The Three Big Brexit Betrayals

Source: The Spectator Australia

Brexit was always going to be stillborn. It is one of the worst policy decisions ever made, by any government, anywhere, any time. Even basic understanding of economics and the structure of global trade would have been sufficient to predict Brexit would be a disaster for Britain.

Yet, Brexit happened. Why?

Brexit was sold very cleverly to a generally uninformed, lazy, and prejudiced electorate as a remedy for three specific "grievances": Brexit would halt immigration to placate racists, jettison excessive regulation to please free marketeers, and - stated less publicly - usher in major tax cuts to make Britain internationally competitive for business.

The pro-Brexit Conservative governments to have ruled the UK since the Brexit referendum have all spectacularly failed to deliver on all three promises. Those who voted for Brexit have been betrayed.

This short note explains how the calamity of Brexit came about and where Britain may be heading next.

Let us rewind to the 1980s. Then Prime Minister Margaret Thatcher was strongly in favour of the European Union (EU). She is sometimes labelled an EU-sceptic, but this is wrong. Thatcher fought with the EU over peripheral matters, such as UK’s contribution to the EU budget (where she won a rebate), but when it came to structural matters Thatcher only brought Britain closer to Europe. She strongly favoured EU as a vehicle for peace in Europe and on account of her strong belief in markets she also pushed hard for the creation of the Single Market in goods and services.

Most telling of all, she supported the Single European Act, which was the basis for the formation of the single currency, the Euro. In her autobiography, she wrote: “It was right to sign the Single European Act, because we wanted a Single European Market” (source: here).

John Major, Thatcher's successor, was also strongly pro-European. “Bastards!” was how he described members of the then tiny anti-EU fringe of the Conservative Party during his time in the big chair. In the early 1990s, the EU-sceptics may have been few in number, but Major’s majority was so slim that he was unable to pass legislation without their support. Exploiting their position of power, they extracted 'a pound of flesh' for every vote and Major hated them.

Meanwhile, the vast majority of Conservative Party members were still very pro-EU at the time. The core of the British Labour Party also strongly supported EU membership throughout and beyond the Thatcher and Major years.

No one in Britain in the early 1990s entertained the idea that Britain would ever leave the EU and the ‘bastards’ were viewed by most British people as Far-Right freaks.

Given the erstwhile strong pro-EU consensus across the British political spectrum, how did Britain ever end up leaving the EU, let alone be governed by the lunatic anti-EU fringe?

Fast forward to the Prime Ministership of David Cameron.

Cameron was adamant not to allow himself to be paralysed as John Major had been by the anti-EU Conservative fringe. In exchange for a promise from the EU-sceptics that European issues would be left on the back-burner during his first term in office to maximise Cameron's chances of being re-elected for a second term, Cameron offered the ‘bastards’ a referendum on EU membership in his second term, if he won a second term.

Which he did. And so Cameron called a referendum on EU membership in 2016. A referendum on its own does not guarantee Brexit, of course. The British people actually had to vote in favour of Brexit too.

Which they did. On the day of the Brexit referendum, 17.4 million voted to leave the EU out of a total UK electorate of 46.5 million. Some 16.1 million voted to remain. Some 13.0 million did not vote at all. The lethargy surrounding the question of EU membership, especially among the young, is still shocking. The lethargy, it turned out, was entirely pivotal to the outcome, because the Brexit vote was basically a protest vote.

The reasons why a Brexit became a way to express protest are many and complex. Most of these reasons were poorly understood at the time. And many of the reasons had nothing to do with the EU per se whatsoever.

It is therefore no surprise that when the referendum result was announced it sent shockwaves through Britain and across Europe. Less surprisingly, the British establishment had not seen it coming, because the British media and many political analysts inhabit a world very different from those who voted for Brexit. They simply had - and still have - no appreciation of how tough life had become for many people in Britain, particularly for those in the lowest income groups.

Yet, in retrospect, the warning signs were there all along. In 2011, riots had broken out in many British cities. This huge red flag should have alerted the media and analysts to the existence of widespread discontent within the lower layers of British society (see here).

This discontent was due to a catastrophic collapse in living standards for lower-income groups in the aftermath of the Global Financial Crisis of 2008/2009. Quantitative easing (‘QE’) by the Bank of England had been the main instrument of macroeconomic policy for generating economic recovery, but QE also massively increased income inequality by pushing up the value of financial assets, whose ownership is strongly skewed towards the rich.

