274. Would rejoining the EU be the best growth strategy?

0:00That battle bus claiming more money for the NHS, that was completely wrong. Look, if you told the British electorate, hey, you know what, you can vote for Brexit, you know, it's going to cost you£2 ,000 a year, but you want less immigrants and you want, yeah, I don't know, cheaper housing because there's less people around, you can have it. The problem is that was never what was promised. There was promised more spending on the NHS, which has basically turned out to be an absolute lie.

0:22Robert Peston:I mean, my rough and ready calculation is on a£3 trillion economy, me, we're looking at£240 billion of income that has disappeared. Is that right? This is an enormous loss of money.

0:47Robert Peston:Hello and welcome to The Rest is Money with me, Robert Paxton. I think Steph McGovern's off solving crime again or whatever she does in her spare time. But I'm thrilled that I'm joined by the distinguished Stanford economics professor, Nick Bloom. Nick, very good to see you. And I think most of what we'll talk about today is the report that you did on the cost of Brexit, which pleased some people and infuriated others. And I was quite struck. I don't know if you regarded this as a badge of honour or something that you'd rather not have happened. But I noticed that the Chancellor has taken to referring to your assessment that leaving the EU has led to an 8 % reduction in GDP, an 8 % loss in national income.

1:49Robert Peston:It's been quite striking in the sort of political sphere that she's started, in a sense, essentially giving you this great accolade of official approval at a time when they're very, very keen to persuade the British people that we need to move economically and actually diplomatically closer to the EU. So it's an important number, that 8%. I think it's roughly double the estimate that the Office for Budget Responsibility, the only sort of official work the Office for Budget Responsibility has done on this, I think said the loss was about 4%. I'm really fascinated just to start with, because you used two different methods, and actually your assessment is the loss is somewhere between 6 % and 8%.

2:33Robert Peston:But talk me through how you set about approaching this assessment and how you came up with that number. Yeah, so basically, there's a top down and a bottom up approach. So the top down is to compare the UK to the EU 27. So 27 countries in the EU plus six others. So US, Canada, Japan, Iceland, Norway, and I can't remember this. There's 33 countries in total. And what we do is we show quite clearly that if you compare the UK to those 33 other countries, it tracks very closely on GDP for 10 years running up to the Brexit vote. So you do the average of the other 33, you do the UK and those two lines line almost on top of each other.

3:17Then the Brexit vote happens in 2016 and the UK line starts to slow down. And you can see this gap opening up and that gap openings opens up year by year. So 10 years later, by 2026, the UK is about 8 % below the average of all the other 33 countries. And that gap, interestingly enough, it doesn't all open in 2016. So the vote doesn't actually do much at the time. It's this kind of death by a thousand cuts. So that's one of the big reasons we differ from the OBR is their numbers are a bit out of date now. And so some of the damage of Brexit accrued in 21, 22, 23. And so by 2026, it's about 8 % on the macro data.

3:57Robert Peston:Just also talk me through the other approach that you took, because you didn't just do the top down. Tell us about the bottom up. Yes, exactly. So the bottom up was actually much more work. So the bottom up with something called the Decision Maker Panel we actually created in 2016. We've been surveying about 5000 British firms on a very regular basis for the last 10 years. And we know how exposed they are to the European Union. So know their sales to the EU, their imports from the EU, their regulatory coverage, how many EU migrants they have, are they EU owned, etc. And so what you can do is you can compare EU exposed firms to non-EU exposed firms and look at the impact on growth.

4:41And again, a kind of similar story before the referendum. If you're a firm that's exposed to the EU, say you have a lot of trade with them and you employ some migrants, your growth rate is pretty similar to a more domestic firm. and then after the referendum happens this gap starts to open up and by 2025 which is the most recent data we have because accounts take about a year to come in you see the gap is about six percent so the bottom up number tells you that there's about a six percent loss from brexit for the uk now about 10 years later basically and the top down gives you eight percent and that's our

5:14Robert Peston:six to eight percent range and so just so that people understand the sums of money we are talking about sums of money that could have contributed to higher wages, could have contributed to a lot more money for the NHS through the taxation system, for schools. And I mean, my rough and ready calculation is on a three trillion pound economy, we're looking at 240 billion of income that has disappeared. Is that right? Totally right. I mean, this is an enormous loss of money. So just to give you a sense, you know, I can hear I'm British. I live in the US now, but my dad and both my sisters work in the NHS.

