Last reviewed 1 November 2021

On Budget day (27 October) the Chancellor published details of the economic forecasts he had been given by the Office for Budget Responsibility (OBR). Set up in 2010 to provide independent and authoritative analysis of the UK’s public finances, the OBR provides much of the detailed statistical background to the Chancellor’s Budget speech. Its findings therefore carry particular weight with its Economic and Fiscal Outlook (EFO) for October 2021 providing 250 pages of detailed five-year forecasts for the economy. It can be found at https://obr.uk/efo/economic-and-fiscal-outlook-october-2021/.

A price worth paying?

One section of this lengthy report concerns the extent to which Brexit has affected the UK’s trade with the EU. This states: “Since our first post-EU referendum EFO in November 2016, our forecasts have assumed that total UK imports and exports will eventually both be 15% lower than had we stayed in the EU. This reduction in trade intensity drives the 4% reduction in long-run potential productivity we assume will eventually result from our departure from the EU.”

In other words, Brexit will reduce the UK's potential GDP by about 4% in the long term. Moreover, the report goes on to say, “we now expect post-pandemic scarring of potential output to be 2%”. So the cut to GDP caused by Covid will be about half the reduction expected from leaving the EU.

When the Prime Minister’s Office was asked if a 4% long-term reduction in GDP was a price worth paying for Brexit, a spokesperson replied: “I think this is a Budget settlement that sets out the agility, flexibility and freedom that has been provided by Brexit, and how valuable that is in a global 21st century economy. There were a number of approaches and announcements linked to that yesterday, things like APD (air passenger duty) and alcohol tax, which we wouldn’t have been able to do if we remained in the European Union.”

Problems in Court

Earlier in the month, the UK’s Brexit negotiator, Lord Frost, warned that the UK was moving closer to suspending the Northern Ireland Protocol, an agreement of which he had, of course, been one of the architects. Repeating his accusation that the EU was failing to honour the spirit of the agreement, he took the unusual step of responding to the Union’s offer to remove some of the restrictions on trade between Great Britain and Northern Ireland, the day before it was made.

Without waiting to see the latest EU offer, he said: “The fundamental difficulty is that we are being asked to run a full-scale external boundary of the EU through the centre of our country, to apply EU law without consent in part of it, and to have any dispute on these arrangements settled in the court of one of the parties.” All of this was agreed at the time when the Protocol was hailed as “having saved Brexit” but Lord Frost now insists that it was “drawn up in extreme haste in a time of great uncertainty”.

He then went on to say that the UK could never accept a role for the EU’s Court of Justice (CJEU) in “policing” the Protocol. A direct challenge to the EU as its legal system is founded on the Court being recognised as the final arbiter in all matters concerning Union legislation, on which the current Protocol is based.

The EU proposals

Choosing to ignore the new red line introduced into the talks by the UK, the European Commission went ahead with its suggestions for amending the Protocol to try to overcome the difficulties being experienced in trade between Great Britain and Northern Ireland. It said that it “stands ready to engage in intensive discussions with the UK Government”, with a view to reaching a jointly agreed permanent solution as soon as possible.

Its latest package of proposals includes further flexibilities in the area of food, plant and animal health, customs, medicines and engagement with Northern Irish stakeholders. The Commission proposes a different model for the implementation of the Protocol, in which the flow of goods between Great Britain and Northern Ireland — in respect of goods destined to stay in Northern Ireland — would be facilitated, it said, to a significant extent. The flexible customs formalities which it is proposing would, the Commission argued, mean a 50% reduction in paperwork. Details of these proposals can be found at https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_5230.

Some Europeans are welcome

Despite the ongoing arguments about the Protocol, the Government has made some moves to ease trade with the EU by proposing an extension to “cabotage rights” in order to alleviate pressures within the supply chain due to lorry driver shortages. This involves making temporary changes to the rules which cover “the transport of goods or passengers between two places in the same country by a transport operator from another country for the purposes of hire and reward”.

The Government will allow unlimited cabotage movements of HGVs for up to 14 days after arriving on a laden international journey into the UK compared to the current rules allowing just two cabotage journeys within seven days of entry. It is proposed that the extension will apply until April next year. Before the pandemic, and while the UK was a member of the EU, cabotage comprised about 0.8% of national UK transports, equivalent to the work of around 3000 permanent lorry drivers in the country.

As cabotage was restricted to three movements at this time, it is anticipated that, if a short-term extension is pursued, this may offer a similar uplift in the number of drivers available, although there is substantial uncertainty about take-up. When the Government moved in September to allow 5000 temporary visas for European HGV drivers wanting to come and work in the UK, the initial take-up was said to be 27 — equivalent to one driver from each of the EU Member States.

When in Rome

In a rather unexpected move, the Government has opened its first trade talks directly with an EU country. The recently appointed International Trade Secretary Anne-Marie Trevelyan has announced the start of discussions on a new export and investment partnership between the UK and Italy aimed at boosting trade between the two countries. The dialogue is intended to drive exports for companies in high-performing sectors such as life sciences, defence and security, as well as growth sectors of the future, such as digital and tech.

The talks will also seek opportunities for greater collaboration and sharing of best practice between the two countries’ export credit organisations — UK Export Finance (UKEF) and the Italian Export Credit Agency — helping SMEs and companies looking to grow. Trade between the UK and Italy was worth more than £34 billion last year with some of the most popular British products exported to Italy including cars and medicinal and pharmaceutical products.

British consumers were able to buy £1.2 billion worth of Italian clothing last year and we imported £860 million worth of beverages and over £641 million worth of fruit and vegetables. “Enhancing our bilateral relationship with Italy is a win-win, which will boost export opportunities and investment promotion for our businesses”, the International Trade Secretary said. “Italy is our ninth-largest trading partner, while the UK is Italy’s fifth-largest export market. I am delighted we are kicking off this discussion.”

Not so friendly French

Relations have continued to deteriorate with the UK’s closest European neighbour, however, as a long-running dispute over licences for French fishing vessels took a turn for the worse. We reported last month that the Government had decided to grant 12 licences after 47 bids from smaller French vessels wanting to fish in its territorial waters under new post-Brexit rules.

Seemingly in retaliation, the French authorities seized a British scallop trawler with one French Minister reportedly saying that the UK “understands only the language of force”. The French Prime Minister is reported to have appealed to the Commission to demonstrate there is “more damage to leaving the EU than to remaining there”.

Environment Secretary George Eustice responded that the French threats to block British boats from French ports and tighten checks were “disappointing and disproportionate”. He was speaking after two British boats were fined when one failed to comply with checks by police and the other was found not to hold a proper licence.

French threats have included the possibility of increased sanitary and customs controls and more controls on lorries travelling to and from the UK. Mr Eustice responded: “The measures being threatened do not appear to be compatible with the Trade and Cooperation Agreement (TCA) or wider international law and, if carried through, will be met with an appropriate and calibrated response.” The short-term forecast for the English Channel would appear to be ”storm clouds ahead”.