The Brexit referendum was carried by an unholy alliance consisting of these angry working-class poor, a small group of very wealthy individuals, a thin slice of British business-owners as well as the elderly, particularly those residing in rural Britain.

Brexit was a wholesale rejection of conventional politicians in favour of populists promising “sunny Brexit uplands” for Britain outside the EU.

Populists had found it easy to attack the EU. Made up of 27 different countries, the EU rarely defends itself very effectively. Nor had perceptions about the EU been aided by the fact that southern Europe had recently experienced serious economic turmoil in the European Debt Crisis (see here).

Strong nationalistic rhetoric and colourful xenophobia employed by pro-Brexit campaigners, such as Nigel Farage easily drowned out the boring pro-EU arguments of mainstream politicians.

Foreign election interference also played a key part as gross misinformation about the EU was targeted specifically at browbeaten swing voters. Among the most persuasive lies were promises of millions of pounds for the NHS, endless lines of immigrants, and Turkey’s imminent membership of EU.

It would be unfair, however, to claim that the Brexit campaign was based entirely on populist lies. Among the top Brexiters, mainly Far Right Tories, who had been thrust into the very heart of government following the generals elections in 2017 and 2019 there existed a carefully crafted and largely coherent albeit politically untenable vision of Brexit.

This group of ardent Brexiters believed in a modern resurrection of the Victorian age in which Britain would once again ‘rule the waves’ by morphing itself into a low-tax, low-regulation, open-economy 'buccaneering' state, free from the constraints of trading blocks and especially EU regulations.

This vision of Brexit proved especially seductive to sections of the British financial elite and the business community, which simply refused to pay attention to the counter-arguments. For example, they refused to acknowledge that, at just 2% of global GDP, Britain is simply not the economic powerhouse it once was. Far more importantly, they paid no heed to the fact that the world long ago ceased to be a collection of stand-alone economies with which Britain could trade at will. Instead, the world of today is organised into large trading blocks to which membership is absolutely essential in order to freely trade and invest. Finally, they simply ignored so-called 'gravity effects', which make EU membership particularly important for British prosperity and economic security.

Instead of facing these challenging facts of life, the Brexiters instead concocted three specific election promises, which, as we shall see, had hardly any basis in reality:

Promise Number One was to end immigration. This promise was tailored to attract the votes of xenophobes among the poorly educated lower-income groups of British society. As mentioned above, these groups had been left behind in the aftermath of the Global Financial Crisis and were struggling. They proved particularly receptive to anti-EU immigration arguments, because they had found it especially difficult to compete with more motivated, harder-working, and far better skilled workers from Eastern Europe.

Promise Number Two was to completely deregulate the British economy. This promise was designed to get the rich and business owners onboard. Brexiters, like Jacob Rees-Mogg, spoke of a ‘bonfire’ of some 4,000 EU laws to turn Britain into “Singapore on the Thames”, seemingly oblivious of the fact that Singapore is actually heavily, albeit very efficiently, regulated. Almost no one in the British media scrutinised the feasibility of removing so much regulation, particularly given the fact that most of it had received strong backing in the British parliament. Perhaps the media’s negligence of the issue can be explained by the fact that deregulation never became a prominent election issue during the Brexit campaign, but it was important nevertheless because the promise of deregulation helped Brexiters to secure a great deal of funding for the Brexit campaign.

Promise Number Three was to cut taxes by at least 10% of GDP. This was by far the most important Brexit promise, yet one which to this day Brexiters have still not publicly acknowledged. Brexit simply makes no sense without a tax cut of this size, because in a world of trade blocks surrounded by tariff barriers Britain can only compete if it lowers its own cost production relative to other countries by this much. The alternative strategy of compensating for tariff barriers in export destinations through rapid productivity growth was a complete non-starter; it flies in the face of historical trend of weak productivity growth in Britain, and would have require major public investment and therefore higher taxes. Deregulation, while lowering some costs, would simply run into other problems, such as non-tariff barriers.

The big problem with tax cuts, of course, is they have to be funded in order to avoid public debt spiralling out of control. So, where are the savings going to come from? Enter the National Health Service (NHS), Britain's much-loved free-to-use health care system. NHS spending accounts for approximately 12% of British GDP, so a sale of the NHS would not only enable the government to lower taxes by the desired 10% of GDP to make Britain competitive again, but also put a massive windfall into the government's coffers.

