The Brexit Dividend: Fact or Myth?
It is time we started asking the real questions about Brexit. Or rather, in an ideal world, we should have been asking these questions long in advance of the 2016 referendum, or at the very latest before Article 50 was triggered. But there are now less than nine months until, as things stand, the United Kingdom withdraws from the European Union.
The fact of the matter is that we have yet to reach anything approaching a national consensus as to the precise mechanics of our withdrawal. It follows from this that there is still great uncertainty surrounding the actual outcomes of leaving; in fact, almost every new prediction paints a substantially different picture to the last. Will Britain lose influence on the world stage? Will we still be able to count on the economic and military alliances of the post-second world war international community? Will we be better or worse off financially?
This brings me onto the so-called ‘Brexit Dividend’, which is best defined as a theoretical cash boost to the UK following Brexit. Broadly, the thinking goes that, once no longer obliged to pay large sums of money to the EU in exchange for membership, Britain will be able to invest that same money in other, likely more domestic, causes.
Unsurprisingly, there has been raucous debate over this claim. Is the Brexit Dividend real? Will our nation in fact, far from the ‘doom-mongering’ of ‘Project Fear’, actually be richer following Brexit? As someone who voted Remain in the referendum, primarily on economic grounds, my next point may come as a surprise to some readers: the Brexit Dividend is absolutely real. But not in the way the Brexiteers think it is.
The good news is that, right now, there is at least £55-60 billion held in reserves by British businesses, with the opportunity to provide the UK economy with the cash injection it so badly needs. The cumulative level of cash reserves held across the bank accounts of all British companies is at a record high, taken as a measure of GDP. If one could see a graph of this data, there would indeed be a surge in this figure following the referendum.
The bad news, because there always seems to be bad news, is that in almost all other respects the UK economic outlook is poor. In 2015, we were the fastest growing economy in the G7. We are now the slowest, by some margin. Various powerhouses of the retail sector - Marks & Spencer, House of Fraser and John Lewis among others - are being forced into huge store-closure programmes at the cost of thousands of British jobs. While the unemployment rate remains close to a record low, the total number of hours worked per member of the UK workforce is almost as low as at any point in the past decade. Couple this with the much-discussed issue of wage stagnation, and the economy does not look as healthy as the Treasury would like us to believe.
Not for one moment am I simply arguing that the economy would be far stronger were it not for the Brexit vote. That is a complex matter requiring a detailed analysis, beyond the intentions of this post. However, on close inspection of the recent trends, a pattern does emerge.
It is far from a coincidence that, since the referendum, companies have simply banked their profits instead of reinvesting into the economy. On average, business investment into the economy is only about one fifth of the level we would expect at this stage in the economic cycle, post-recovery. In my view, it is clear that this reluctance to invest is a direct consequence of the uncertainty surrounding what kind of economic relationship the UK will have with the EU following Brexit. Put yourself for a moment in the mind of a business executive. Why take the risk to open up a new branch, make a big acquisition, or hire some new staff while so much remains unclear? Instead, up and down the country, these executives have simply allowed their company bank accounts to grow.
In summary, Brexit has indeed made us poorer. Brexit has caused the UK economy to shrink. This money would have been invested into the economy under normal circumstances. But this need not be permanent. While the politicians should have been focussed on providing clarity through accelerated negotiations, British business leaders have done the sensible thing and saved for a rainy day. Or more specifically, for the moment there is finally some agreement on a deal.
The Brexit Dividend is real. All that is required is some long-awaited clarity.