5:55The expenditure on the NHS is about 8 % of GDP. So it's like we could have doubled the money on the NHS if we'd not left the European Union. And so I remember that battle bus claiming more money for the NHS. That was completely wrong. It was, you know, as it happens, NHS is facing a funding crisis and Brexit is a big factor. more money for defence. To give another way to look at it, it's about£2 ,000 a year per person in Britain. That is, we've lost because of leaving the European Union.

6:26Robert Peston:I think we're now going to go to a quick break. And after the break, I want to ask you, if we had had a more orderly Brexit, would it have been less damaging? And then secondly, the other question I'm going to ask you is, basically, having lost this 8%, how much of it could we get back if we rejoined, would there be a catch up if we rejoined the EU? So let's come to those in just a couple of minutes after a quick break.

6:56This episode is brought to you by Octopus Energy. Now, you know, we love talking to entrepreneurs on this show.

7:03Robert Peston:So with us is the founder of Octopus Energy, Greg Jackson. Right, I'm going to start with this. If you could change one thing to help Britain's economy grow, what would it be? I'd love to see pension funds putting more money into British businesses. Over the last 25 years, they've fallen from 40 % of their investments going to British businesses to 4%. That's bad for business here. It's bad for our stock market, but it's also bad for pensioners. In fact, a Canadian pensioner will get almost double the pension from the same amount invested as a British pensioner. We need to sort that. Nice one, Greg.

7:36Well, thanks to Octopus Energy for powering this episode of The Rest is Money. Your employees send hundreds of emails every day, and every email represents your organization. The problem is nobody manages the email signatures. This leads to the use of outdated logos, invalid contact information, and incorrect legal disclaimers. This puts your organization at risk. Xclaimer is the leading email signature management solution. One dashboard, total control. Visit exclaimer.com to start your free trial today.

8:15Robert Peston:There are actually some pretty common sense explanations for why there would have been this effect. And I want to talk to you about those in a minute. But I think it is important to acknowledge that economists, particularly those economists who supported Brexit, some of them have said some quite unkind things about you, but there has been some criticism. And I suppose there's one bit of criticism that seems to me to, from the point of view of, how can I put it, sort of common sense, to use that phrase again, I think it's important to examine, which is, and there was a bloke called Julian Jessup who said this.

8:57Robert Peston:He said, basically, if we had grown 8 % faster than we actually did, that would have meant that we would have been, along with the US, the top performing rich economy in the entire world. And he takes the view that, although I'm sure he's a great patriot, that it is completely inconceivable that Britain could have been an economy performing as well as, let's say, the US over that period. What do you say to those who, in a sense, say, you know, whether we'd stayed in the EU or left, this idea that staying in could have turned us into this sort of unbelievably dynamic place? What's your response?

9:44I don't think he actually read the paper. I, you know, his maths, I would just explain his maths is just completely wrong. You know, even GCSE maths would show that can't be true. So just to be clear, Britain is 8 % below the average of the other 33 countries since 2016. So if you added 8 % to us, we would be at the average of the other 33 countries. So that means it would be impossible for us to be the top if we're at the average.

10:12Robert Peston:But then let's look at the other thing that he says. And I think you have acknowledged, because you looked actually, you did all sorts of different methodologies top down. You looked at also and you did, I think, in the end, acknowledge that the thing that he also got upset about was you had a so-called synthetic basket and then you had various other baskets that you were comparing with. And I think you have acknowledged that the synthetic basket you're quite happy to ditch because the other ones still prove your point. So tell me, is that right? Yeah, exactly. So just in kind of layman's terms, we have 33 other countries to compare Britain against.

10:47So what would you do? So one version, which is our main version, you take the average of all the other 33. That seems probably the fairest. And that's what we do. But there are a number of other versions. Another is called GDP weight. You put more weight on the big ones. You could do distance weight, more weight on the nearby ones. There's another version, which is called synthetic, which you put more weight on the countries that look most like Britain before Brexit. And it turns out that before Brexit, for the 10 years before Brexit, Britain was actually doing pretty well. and so it's growing pretty fast.

11:18So under the synthetic version, you match us to other fast-growing countries of which one of them is the US. Now that's only one of five or six versions we do. That's not even our main version. But yes, he picked on it. But if you're trying to score political points, you pick on some weird outlaw thing and complain about it. But that's not where our 8 % number comes from. So I'd say, to be honest, that's kind of irrelevant to the conversation. In just a minute, because people will want to know this,

11:45Robert Peston:Let's talk about why in practice leaving the EU would have did lead to Britain becoming poorer than it would otherwise have been. But I must just talk to you a little bit about the politics because as I understand it, this was a bit of work that you couldn't necessarily publish. I think, was it because some of the people that you were collaborating with worked at the Bank of England? What was the reason why there was some issue around the timing of publication? Yes, exactly. And just to say, by the way, if you want to take an independent view, something like the IMF, I'm aware that everyone has their position on Brexit.

