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Brexit cannot lead to a favourable outcome

ad_221423652_e1475423881572There is no realistic possibility of Brexit resulting in a favourable outcome. Following Brexit, the living standards of the population will be lower. In addition, the capacity for government spending on public services will fall along with its capacity to invest. As a result, it is likely there would the continuation of current trends, where there is a government-sponsored rise in racism, hate crime and xenophobia, in order to distract from the crisis created by government policy.

Forecasting Brexit effects

Economic forecasting is an inexact science. But its findings are also often presented and understood inexactly too. Forecasts can be presented as a range of probabilities but should nearly always be conditional, as outcomes depend on a series of factors outside the main elements of the analysis. So, for example, it is certain that prices will rise much higher than they otherwise would because of the Brexit-induced slump in the value of the pound. But the precise level of consumer price inflation in 2 years’ time must be an unknown without foreknowledge of the level of global commodities’ prices, knowledge of the ability of firms to reduce profit margins, the response of consumers and so on. Yet there is still the certainty that prices will be higher, and that any tariffs will make prices much higher still. Real incomes and living standards will fall.

So it is with GDP forecasts. There are two main documents setting out the central projections for the economy if Brexit goes ahead. The first is the analysis from the UK Treasury, the second is from the grouping Economists for Brexit. Both have been subjected to critique and readers interested in those can find them here and here.

There are some surprising similarities in the analyses and some huge differences. There are also some important omissions.

Taking first a point of agreement, in discussing versions of ‘Hard Brexit’ which would involve the unilateral removal of all trade barriers by the UK, all sides are generally agreed that incomes fall significantly, although the Treasury is the least concerned with this important matter. However, in the model formulated by the principal author for Economists for Brexit Patrick Minford prices will fall much further than incomes, as the UK economy enjoys the fruits of an unfettered and largely unregulated free trade. As a result, in this scenario real incomes rise significantly. This is flatly contradicted by the UK Treasury analysis and the Brexit economists’ critics. Finally, there is widespread confusion about the role of investment in the economy, which means even the most apparently pessimistic scenarios may underestimate the negative effects.

Falling prices?

Patrick Minford did not receive as much publicity as Alan Walters in terms of his influence on the Thatcher governments. This was almost certainly a mistake as his work was crucial in formulating the ‘supply side miracle’ of Thatcher’s efforts to create unfettered markets in goods, capital and labour. Everything from banking deregulation and Big Bang through to privatisations of state -owned industries, the end of the ‘closed shop’ and now zero-hours contracts all owe something to Minford. He is an important figure in recent British economic history.

He also bears some responsibility for the entire economic debacle of this period and now the crisis caused by the Brexit vote. This is not an ad hominem attack, but is used to show that Minford’s ideas have already been tested in the real world and they have been disastrous. He begins with the reasonable proposition that barriers to trade impose a cost to the idea that the removal of all barriers must be a benefit. This is clearly logically false. There is a cost to imposing fire safety standards on all new homes and public buildings. But there is a far greater cost if buildings frequently burn down and lives are lost.

The Minford claim that prices will be lower after Brexit rests on two spurious propositions. The first is that prices are on average 10% higher in some EU countries (or were 14 years ago when the data Minford relies on was collated!) so that these must arise from non-tariff or regulatory barriers inside the EU, which will no longer apply if his ‘Britain Alone’ model is adopted. Secondly, he argues, ignoring both geography and history, that other countries will supply those same goods or services to the UK at prices equivalent to the non-tariff EU prices. Notably in his view, all of this benefit will lead to the elimination of British manufacturing and the huge growth in inequality, even while the economy as a whole is boosted by 4% over the long run.

This is nonsense. Minford’s analysis takes no account of the quality of products. Take housing, the single largest component of household expenditure. The UK housing stock is much more dilapidated than the EU average. Approximately half the proportion of homes in the EU are more than 70 years old compared to Britain. Price should be adjusted for quality, and Minford makes no effort to do that. Higher prices can just as easily denote higher quality goods.

But the assertion that other countries will meet the removed EU goods and services is outlandish on two grounds. The British economy is tied through a network of increasingly complex supply chains to the European economy. If those supply chains are severed, it will not be by US or Chinese firms inserting themselves. They cannot under EU rules pass themselves off as EU producers once the UK has left. Nor would they be interested in removing all the non-tariff barriers that protect their firms just to sell into the British economy, which is simply not that important on a world scale.

