Brexit is the ultimate reason why the UK now faces a fresh round of austerity, a former interest rate-setter at the Bank of England has said. “The UK economy as a whole has been permanently damaged by Brexit,” Michael Saunders, who was an external member of the central bank’s monetary policy committee, said in an interview with Bloomberg TV. “It’s reduced the economy’s potential output significantly, eroded business investment,” he said, adding: “If we hadn’t had Brexit, we probably wouldn’t be talking about an austerity budget this week.” “The need for tax rises, spending cuts wouldn’t be there, if Brexit hadn’t reduced the economy’s potential output so much.” Saunders joined the rate-setting committee shortly after the result of the Brexit referendum in 2016 and left the role in August this year. He said the “main legacy of that period” was weak economic output.
The prime minister, Rishi Sunak, and the chancellor, Jeremy Hunt, have both warned that the autumn statement will probably include spending cuts and tax rises. Hunt, who is to address parliament on Thursday, said last week that there would be a “tough road ahead”. Saunders’ remarks came as calculations, compiled in an index by Bloomberg, suggested the US dollar value of shares listed in London had been overtaken by Paris. This means that London has lost its crown as the biggest hub for stock market listings in Europe. Asked about this turn of events, Saunders said it was only one illustration of the broader damage caused by Brexit. The pound’s depreciation following both the Brexit referendum and in the aftermath of Liz Truss’s mini-budget was a likely factor behind the shift in fortunes. Long-term concerns about consumer resilience in the face of the cost of living crisis have also depressed market valuations for mid-sized listed firms with a large share of their activities in the UK. Some of the intentions behind Truss’s failed mini-budget were correct, Saunders said. The ambition to try to raise the potential of the UK economy, the ceiling under which can generate non-inflationary growth, was well–founded. “Liz Truss, in her brief failed premiership, got that one point right.” The methods of cutting taxes and pushing for deregulation chosen by Truss and her chancellor, Kwasi Kwarteng, were less wise, however. “I’d put more of that emphasis on improving trade links with the EU,” he said, along with investing in education and addressing long-term sickness among working-age people. His remarks echo those of investors who said that the UK could improve its overall productivity – non-inflationary growth – if it revisited its trade links with the continent. Other suggestions for increasing output included increasing the amount of skilled and unskilled workers by allowing more immigration into the UK.