In short, there was a clear economically viable vision behind Brexit, but unfortunately for the Brexiters their vision always sorely lacked in political realism. And it is for this reason that all three Brexit promises – spoken and unspoken – were broken right from the start. Consider each promise:

Brexit Betrayal Number One: Contrary to ending immigration, immigration has risen significantly in post-Brexit Britain. Immigration took off like a rocket the moment Brexit happened (see chart below). In addition to the rise in overall numbers, there has also been an important shifts from EU to non-EU immigration (and hence from white people to brown people) and from lower paid/skilled sectors to occupations with higher pay and higher skills (see here). These shifts have arguably contributed to rising inflation, because they have worsened Britain's shortage of workers with vocational skills. Britain has depended on workers with vocational skills from EU ever since Thatcher abolished conventional apprenticeships in the 1980s. Of course, the City of London and big business owners continue to obtain the skilled foreign workers they need. Viewed from the perspective of a typical lower-income British xenophobic Brexiter, this is hardly the version of Brexit he or she had in mind.

Brexit increased immigration dramatically (Source: here)

Brexit Betrayal Number Two: The second group to be betrayed was British business. In April of 2023, the government of Rishi Sunak cancelled Jacob Rees-Mogg's planned bonfire of 4,000 pieces of EU regulation after the government discovered that removing these laws was fundamentally undesirable. Most of the laws serve perfectly legitimate purposes. The other problem is that British goods and services will not – in many cases – be cleared to enter important export markets unless these laws are in place. So far, the only major accomplishment with respect to deregulation has been to allow water companies to pour sewage directly into Britain’s rivers. Some 94% of British voters oppose pollution of rivers (source: here).

Brexit Britain is drowning in shit (Source: here)

Betrayal Number Three: Most importantly of all, the promise to cut taxes ran into a brick wall as former Prime Minister Liz Truss and Chancellor Kwasi Boateng discovered when their budget was rejected by financial markets. The message sent by the City of London was extremely clear: Britain cannot borrow endlessly without adequate incoming tax revenues. In layman's terms, you cannot cut taxes unless you also undertake commensurate spending cuts. Opinion polls have so far made NHS privatisation impossible and newly appointed Chancellor Jeremy Hunt was forced to raise rather than cut corporation taxes after the Truss budget debacle.

They deemed the public finances to be safe in her hands….Former Prime Minister Liz Truss , whose time in office lasted less time than a lettuce survives in the fridge (source: here)

Does Jeremy Hunt's policies mean that tax cuts are completely off the table? Probably not. Despite the omni-shambles that has characterised Tory policies since 2016, there are still people in the Conservative Party, who believe a Tory win can be snatched from the jaws of defeat at the next general election in 2024. They want Sunak to move decisively to the Right, particularly on immigration. So far, none of them have had the cojones to mention a sale of the NHS, but without which Brexit can never become economically viable.

So far, the government's strategy has been to run down the NHS slowly. It does so by increasing the difficulty of getting GP appointments, creating longer and longer waiting lists, letting patients die in ambulances, and fomenting a crisis in mental health care. The idea is to gradually induce patients to give up on the public health care system and take out private health insurance instead (See here).

NHS waiting lists (source: here)

However, in my opinion British votes will not stand for an outright sale of the NHS. Everyone knows that the alternative - a US style health care system - would be a disaster. Besides, there many people who reside in the soft economic underbelly of Britain who simply cannot afford private healthcare. What will happen to them if NHS is sold?

Which brings us back to statement I made at the top: Brexit was stillborn. If NHS can never be sold then the big tax cuts required to make the economy work will never be feasible. And, in turn, this means that Brexit will never succeed. Tax cuts, clearly, are the Achilles Heel of Brexit.

For these reasons, Brexit is simply another classic British misadventure orchestrated by the country's small, wealthy elite, which is taking advantage of a very ignorant and deeply neglected underclass of the electorate. As the Brexit misadventure sours further, it will - correction it already is - become more and most costly for the poorest, the most ignorant, and the most vulnerable people in Britain. And the vulnerable white poor are certain to take their anger out on immigrants.

When will British politicians accept a change of tack on Brexit is required? Clearly, since Brexit will never work it will be as much of a millstone around the neck of the next Labour government as it is around the neck of the Tories. Polls show that a clear majority of British voters now favour re-joining the EU. The least painful route to a new referendum would probably be to argue that Brexit was sold to voters on false pretexts.

Unfortunately, myopic British politicians from both parties were far too eager to vociferously support Brexit in the immediate aftermath of the referendum. They now find it difficult to undertake a big public U-turn on Europe. It is therefore likely that the next election will not be major Brexit watershed (see here). Britain's long decline looks set to continue.

The End