The writer is chair of Marshall Wace, a multi-asset manager
Public opinion in the UK is settling on the view that Brexit has been an economic failure. So far, it is hard to argue with the pollsters. But what is not clear is whether the issue is Brexit itself or the way it has been implemented.
At the time of the Brexit referendum, many of its supporters (myself included) took the view that there would be short-term economic downside but that this was more than outweighed by the longer-term political benefits of regaining national sovereignty. We wanted to be governed from Westminster and not from Brussels, for good reasons.
The expectations of short-term economic friction have turned out to be correct. The erection of barriers with our largest trading partner has led to a contraction in trade flows, especially in industries most subject to cross-border regulation such as food and agricultural goods. This friction has probably been worse than expected due to poor management by successive UK governments, coupled with the desire of our EU “friends” to punish us for leaving.
But as time has elapsed since the referendum, it has been increasingly clear to me that the long-term economic benefits of leaving the bloc should more than outweigh the short-term losses.
While still early days, the important deals signed with the US, India and members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership offer substantial long-term opportunities. Surely it is right to align our trade with the fastest-growing regions of the world over the stagnant EU? But the bigger prize is the opportunity to drive growth and productivity through innovation and investment. The EU, overburdened by regulation, has become a zone where innovation is clearly insufficient. In contrast, the US is powering ahead. It leads the world in many of the major fields of technology and innovation. And its prosperity — measured by GDP per capita — is 41 per cent ahead of the UK on 2025 estimates.
Our political leaders have been overly focused in recent years on labour force growth as an economic tool, as seen in immigration policy, and not enough on productivity and innovation.
Thanks to our university sector, a relatively entrepreneurial culture and the historic strength of our capital markets, we are second to the US in many of the most exciting industries of the future. Post-Brexit, there was an opportunity to establish a light-touch regulatory regime and attractive tax arrangements for emergent industries that would make Britain a hub for talent and entrepreneurship.
But sadly we have done almost the opposite. Take AI, the single most important driver of future innovation and growth. It needs clear, light-touch regulation along with cheap and abundant energy. The UK has severely hamstrung the rollout of data centres due to our extremely high electricity costs (although that has nothing to do with Brexit).
And the EU has massively hindered AI development through its General Data Protection Regulation regime, which places huge obstacles on the sharing of data. Instead of designing our own more innovation-friendly policy, the UK simply chose to incorporate the EU GDPR into domestic law. Recent research has shown that the EU GDPR has also led to a significant decline in clinical trial activity in the healthcare sector and the same will no doubt be found for other sectors.
Post-Brexit, London also could have become more of a hub for blockchain and stablecoins. But many Bitcoin traders prefer Portugal and Milan because of the tax regime. While Japan, Singapore and Abu Dhabi all introduced innovative stablecoin laws several years ago, the Financial Conduct Authority is still in the consultation phase.
All of these failures have been compounded by a fiscal policy apparently intent on repelling international talent. The UK’s main corporation tax was, inexplicably, raised from 19 per cent to 25 per cent in 2023. It is a miracle that any international anglophone company locates its European headquarters in London. Meanwhile, talented individuals are being driven away by a mixture of recent tax rises as well as the abolition of the non-dom tax status.
It is not too late to reverse bad policy. But that requires good governance. And unfortunately, what Brexit has revealed is that our governing class is not up to the challenge of governing. This was perhaps the biggest error of the Brexiters. We assumed that the UK governing class would rise to the challenge. There is still an opportunity to embrace a dynamic and innovative future. But it will require radical change in our institutions and personnel.
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