12:30The IMF kind of stands back and is the, in a sense, global referee. Their numbers, they, in fact, Gita Govanath, who is the deputy head of the IMF and chief economist, now quotes our numbers. So I wouldn't say there's anything particularly extreme about our numbers. They become the normalized numbers that most people are using. So why couldn't we get that out earlier? As you know, Robert, much better than me, the politics around this is sensitive. Some of my co-authors at the Bank of England, and so we just didn't feel we should be publishing numbers on Brexit in the kind of recent, you know, recent period after the vote because it was still politically sensitive.

13:08in 2025 it just became orthodoxy in the kind of mainland mainstream view that look brexit has clearly been damaging i don't think at this point anyone disputes i mean even the markets just to be clear the day of the vote the day after the vote when it became clear britain was leaving the european union the pound dropped about 15 because markets were aware this was pretty devastating for the economy so it just took a while for us to be able to get it out for people to kind of stand back and say, look, let's move along from the politics, let's look at the real impact. And at that point, we could get the figures up.

13:38Robert Peston:You know, let's be clear, it is now infusing political debate, because it is now the number the government uses. And for years, you know, and many would say this is because they were frightened of making the case for getting close to the EU, that, you know, they ran away from the whole debate about the essentially how much we'd been damaged by Brexit. So I do think it is significant. You know, it was quite striking to me when the Chancellor, I think it was earlier this year, started using our 8 % number. Yeah, I mean, there are some things for political reasons get, you know, hidden. For example, in the US, the current, you know, government doesn't want to talk about climate change.

14:22It's pretty clear the climate change, but they're not talking about it. In the same way in the UK for a while, it was difficult for the government to talk about the damage of Brexit. at this point in 26 is just so obvious and so clear.

14:34Robert Peston:What I'd like to do is now to unpick, you know, what the transmission mechanism was from that vote to leave the EU and the fact that we got poorer. I mean, you know, I remember at the time, or rather in the run-up to the vote, there was quite an important piece of research that the Bank of England did. And what that said was simply by dint of the cost of access to the world's biggest market going up, the cost of access to that market going up, the cost of trade with that market going up, there would inevitably be less investment by firms. And that would make us that would be one of the mechanisms that would make us as poorer.

15:24Robert Peston:Is that something is that is that part of what has come to pass? Totally. So there's two blocks and they're both about the same size. So one block of damage that's three to four percent is exactly what you're talking about, which is it's just harder to trade. So, you know, there's tariff and non-tariff barriers. The rules and regulations keep changing. You know, it's complicated. So imagine you're a store. Imagine you're Sainsbury's. And rather than being on the high street, you decide to set yourself up two miles down a long, narrow path. Not surprisingly, sales goes down because it's harder to get in and out of the store.

15:58So that's like fact one is it's just harder to trade with the rest of Europe. And that's three to four percent. And that was totally predictable. And there's about we look in the paper. There are 25 forecasts made in advance of Brexit and 22 of them that weren't by advocacy groups predict this. It's like it's Econ 101. The other half that I think was less predictable, but it's turned out to be a big deal. is the chaos, uncertain and confusion of the process, including going through six prime ministers, one lettuce, you know, everything as you know. And that looks like it's added an extra three to 4%.

16:31In the paper, we actually unpick some of this. We measure uncertainty. In fact, some of the most revealing stuff is the amount of time that CEOs, CFOs said they spent on Brexit. It was hours and hours.

16:42Robert Peston:I was going to ask you about that because you've got this amazing survey that you do of thousands of companies. And I think you say it represents something like 10 % of the private sector. Is that right? This is a very big and therefore reliable survey. And one of the things I did find shocking was just, and talk us through this, just a sheer number of hours that chief financial officers and other senior executives were spending on just adapting to this new trading world. Yeah, and they were giving us numbers of about two hours a week on average for the three years that we were collecting that data.

17:16That is a huge amount of time. Imagine instead you took that time and said, we're going to spend two hours a week improving IT, maybe adopting better technology training, doing strategy. You're going to see these firms grow a lot faster. And instead, it's taken out and it's dealt on paperwork. There's also a lot of stockpiling. So you see these photos of tens of thousands of lorries stuck at Dover. But that affected firms because they had to hold more stock. There was a bunch of companies who complained about things like, I'm trying to import, export flowers. the stuff died at the ports because it sat there so long.