On this issue, the Economists for Brexit are wrong and their critics are right. Prices will rise post-Brexit. They are rising already. As all analyses accept that incomes will fall, this can only mean that living standards as whole will fall significantly.

Misunderstanding investment

The Economists for Brexit pay almost no attention to investment, despite frequent references and a chapter nominally devoted to it. Instead, it is simply asserted that investment will rise following the (spurious) forecast of vastly improved trade at lower prices.

But the Treasury analysis, while much more serious in its examination of the effect on investment, is sorely lacking. In effect, the focus is almost exclusively on the negative impact on Foreign Direct Investment of leaving the EU. As FDI is defined as the ownership of 10% of equity or more, FDI conflates two different things, a change of ownership via overseas acquisition of equity and actual fixed capital investment.

The UK economy is in precarious position, with a record current account deficit. FDI inflows offset that, and without it living standards would immediately fall even further. This would be expressed as a further slump in the currency and rising long-term interest rates.

This is a run-down of UK assets to finance UK consumption that exceeds UK production. It is only possible to begin to reverse that with actual fixed capital investment to raise production.

However, Brexit itself makes this both less likely and less effective. Private sector investment becomes less likely with Brexit because investment is driven by returns, the key factors being the size and growth of the target market. Outside the EU, the UK economy is a far smaller market than a component of the Single Market. It will also experience slower growth.

All UK investment also becomes less effective outside the EU. As Adam Smith demonstrated long ago the effectiveness of investment is determined by the size and scope of the market, including, but not confined to well-known factors such as ‘economies of scale’. As the size of the market in which the UK can operate is restricted, the efficiency of investment declines.

As a result, of the two main scenarios outlined by the Economists for Brexit makes little sense, while the UK Treasury analysis underestimates the long-term effects of leaving the EU. Things are likely to be worse than they suggest.

No ‘People’s Brexit’

It would be possible to overcome all of these negative factors if investment were to rise by a large factor. But as we have seen private sector investment will fall.

In effect, in order to offset these negative effects public sector net investment would need to both replace reduced private sector investment and increase the aggregate total to compensate for the lower efficiency of investment outside the EU. From about 1.5% of GDP, public sector net investment would have to rise to something like 20% of GDP. This is not a realistic possibility in the current economic and political circumstances in Britain.

All likely and realistic Brexit scenarios entail a significant diminution in the living standards of the population. This will include rising prices and lower real incomes, job losses especially in manufacturing and high value-added sectors as well as cuts to public services as government finances deteriorate. The Tory government over 6 years has not been able to generate popular enthusiasm for policies that have led to falling living standards. It has deliberately fostered racism, Islamophobia and xenophobia as a distraction, with some effect.

Labour cannot possibly stand on this ground. Aside from the moral bankruptcy and the economic illiteracy this would entail, it could prove fatal. The Tory party can and does subsist on promoting reaction. Labour would risk annihilation as its natural supporters, who overwhelmingly voted Remain, deserted it in droves.

The arguments used to support a ‘Lexit’ are spurious and misleading. Overseas workers cannot possibly drive down wages as on average they are more highly paid then UK workers. They are net contributors to public services, not a drain on them. They are not taking anyone’s jobs; record levels of immigrant numbers coincide with record low unemployment.

There is no prospect of better protections for workers, greater environmental protections, better health and safety rules under any likely Brexit government. Unwilling to increase public investment to the required level, they will tolerate or even foster a race to the bottom. It is impossible to fight neoliberalism via Brexit. The UK will become an archetype of neoliberalism.

More technical arguments that, for example, EU state aid rules prevent a radical programme of nationalisation are equally spurious. Jeremy Corbyn and John McDonnell do not propose a large-scale programme of nationalisation, for very good reason. There are not the spare funds to purchase the equity of the energy, transport, building and other firms and the banks. And the political situation simply does not allow any nationalisation without compensation. It would just be posturing to suggest that court orders ruling in favour of private property rights would be overturned or physical seizures of property take place.

The limited retrieval of the rail franchises as they fall back into public hands that is planned is realistic and would not at all contravene EU state aid rules. On the contrary, after the Brexit vote the UK is now set to hand out state aid to major manufacturers simply to keep them here.


In the concrete circumstances of the UK economy Brexit can only lead to a fall in living standards. Prices will be higher, real incomes lower, and living standards will fall. All political forces who wish to raise living standards will have to fight against it, or overturn it if necessary. There can be no idea of embracing Brexit as a road to prosperity. That is an impossibility in the actual circumstances of British politics and the British economy.

