Today Rachel Reeves will outline her first Budget as Chancellor of the Exchequer. A Budget wrought in the shadow of the worst inheritance of any incoming government in modern British history, with an economy handcuffed by debt, suffocated by stagnant growth and blighted by Brexit barriers.
What is Reeves’ inheritance?
For some inheritance might mean getting a few bob, or a family heirloom. For Rachel Reeves it's a country whose economy is inert, whose politics are divided and whose relationship with our biggest trade partner is, at best, frosty. Labour have inherited a society that is fractured. Fractured by 14 years of chronic underfunding and austerity that has driven public services to their knees. At the same time, ordinary people are living with a tax burden that is the highest since the Second World War.
Reeves faces a monumental task to get Britain back to growth. The most recent OBR figures place national debt at 98.5% of GDP, or the highest level since the early 1960s. Economic growth over the last ten years averaged a measly 0.2% of real per capita GDP growth rate per year. This inheritance is not the norm.
Take the last three incoming chancellors from new governments: Geoffery Howe in 1979, Gordon Brown in 1997, and George Osborne in 2010. All inherited economies which were growing by at least 3% of real per capita GDP per year. All inherited considerable head room in relation to debt, rather than the £89 billion of the Budget that the OBR expects will be spent on interest repayments. Reeves also has the misfortune of inheriting the weakest pound to the dollar of any incoming government, and the worst balance of payments for any incoming Government since at least 1955.
In his pre-Budget speech, the Prime Minister pointed out that in 1997, Labour inherited good public finances, but poor public services. In 2010, the Conservatives inherited poor public finances (after the 2008 financial crash), but public services were strong once again. In 2024, Keir Starmer inherited the worst of both worlds. But behind the figures lies an unspoken truth. Our country's economic woes have been, and will continue to be, exacerbated by Brexit.
Find out how much Brexit is costing the UK
What is the cost of Brexit?
Conversations surrounding Conservative mismanagement have tended to focus on the devastating impact of austerity, that infamous mini-Budget, and a certain £22 billion black hole. But when you look at the Reeves' Budget, remind yourself of what still isn't being said: the damage that Brexit has done to Britain, and the loss of our status as the second-largest economy in the world's biggest trading bloc.
According to recent studies, Brexit:
- Shrunk the UK economy by £140 billion
- Reduced imports and exports by 15%
- Decreased productivity
- Is predicted to cost three million jobs by 2035
The cost of Brexit is a burden carried most by the vulnerable in society, with the poorest 10% of the population experiencing a 20% fall in living standards between 2019/20 and 2024/25. Brexit has added £250 to yearly household food bills, and has cost the average Brit almost £2,000. Money that could have proved invaluable for many during the cost of living crisis.
While George Osborne inherited a ship dented by the 2008 financial crisis, Reeves is inheriting a ship with the sail ripped from the mast, unable to use the winds of trade or investment to steer into calmer waters. Though a lot has rightly been made of the £40 billion that Reeves needs to raise in tax, or cut in public services, what has not been addressed is the tax revenue lost as a result of Brexit's contracting effect on the UK's economy. If we imagine that the tax burden remained at its current level of 37.7% of GDP, then that aforementioned £140 billion would have generated almost £53 billion in extra tax revenue, just under half of the current education budget.
Will the cost of Brexit decrease?
Without being addressed the costs of Brexit will continue to compound one another. Cambridge Econometrics predict that by 2035, Britain will have received 32% less investment, and the economy will be £311 billion smaller. If we calculate the loss of tax revenue by 2035, it equates to around £117 billion - more than the current education budget.
How can these problems be fixed? The new government has made a start, with warm words on resetting the UK's relationship with our biggest trading partner. Regular meetings between the UK and EU are underway, and we're already seeing some progress with the new Trinity House defence agreement with Germany.
But there is plenty more to do. The UK Trade and Business Commission, supported by Best for Britain, produced a roadmap to fix the Brexit deal, containing 114 distinct recommendations. Two steps which could help drive growth (and are popular with Brits) include a youth mobility scheme and regulatory alignment with the EU. A youth mobility scheme would provide indispensable support for our struggling hospitality sector, galvanise our world-class higher education institutions, and give the UK’s young people the same opportunities that their parents and grandparents enjoyed. Regulatory alignment would prove a cost effective method for inspiring growth and investment in the UK, by simplifying regulations and allowing British businesses to trade with Europe without reams of red tape.
The cost of Brexit will not improve by itself, and people from Aberdeen to Aberystwyth will continue to pay the price until that fact is accepted by those in power. Rachel Reeves' inheritance has left her with few levers to pull to achieve the growth our country so desperately needs. Improving the Brexit deal is a lever that should not be ignored. The EU has welcomed the opportunity for a closer relationship with the UK. It's an opportunity that Labour should grasp with both hands.