Alan Wheatley
Associate Fellow, Global Economy and Finance
The intense focus on the post-Brexit trading relationship with the EU misses a crucial point: the UK’s economic prosperity depends on it raising its game in areas, such as education, over which Brussels has no sway.
Houses of Parliament. Photo by Getty Images.The UK falls short because governments of all stripes have failed to invest sufficiently down the years in a clutch of key areas. Photo by Getty Images.

UK living standards are 8-10% higher than they would have been if the country had not joined the EU in 1973 and enjoyed the benefit of free trade and investment, according to Professor Nicholas Crafts of Warwick University, one of Britain’s leading economic historians.

It’s reasonable therefore to assume, all other things being equal, that national income will gradually fall by a similar order of magnitude if the UK leaves the single market and customs union in a ‘hard Brexit’, sacrificing free trade in order to control immigration.

The Treasury’s central-case forecast is that GDP could be 6.2% lower in 2030 than if the UK stayed in the EU. Even with a free trade agreement with the EU, the UK’s exports of services could drop 60% and goods by 35%, according to the National Institute of Economic and Social Research.

All of which puts a premium on trying to make sure that all else is not equal by laying the foundations for a more innovative, productive economy.

Those who successfully campaigned to leave the EU in the 23 June referendum argue that a bonfire of red tape is all that is needed to unleash Britain’s dynamism: scrap bankers’ bonuses, fiddly food packaging rules, egregious farm subsidies and the working time directive and watch the economy boom.

Some EU rules are doubtlessly unnecessary and stifling. But if the dead hand of Brussels is holding Britain back, why is labour productivity – the ultimate key to living standards – more than 30% higher in France and Germany than in the UK? After all, they are all subject to the same rules and regulations. Indeed, in 2014, UK output per hour was five percentage points lower than in Spain and considerably lower than productivity in Ireland, Belgium and the Netherlands.

The answer is to be found at home, not in Brussels. The UK falls short because governments of all stripes have failed to invest sufficiently down the years in a clutch of areas that form the sinews of any successful, high-performance economy. Here are five:

  • Education. In the OECD’s international Pisa rankings, the UK comes 23rd out of 40 for reading and 26th for mathematics. Sir Michael Wilshaw, the chief inspector of British schools, marked their performance as a ‘mediocre’ six and a half out of 10.
  • Skills. The UK has more people with low skills than the EU average, ranking 20th out of 32 OECD nations; and 36% of the adult population have only intermediate skills, placing the UK 25th. However, the UK fares better on higher skills, ranking 11th.
  • Research and development. The UK spends less on R&D as share of GDP than the EU or OECD rich-country average – and less than China for that matter. Quitting the EU will jeopardize British participation in collaborative pan-European science and technology projects.
  • Infrastructure. Britain has spent less on infrastructure in the past three decades compared to other OECD countries. Its only high-speed rail line runs to the Channel Tunnel. The Crossrail underground rail line in London, first proposed seriously in 1980, is finally due for completion in 2019. A third runway for London’s congested Heathrow Airport has been held up by political and legal objections since it was officially recommended in 2003.
  • Housing. The UK has been building little over half of the 250,000 homes a year needed to prevent spiralling property prices and a shortage of affordable homes, factors that badly hobble labour mobility. Fierce planning restrictions, set in London not Brussels, and a slump in new-home building by local councils, kept on a tight leash by central government, are among the main causes.

The UK is storing up trouble in other important areas too. Demand for health care from an ageing population is rising steadily, yet spending on health as a share of GDP has been falling and is now below the OECD average.

Addressing these shortcomings will not guarantee a smooth economic ride after the UK leaves the EU. Prime Minister Theresa May also needs to keep the door open for skilled workers and researchers and retain as much access to the single market as possible. But Britain’s post-EU economic fortunes will be determined primarily on the home front.

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