Former Bank of England policy maker Michael Saunders said Britain’s exit from the European Union is one of the reasons why the UK is now entering a period of austerity.
“The UK economy as a whole has been permanently damaged by Brexit,” Saunders said in an interview with Bloomberg TV on Monday. “If we hadn’t had Brexit, we probably wouldn’t be talking about an austerity budget this week. The need for tax rises, spending cuts wouldn’t be there.”
He said that the UK’s decision to leave the EU and the customs union reduced the country’s potential economic output and eroded business investment. His comments echoed the sentiment last week by the head of the British Chambers of Commerce, Shevaun Haviland, who said that British firms haven’t seen any upsides from Brexit so far.
The remarks add to growing criticism of the central accomplishment of the Conservative government, which after a referendum in 2016 decided to implement a strict break from the EU. It also feeds into debate about how Prime Minister Rishi Sunak’s should handle the economy, which the BOE says is already in recession.
Saunders, who sat on the Monetary Policy Committee until August and is now senior economist at Oxford Economics, said that Chancellor of the Exchequer Jeremy Hunt should focus on improving trade links with the EU. He also pointed toward improving education and training as ways to boost productivity, as well as fixing the rise in long-term sickness, which has driven large swaths of people out of the workforce since the pandemic.
Saunders also said that the chancellor’s fiscal statement on Thursday should include measures that avoid damaging the economy further. So far, Hunt has suggested he’ll cut spending and raise taxes to plug the Treasury’s widening deficit -- delivering a squeeze on the economy at a time the economy is shrinking.
The former BOE official suggested policies included introducing a tiered system of interest rates on banks reserves, reducing tax relief for top rate taxpayers on pension contributions, closing some of the tax loopholes open to non-domiciled residents, and reducing the tax-free allowance on dividend income.
“These kinds of measures would probably have a less adverse immediate effect on the economy than raising the headline tax rates or cutting the main departmental public spending,” said Saunders.