This article first appeared on Socialist Economic Bulletin.


  1. Danny Nicol says:

    What a useless blog this is. Endless articles by committed capitalists on why we cannot have socialism and why we must have coalitionism. A constant drip-drip of capitalist propaganda instead of debate on socialist theory, strategy and policy.

    Enough already: we need a proper Labour socialist blog – elsewhere.

    1. John Penney says:

      Yes indeed, Enough already, with this repetitive, totally uncritical, scaremongering, pro EU nonsense from O’Leary. He and his “in denial” pro EU co-thinkers need to “get with the new reality” – that the the UK is leaving the EU, which was always a capitalist club, and in the last few decades a specifically pro neoliberalist capitalism enforcement machine.

      There are big dangers ahead, with a vicious Right wing Tory Government in charge of Brexit, but if we have any hope that eventually we will get a radical Left government in the UK, being out of the EU AND out of the Single Market is an essential precondition for serious transformation of our economy to benefit working people . An alternative economic model, away from the ever increasingly financialised, “uberised” gig economy of today, which leaves most regions outside the South East as deindustrialised wastelands.

      I think we’ve had quite enough uncritical daft pro EU articles from Mr O’Leary on what is meant to be a socialist “Left Futures” discussion site , thank you very much.

  2. James Martin says:

    Not another one! Can I ask, seriously, who the feck is this Tom O’Leary as I’ve never heard of the bloke?

    And why is he being given so much space on Left Futures for his utterly non-socialist cod-economics articles (all related to how awful it is we are leaving the capitalist club EU) when he would clearly be better off and better appreciated writing for a Lib Dem forum instead (although I suspect even they would get pee’d off pretty quickly with him)?

    1. Rob Bab says:

      @James Martin
      “…who the feck is this Tom O’Leary…”
      Don’t know if this helps but after clicking on the Socialist Economic Bulletin hyperlink at the bottom of the article it takes you to a site ‘published by Ken Livingstone’.
      At a guess, if Tom responds it will be a repetition of his October 20th remark;
      “Self-styled Lexiteers, in reality Brexiteers, really don’t like facts, do they?”

      1. Rob Bab says:

        It appears, after checking the archive, Tom O’Leary has almost been the only contributor, in the last few months, on KL’s SEB.

  3. David Pavett says:

    I would like to add my voice to the objections to this article although from a different angle to those already made (I was a sceptical Remainer).

    1. Like previous articles by TO’L the apparent objectivity of references to external sources is a charade which amounts to no more than looking for whatever might support the case to be made rather than looking for things that might challenge it and then showing why the do not in fact do so (i.e. the only sensible way to make a case).

    2. The references are either misleading or inaccurate. Thus it should have been pointed out that the Treasury document was produced before the referendum as a part of George Osborne’s pro-EU position. It is also claimed that Patrick Minford (for whom I hold no brief) says that Brexit will lead to the “elimination” of the manufacturing sector. In fact he says that it would be “diminished”. A modicum of accuracy about such things is surely necessary.

    3. The guiding political spirit of the article can be summed up by saying that we can’t have a socialist transformation of the economy (1) because that is not a Labour policy (true) and (2) more importantly, the ruling class would not allow it. Strange stance from the left.

    4. Finally the conclusion reached reflects the confusion of the article we are told that a fall in living standards is inevitable but that we should fight it (how do you fight the inevitable?) and “overturn it, if necessary”. And then again we should remember that is “impossible”. What kind of a conclusion is that?

    I agree with those above who say that we need economic analyses from a socialist viewpoint. Why is LF giving so much space to TO’L? Who is he? Why does he not reply to criticism?

  4. Bazza says:

    Shock US election result today and whilst it is tempting to say, “Those that the Gods seek to destroy, first they send mad” the conditions were there for a Trump win – Rust belts, neglected working class communities, international capital shifting production to less developed countries for super cheap labour,
    Massive inequalities in wealth.
    So by a 1% margin the US has chosen a Right Wing Populist US Billionaire pro-capitalist Fake Champion of the working class when solutions can only really come from the Left.
    One would hope sections of the white working class, Black Lives Matters and the black community, Women, Hispanics etc. the disabled, LGBT etc. and women will come together as a diverse working class movement to create a US Labour.
    We need left wing democratic socialist parties in every country (including China too) to give us hope in these dark times.
    Wasn’t fun waking up to snow and bloody Trump this morning!
    Keep Hope Alive!

