Sometimes I blunder that the UK is still a part of the European Union (EU). Whether when discussing a unified policy stance on sanctions targeting Russia or a common polity on sustainable energy strategies for a resilient future of Europe. Brexit may be a figment of the recent past, but its tremors are certainly not bygone. And the European cohesion, which should’ve been envied at a time when Russia is wreaking havoc on its energy security, seems ephemeral as Britain’s vexed relationship with the EU refuses to recede. However, amid the boiling economic crisis in Britain and the rest of Europe, public sentiments betray an inherent admission: Britain’s exit from the Union might have been a mistake. But the connotation of this public rhetoric is just as awry as the Brexit chatter leading up to the 2016 referendum.
The opinion of Britons has been notoriously fickle throughout history. But the outcome of the Brexit referendum was razor-thin at inception. Now, a stagnant economy; a revolving-door political leadership; and decades-high inflation are turning the tide against the championed narrative of the Conservatives. According to a recent opinion poll by YouGov – a leading market research and data analytics firm headquartered in Britain – 56% of the Britons surveyed concurred that leaving the EU had been a mistake. Only 32% believed that Brexit was a good idea. However, while many Brexit critics would jump onto this opportunity to bash the Tories, this perception is misguided, a product of frustration of an irate populace looking to blame something for their woes. And Brexit has been a notable feature of the ruling government.
Britain installed its fourth prime minister since 2016 last month. But the damage was already done a few months back. Britons were already reeling from soaring energy prices and acute food shortages. The economic slowdown was heralding an unfamiliar era of high-interest rates and unemployment. Then entered Liz Truss, the former prime minister who eschewed economic orthodoxy with her trickle-down tax-cut plans. Her disastrous stint in office – that barely lasted 50 days – tipped the pound into a free fall, sparked a liquidity crisis for pension funds, and sent government borrowing costs spiraling to harrowing levels. While the incumbent Prime Minister Rishi Sunak has managed to calm the turbulent economy, the wreckage is still visible in the mortgage market.
Earlier this year, mortgage rates in Britain typically remained below 2.5%. Since October, however, the average two-year fixed rate mortgage is hovering around 6.25% – slightly down from the peak of 6.65% on Oct. 20. The lowest two and three-year fixed rates are still above the 5% mark, according to Moneyfacts Group, a financial information company. Unlike the United States, British mortgages run for shorter terms. For instance, about 2 million mortgages in Britain would reach the end of their fixed terms by the end of next year, pushing many Britons to refinance at rates more than double their initial settlements. An estimated 1.6 million borrowers in Britain have variable mortgages, which track the central bank’s policy rate. Thus, as inflation keeps running ablaze, no respite seems on the cards.
The annual rate of inflation in Britain has reached a multi-decade high of 11.1%. And at its last policy meeting, the Bank of England (BoE) – the central bank of Great Britain – hiked its interest rates by 75 basis points, taking the policy rate to 3% – the highest level since the financial crisis of 2008. Andrew Bailey – governor of the Bank of England – doubled down on his commitment to raising interest rates higher to deter double-digit inflation fuelled by pandemic-induced supply chain logjams and the mercurial energy prices triggered by the Russian retaliation against Western sanctions. While the logistics backlogs seem to be improving, the Russian dilemma shows no sign of resolution. And as the Western coalition prepares to implement a price cap on Russian energy supplies, economic difficulties would only worsen for the British citizenry.
According to the Office for Budget Responsibility (OBR), a fiscal watchdog group in Britain, inflation-adjusted disposable income is projected to slump by circa 7% over the next two years under the government’s new budget plan. Introduced as the “autumn statement,” the 55 billion pound ($65.4 billion) budget virtually reversed every plan by Ms. Truss. Mr. Jeremy Hunt – the new chancellor of the Exchequer – has frozen the annual taxable income threshold until April 2028 rather than having those bands adjust to the inflation rate. Consequently, the top tax rate of 45% would now be applicable on earnings starting from £125,140 instead of the current level of £150,000. The government has also raised the windfall tax rate on energy firms from 25% to 35% until March 2028. Hence, economists believe that aggressive rate hikes coupled with such steep tax increments could trigger a brutal recession – perhaps the most debilitating since the 1930s.
So blaming Brexit for the economic turmoil battering Britain is not an accurate depiction of the public sentiment regarding Brexit. And it is chiefly because the throes of the British economy are tricky to quantify under a defining rubric.
True, the UK is struggling with labor shortages. But this issue is not entirely driven by Britain’s inability to replace workers from Europe, who left after Brexit. A substantial portion of workers are Britons, who left during the pandemic and never returned to the labor force. Many started their own businesses; some settled into the groove of remote work.
Admittedly, Britain’s sluggish growth further worsened when investments diverted to other epicenters of commerce in Europe after Brexit. Britain is the only member of the Group of Seven (G-7) advanced economies with an economy smaller than its pre-pandemic level. Recently, India replaced Britain as the world’s fifth-largest economy; Paris supplanted London as Europe’s highest-valued stock market, according to data published by Bloomberg. But Britain’s productivity has been in decline since 2009; public funding has been in the dumps ever since austerity policies were implemented in the aftermath of the 2007 financial collapse. High-interest rates are visibly hurting the domestic outlook of the British economy. But it is mainly because people were so conditioned to the ultra-low interest rates over the past decade that their perspective is dovishly askew.
Nonetheless, the British government has the incentive to structure a trade mechanism with the EU. While the hardliner Conservative MPs who voted Sunak into the office would definitely resent (and veto) an intimate relationship – like that enjoyed by Switzerland and Norway – with the single market, a settlement of disputes revolving around the hybrid trade status of Northern Ireland is imperative to Britain’s economic revival. Yet, if the Labour Party manages to topple the Tories in the next general elections, a closer alignment with Brussels should be in the vanguard. Because while Britain’s economic debacle might not be entirely Brexit’s unraveling, the UK cannot resurface without improving relations with Europe in an openly hostile neighborhood with a bleak future.