due to the changes in trade in goods between the EU and U.K., the OBR found. 

“If U.K. trade in general recovers less quickly than the trade of our near European counterparts it’s hard to believe that won’t be due to Brexit, rather than COVID,” said Jonathan Portes, professor of economics at King’s College London. Realistically, data can’t offer a guide to how Brexit has impacted trade until the end of the year, he said.

In normal times, 0.5 percent would have been a decent rate of quarterly growth for the U.K. This would have wiped it out and caused the economy to shrink. If it worsened in the subsequent quarter, it might have amounted to a recession in its own right. “It would be the difference between the economy growing or not,” Portes said.

But, of course, these are not normal times. Government support for sectors hard-hit by Brexit has amounted to tens of millions of pounds, and Whitehall’s preparations for Brexit will end up costing several billion. All that is thrown into the shade by the government’s number of the day for its total response to the pandemic: £407 billion. 

This gave Sunak a degree of freedom to ignore Brexit, but also other traditional political pressures: no one, not even proponents of austerity to keep public finances in check, told him to turn the taps off or hike taxes right away. Such is the economic nightmare Britain and the rest of the world finds itself in, the chancellor is largely free, in the words of former European Central Bank chief and now Italian Prime Minister Mario Draghi, to keep doing “whatever it takes.”

Still, the freedom of crisis will not last forever. Business groups are worried that the announcement to raise corporation tax to 25 percent from the present rate of 19 percent could damage the U.K.’s international competitiveness. That strikes to the heart of political arguments around Brexit.

“This is a really good job done for the short run. It smooths the transition from the crisis to recovery. But, the 10-year challenge for Britain is how we’re going to compete in the world in the aftermath of Brexit and the aftermath of the crisis,” Tony Danker, director general of the Confederation of British Industry, one of the U.K.’s largest business lobby groups, told POLITICO.

That means working out “how we’re going to use new trading relationships, net zero leadership and technological opportunities to grow in the medium to long term. That is going to need competitive tax, competitive investment strategies and a high degree of alignment between business and government on the road ahead,” he said. 

Tax breaks such as the so-called super deduction, a mechanism which allows companies to be taxed on profits after accounting for investments, should help frontload the country’s economic recovery. This has been specifically designed to encourage companies to invest right away, after Brexit uncertainty had a depressing effect on business investment in recent years. 

Beyond the budget itself, the biggest question facing Britain’s economic outlook is the impact of its relatively successful vaccine rollout. That could help drive an economic recovery with a three-month reopening advantage compared to competitors, economists said. 

“Towards the end of last year, lots of people were saying, ‘we’re going to become the pariah of Europe and we’re going to look really bad [in the pandemic response]’ and there’s no doubt that’s happened in some areas,” said Jessop. But that narrative has shifted with the rapid rollout of the vaccines. 

“Now some countries are looking enviously at the U.K., it’s improved the standing of the U.K. compared to some European countries and to the EU itself,” he added. Brexit uncertainty is over and “we seem to be doing some things pretty well.”

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