Brexit Back in the Frame as UK Faces £18bn Productivity Blow

As the UK government prepares for the forthcoming Autumn Budget, the economic legacy of Brexit is resurfacing in fiscal policy discussions – reviving what many had hoped was a closed chapter.

Officials briefed on the forthcoming Office for Budget Responsibility (OBR) forecast say the independent body will attribute a pending downgrade in UK productivity to a combination of Brexit and the COVID-19 pandemic. The OBR is expected to lower its trend productivity assumption by about 0.2 percentage points, which translates into an estimated £18 billion annual hit to the public finances.

That figure forms part of what Chancellor Rachel Reeves has said may be as much as a £30 billion fiscal shortfall, to be addressed via tax rises, spending cuts or both.

A Strategic Shift in Blame

The political significance is clear: the “B-word” is no longer off limits. Government sources indicate the OBR will “say clearly that Brexit had a bigger effect on the British economy than they expected, along with Covid.”

That marks a departure from previous reluctance to dwell on Brexit’s impact. One senior official observed in an interview with The Financial Times: “The OBR productivity downgrade is a backward-looking process … and the Tories were in power for the last 14 years. But that is a hard argument to land.”

Whilst the current Labour administration insists it is not mounting a large-scale “Blame Brexit” campaign, the framing around the Budget suggests they see value in acknowledging structural constraints tied to the UK’s EU exit.

Public Sentiment and the Political Risk

Polling indicates only 31 per cent of the public believe the UK was right to leave the EU, while 56 per cent say the move was wrong. Only 23 per cent believe Brexit has been good for the economy, while 65 per cent say the opposite.

Nevertheless, revisiting Brexit as a cause carries risks. Labour strategists accept that many voters wish to “move on”, and hard-Brexit Leave voters may resent being told they were wrong.

The Economic Backdrop

The OBR already estimates that the version of the EU-UK trade deal that came into force in January 2021 will reduce long-run productivity by around 4 per cent compared with remaining in the EU.

The consequence: the Chancellor enters the Budget period with significantly reduced fiscal headroom, despite record tax revenues and tight public spending so far.

Outlook for the Budget

With an expected shortfall of around £30 billion, key questions include where tax rises or cuts will land. The government has emphasised that it does not intend to reload the burden on working-class taxpayers, but choices will be difficult.

Labour’s ability to shift the narrative hinges on two things: first, successfully broadening the debate beyond blame-game rhetoric; second, articulating credible growth policies to offset the structural drag from Brexit and the pandemic.

In short, Britain’s next Budget is likely to be framed as “making good on the past” rather than just charting a new path forward.