    1. Imran Khan says:

      As with Brexit, political correctness is coming home to roost. The Democratic elite as with the Guardianista metro sexual dinner party hipsters have abused the white working class for too long and it is biting back on both sides of the pond.

      1. Rob Bab says:

        Shouldn’t that be;
        “Guardianista middle class metro sexual dinner party hipsters…”
        or is that code for middle class? Made me laugh either way!

        “metro sexual”

  5. C MacMackin says:

    I admit, I couldn’t make it through this whole article and didn’t have much drive to given the poor quality of the author’s previous posts. However, I did see that Tom O Leary rules out nationalisation of anything other than rail operators. He does this on the basis of not having enough money and not having the necessary political forces. He ignores the fact that the government had even less money in the post-war period when Attlee made his nationalisations (accompanied with generous compensation). Why on earth is such a comment appearing on a socialist website? The fact of the matter is that, if we can not nationalise at least some industries, then it will be unlikely that a future Labour government can implement a viable economic policy.

    1. David Pavett says:

      I agree. I wonder if LF feels that this material must be okay because it come from Ken Livingstone’s on-line magazine. It isn’t okay.

      1. Imran Khan says:

        What’s wrong with Ken Livingstone?

    2. Imran Khan says:

      What you ignore, or don’t know, is that the rail companies in 1945 were virtualyl a state enterprise because of their reorganisation during the war for the effort of that conflict and that they hadn’t, any of them, paid out on an ordinary share since just after the First World War. They were quite happy to get something, anything for themselves and their shareholders.

      1. C MacMackin says:

        It was hardly just the rail companies that were nationalised though. It was also coal mines, the steel industry, electricity, natural gas, telephones, road haulage, ports, airlines, hospitals, canals, water, etc. All at a time when the government was practically broke. There is no doubt that the poor state of British industry at the time made it easier for Attlee to achieve this with minimal resistance (as compared to the Swedish Social Democratic Party’s failure to nationalise industries at about the same time), but that doesn’t change the fact that they were done at a time when money was scarce. Furthermore, as socialists, we are supposed to be in favour of nationalisation (or at least some form of common ownership) and we need to find a way to make it possible, not simply write it off in a single paragraph.

  6. Karl Stewart says:

    This is about the fourth article from this same pro-capitalist, neo-liberalist in just a couple of weeks.

    Did this site’s editorial policy get taken over by Blairites?

    Is there anybody there who can respond to the points and questions and general bafflement from everyone?

  7. Verity says:

    On this occasion I only managed to read the first paragraph. Next time I will give it a miss altogether – far too much important reading to do.

  8. Imran Khan says:

    ” Rise in government sponsored racism”? Perhaps you could explain or do we take that you are simply hysterical?

  9. Tom O'Leary says:

    Patrick Minford, “Over time, if we left the EU, it seems likely that we would mostly eliminate manufacturing, leaving mainly industries such as design, marketing and hi-tech. But this shouldn’t scare us.”

    1. John Penney says:

      Tom, really , is that the best you can do in response to all our criticisms ? Bring on the neoliberal economist , Patrick Minford , in aid of your doom-mongering ?

      Over time – In or out of the EU , let’s be clear, if we continued with the rule of a Right Wing Tory Government for long enough ,no doubt every remaining public service and asset would be privatised, trades union activity of any sort would be made impossible, the superrich and Big Corporations would be paying no tax at all, and the London-centric financialisation of the UK economy would continue unchecked, leaving many Northern Regions as deindustrialised, high paid job-less wastelands even worse than today.

      BUT , Tom, surely we , as socialists, hope that the quite evident continuing post 2008 Crash collapse of the neoliberal , globalist, economic/social model, that has produced the Europe-Wide “Left Surge” , and its dark “Right Surge” mirror image , and both “Sandersism” and Trumpism in the US, gives us the opportunity to work hard to win a radical , transformative Left government in the UK, as the capitalist crisis throws all the political and economic certainties of the last 30 neoliberal years back in the melting pot ?

      If we do manage to win a Left wing Government of any degree of radicalism, it will require to employ capital controls, selective nationalisation, and wide-ranging state-led direction within a framework of comprehensive economic and general resource Planning, to transform our economy so that it is more sectorally and regionally balanced . Such an economic regeneration strategy would be impossible within the neoliberal enforcement machine that is the current EU.

      That’s why, despite the undoubted medium term economic dislocations leaving will produce – particularly under a vicious Right Wing Tory Government , it is better for the UK to recover its national sovereignty as a state outside of the EU and Single Market structure.