17:48So there was two blocks. They're both three to four percent. One was like classic. If you just make it harder to do business, businesses do less well. Think of it as just taxing trade. And the other half is just chaos, uncertainty. The latter, the second half didn't need to happen. But the problem was, and I remember this at the time when they voted on Brexit, there was not really a clear plan of what Brexit was. and the next six, seven years was fighting over what that plan was. And that made the effect much more damaging.

18:16Robert Peston:As a political editor, which I have been for the past few years, living through those years after we voted to leave the EU and before we had the most basic trading agreement put in place by Boris Johnson when he became prime minister, which, you know, we came into effect at the beginning of 2020 or the end of 2019. The run up to that, I've never known chaos in parliament like it. You know, Theresa May had one plan and then another plan and a party was split and there were all sorts of votes for various different bits of what she wanted to do. that the MPs constantly threw out. We had the chaos of Boris Johnson trying to send MPs home, apparently in the process of misleading the Queen at the time.

19:21Robert Peston:Honestly, it was, you know, it was parliamentary chaos like none I've ever experienced. So of course, if you were a business trying to work out at the time what kind of relationship we would have with the EU was impossible because none of us knew. Do you think that if, you know, essentially David Cameron, before he'd organised the Brexit vote, had actually put in place any contingency planning for what Brexit might look like, you know, actually the cost of Brexit might have been reduced a bit? Massively. I mean, our estimates are roughly halved. So look, if in 2016 there'd been a vote and there was Remain and then Leave had an actual clear plan, these are the eight steps, These are the, you know, we're going to do it over the next three years is the transition phase.

20:10And the day after we'd voted and voted to leave, they'd start to execute that carefully, methodically, predictably. Yeah, it had probably seen three, four percent loss of GDP, but it wouldn't be nearly as bad as it has been. You know, what are the kind of things we see in the data? Investment dropped far more. There was a collapse in British investment. It's so incredible. If you look at the charts, British investment was surging ahead for 10, 15 years up to 2016. They just move sideways and every other country shoots up. Investment in R &D, patents, they drop back, training. All of this stuff is held back because companies are like, what on earth is going on?

20:48I mean, look, turn it around. If you're running a business, imagine you're running a business, you've got to import and export to Europe or you're using migrants, and suddenly you've no idea whether that's going to continue or not. You think, well, I'm just keep the money in the bank. I'm not going to invest. It's too risky. I could be left in the wrong place. And now I've got to deal with a ton of paperwork to fit, you know, in the meantime. And so, of course, yes, that that basically doubled the damage was the chaos over the next six or seven years after the vote.

21:17Robert Peston:The milk has been spilled, as it were. We had a chaotic exit. We are out of the European Union. You know, 8 % of GDP has been lost, according to your projections. So what do we do now as a nation? We've got a government that right at this particular juncture is saying, if it can, I mean, it's not at all clear it'll be able to persuade the EU to do this, but its current approach is sector by sector, look at a particular sector, Look at look at whether the businesses in that sector are saying that if we aligned our rules with the EU's rules, followed the rule set by Brussels, if the businesses there are saying, yeah, we want to be a rule taker in that space.

22:12Robert Peston:They the government will then try and negotiate, as it were, the equivalent of single market access just for that sector. but then there are of course lots of other whether they're MPs or pundits or even members of the government and if it's members of the government they have to say this privately who are just saying actually it's completely clear that we should simply rejoin the single market rejoin the customs union and the most effective way to do that rather than doing a sort of Norway deal or a sort of rather complicated Swiss kind of deal. We should just rejoin the EU. I just wondered, if you look at what the data that you analyse tells you, does it reveal anything about whether the rational thing to do is just to go the whole hog of rejoining the EU?

23:06Robert Peston:Or is there method in the government's attempt, at least? I mean, I have to say, I think there's a very good chance Brussels will just tell the government to hop off because they've always said they don't like cherry picking when it comes to access to the single market. And what the government is apparently trying to do is cherry picking. But if the EU are prepared to play ball on cherry picking, is that a perfectly reasonable approach? I think there's two ways forward. One is to say, look, we've had chaos for the last eight, nine, 10 years. There isn't enough political will, will, and reform who are currently ahead of the polls, it would reverse anything we did.

23:46So the last thing we want to do is generate more uncertainty. Let's quietly and gradually try and align ourselves to the European Union, but we can't go back in. So that will be the kind of safe, boring bet, but that at least reduces him out of turmoil. The other is just say, look, we made a mistake. We should never have left the European Union. It was clearly a mistake. Everyone agrees at this point. Let's just reverse it. You're right. One of the problems is, will the EU let us back in? It's a bit like a prison gang. You know, in prison gangs, if a member leaves, they give them a beating to make sure that no other member leaves after that.