We are used to hearing apocalyptic descriptions of the impact of the Covid-19 pandemic on the British economy: “the biggest drop in economic output since 1709”, was the verdict of the Office for National Statistics eight months ago.
Yet the Office for Budget Responsibility, in its budget report on Wednesday, estimates that the long-term impact of Brexit will be more than twice that of Covid. He believes Brexit will reduce UK productivity, and therefore GDP per capita, by 4%, while Covid’s impact on GDP will only be 2%, with a slightly smaller impact on GDP per inhabitant.
This shouldn’t be surprising. The decline in production in 2020 was both inevitable and desirable – it was not, in economic terms, all that different from an extended holiday. Just like a holiday, we have chosen to shut down much of the economy. The difference was that it was out of necessity – to save lives – rather than choice, but the consequences aren’t that different. The economy has contracted, and by a lot.
Holidays do not reduce the productive capacity of the economy. If a factory closes for a month, the machines are still there when it reopens. Likewise, when workers come back, they always know how to do their job. The virus does not destroy factories, roads, buildings or software, and although its human toll has been appalling, the impact on the size or composition of the working-age population will be relatively small in macroeconomic terms.
The concern, therefore, was not the huge short-term drop in GDP. It was that temporary closures would cause permanent damage to the economy. The greatest risk was that, as in the 1980s, we would allow mass unemployment to take hold or viable businesses to fail.
But, thanks to the leave scheme and other business support measures, we seem to have avoided this risk in the UK and elsewhere. Indeed, US GDP – boosted by Joe Biden’s stimulus plan – has already exceeded its pre-crisis level. The UK is not that far behind, although it remains well below the pre-crisis trend.
Indeed, the most obvious short-term economic problem in most advanced economies is now supply bottlenecks and labor market mismatches as economies reopen, leading to rising wages and salaries. shortages of certain goods. But if this will reduce – as the OBR also says – both growth and, via inflation, real wages, it will be mostly temporary.
The OBR is not entirely optimistic – it still believes that Covid will permanently kick some people out of the workforce, through early retirement or potentially long Covid, and that there will be an impact sustainable on productivity. But things could have been much worse.
On the other hand, Brexit is, by nature, a long-term issue. Just as it took decades for the UK to see the full benefits of EU membership, we will still be discussing the economic impacts of Brexit long after I retire.
The direction of these impacts is not controversial. The principle that increasing barriers to trade and labor mobility between two major trading partners will reduce trade and migration, and that this will generally reduce economic well-being on both sides – but especially for the smaller partner – is not really involved. While there was no shortage of politicians who argued that somehow new trade barriers wouldn’t make a big difference, or that trade with our closest trading partner and most importantly could easily be replaced by trade with the rest of the world, no credible economic analysis endorsed such claims.
The 4% OBR estimate of the impact on the UK economy is also no different from that of independent economists – we in the UK in a changing Europe estimate it at a bit. less than 6%.
More importantly, these two estimates (and others) predate Brexit. So the news here is that the OBR has taken a close look at the evidence to date on the real impact of Brexit. His conclusion, briefly, is: “So far, everything is bad.” That is, the UK’s trade performance this year is consistent with its initial estimates that UK exports and imports would both fall by 15%.
Indeed, in some ways the data so far looks even worse than that – UK exports have already fallen by about as much from pre-pandemic levels, while advanced economies as a whole have seen their exchanges increase. And, again in common with outside analysts, the OBR sees no evidence that trade deals with third countries, or any of the other putative economic benefits of Brexit, will significantly offset this.
No model understands everything. OBR is no exception. This ignored the damage to education during the pandemic, especially for the poorest children. Here, the government’s failure to fund a serious catch-up program could leave permanent scars – both economic and social. And, on the other hand, a more liberal migration system towards non-European migrants could, in principle, offset some of the damage from Brexit.
But so far it looks like, from an economic standpoint, Covid is for Christmas, while Brexit is for life.