      If you don’t think any of that basic “Left Wing Stuff” is possible, Tom, why are you wasting our time with your , supposedly “Left Wing, (but actually entirely Left Wing analysis or Left Wing policy proposal, free argument) articles ? All your utterly uncritical pro EU , doom-mongering articles actually say is “we gotta stay in – because bad things will happen if we leave” .

      PS, Tom, Patrick Minford is not a neutral observer , or on our side – he assumes the continued , unopposed, rule of the Tory neoliberal Right after Brexit, in a wet dream UK neoliberal experimental playground . Our job on the Left is to make sure the Tories DON’T retain power to bring that neoliberal nightmare about .

    2. David Pavett says:

      That statement was not in the documents you referenced. And even then he said “mostly eliminate” and should have been correctly quoted.

      Much more importantly, as John Penny says, you have picked on one relatively minor point of detail and ignored all the substantial issues raised. That is not a discussion.

  10. Jim Denham says:

    Now the usa has its own version of Brexit, are our “left” Brexiteers having any second thoughts? Too much to ask of political illiterates, I suspect.

    1. John Penney says:

      Why is the election of Right populist demagogue, Donald Trump, in any way directly analogous to the multi facetted Brexit result in the EU referendum, Jim ? Other than in the fevered imaginings of middle class Guardianistas and middle class liberal Lefties horrified at the unprecedented voting intervention in such large numbers of the “ignorant lower orders from their ghastly estates” , and the very real collapse of the neoliberal ideological consensus following the 2008 Crash which underpins both.

      Whatever you , and the horrified , Guardianista middle classes, think about Brexit, Jim, it’s going to happen, so you need to “geddoverit” , and help build a socialist mass movement to fight the current Tory attempt to turn the UK into a neoliberal Freeport, and get a radical Left government elected ASAP to implement a radical Left economic programme. A Left programme impossible as long as the UK remained in the capitalist EU neoliberal enforcement machine.

      1. James Martin says:

        Jimbo’s just worried in case Trump follows through on his previously stated dislike for NATO and foreign wars, who would he have to cheer then in terms of bombing civilian targets (like he did when NATO bombed Belgrade), what would he do if he didn’t have an imperialist occupation force to support as he did in Iraq where his nasty AWL sect *opposed* the withdrawal of US and British occupying troops. But cheer up Jim, at least Trump seems like you to be a fan of apartheid Israel so it’s not all bad for you eh pal!

      2. Verity says:

        I do agree that attempts to associate Brexit with the support for Trump is an attempt to discredit the anti EU position. As an opponent of British membership of the EU I do have to concede though that many who were with me on this may have done so for variety of reasons. I would find many of these reasons discouraging and in canvassing support did so. Could there not be some similarities between the pro Trump and the anti – EU inasmuch as both present as a rejection of the establishment neoliberal consensus? It is easy, it is only a vote, not a lifetime commitment for something. Votes can often be about the rejection of one choice by supporting another, despite severe worries about what that which the supported position might represent. Anger can produce some irrational outcomes, especially if you think your vote may never count for anything – as possibly with both Trump and the EU.

        What many Brexit and the Trump votes do have in common in my view is an angry alienation with an establishment consensus that seeks to impose on me. It is a vote against something rather than a vote for something. If the ‘Americans’ wanted to vote for something they could have chosen Bernie Sanders and only some did so.

        My suspicion and fear is that Corbyn is where he is because of a vote against something rather than a committed vote for something. That is why this interim period has a lot to achieve and in my view has lost well over one year in trying to make that transition.

    2. Karl Stewart says:

      No comparison.

      More people voted to leave the EU than voted to remain.

      More people voted Clinton than Trump.

      No comparison.

    3. C MacMackin says:

      Verity’s post I think is a good one (including in terms of his sober comments on Corbyn’s support). Karl Stewart’s point is also important. I will add that, from what data I’ve seen, Trump didn’t actually get that much turnout–less than Romney or McCain. The problem was that Clinton was even worse at mobilising her base. That had nothing to do with Brexit. If Brexit were to have any effect, then, it should have been to help Clinton by scaring her base enough to make sure they voted for her. Mind you, I’ve seen various and sometimes contradictory interpretations of results and exit polls by leftists, so take this with a grain of salt (or add to taste).

      1. Karl Stewart says:

        According to the New York Times, Trump’s about 1.3 million down on Romney’s 2012 total and Clinton’s about 6 million below Obama.

  11. Chris says:

    We can nationalise

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