Brexit and drop in workforce harming economic recovery, says Bank governor

Andrew Bailey also said disastrous mini-budget had damaged Britain’s international reputation

Britain is suffering worse economic performance than its rivals because of Brexit and a stark drop in the size of the workforce since the Covid pandemic, the governor of the Bank of England has said.

Andrew Bailey said a combination of headwinds had prevented the economy from recovering to pre-pandemic levels, while warning it would also take time for the government to repair damage to Britain’s international reputation caused by the disastrous mini-budget under the former prime minister Liz Truss.

It came as rampant inflation of 11.1% – the highest figure since October 1981 – piled more pressure on the Bank to continue raising interest rates.

In a downbeat assessment on the eve of the chancellor’s autumn statement, the Bank’s governor told MPs on the Commons Treasury committee: “I’m afraid it’s not a good story.”

Bailey said UK GDP remained about 0.7% below its pre-Covid level, compared with much stronger recoveries in the eurozone and in the US, where he said the levels of GDP had recovered to about 2.1% and 4.2% above pre-pandemic levels.

“It’s a dramatic difference,” he said. Asked whether Brexit was contributing to the country’s underperformance, he said that “there is an effect” from leaving the EU, including a “long-run downshift” in the level of productivity.

“It’s not [an impact] we’ve been surprised by. As a public official I’m neutral on Brexit per se, but I’m not neutral in saying these are what we think are the most likely economic effects of it,” he said.

In a damning verdict on the mini-budget, Bailey said the UK had “damaged our reputation internationally because of what happened”. Threadneedle Street had been forced to step in with an emergency bond-buying scheme to calm turmoil in government debt markets after Kwasi Kwarteng, the then chancellor, announced almost £50bn in unfunded tax cuts.

Bailey said the meltdown had been raised at the gathering of world leaders and central bank governors at the International Monetary Fund’s annual meeting in Washington last month. “People were saying, ‘we didn’t think the UK would do this.’”

Suggesting that bond market investors had watched Kwarteng’s mini-budget speech unfold in a state of near-disbelief, he said the former chancellor’s plan to abolish the 45p additional rate of income tax had caught attention in particular. “Economically speaking it’s not the biggest thing. [But] the way people in the market put it to me it was, again, is that the right thing to do in this situation?

“The camp of believers in what I call the sort of trickle-down economics of the early 1980s is not a very large camp these days.”

Under questioning from MPs, Bailey said he would not take a pay rise if he was offered one.

Households are under intense pressure from inflation after the rise to 11.1% in October, driven by soaring energy bills and the rising cost of a weekly shop. Data from the Office for National Statistics (ONS) showed the annual inflation rate last month jumped a percentage point from 10.1% in September.

Official figures showed Britain’s economy took the first steps towards a potentially lengthy recession in the three months to September, with a 0.2% decline in GDP in the third quarter. A second consecutive decline in the fourth quarter would mark the technical definition of a recession.

Answering questions from MPs on the Treasury committee, Bailey and three other members of the Bank’s monetary policy committee (MPC) said part of the reason the country was being held back was a sharp decline in the size of the workforce since Covid.

“The UK is a dramatic outlier compared to all of the other advanced economies. This is a puzzle,” said MPC member Catherine Mann. Employment in the UK remains lower than before the health emergency struck, thanks to a rise in older workers leaving the workforce and record levels of long-term ill-health among working-age adults.

Swati Dhingra said Brexit was holding back UK trade and driving up inflation by adding to the cost of imported food and other products. “It’s undeniable now that we’re seeing a much bigger slowdown [in trade] in the UK compared to the rest of the world,” she said.

She said post-Brexit trade barriers had led to a 6% increase in UK food prices, alongside a negative impact on wages and living standards in Britain, adding: “We’re definitely underperforming compared to our peers.”


Richard Partington Economics correspondent

The GuardianTramp

Related Content

Article image
In 2022 Liz Truss tried to bin economic orthodoxy – but what is it?
Rishi Sunak soon rowed back from his predecessor’s chaotic experiment, reasserting the seven pillars of UK Treasury wisdom

Larry Elliott Economics editor

27, Dec, 2022 @3:00 PM

Article image
Bank of England ‘blindsided’ by Kwasi Kwarteng’s mini-budget, says governor
Andrew Bailey tells Lords committee of ‘extraordinary process’ with ‘no formal communication’ between Treasury and Bank

Richard Partington

29, Nov, 2022 @6:00 PM

Article image
Who is the ‘sexy turtle’? Andrew Bailey helps decide your mortgage costs
Some praise UK’s most powerful non-elected official for mini-budget response while some say Bank of England governor is out of touch

Anna Isaac

14, Dec, 2022 @3:00 PM

Article image
OBR forecasts likely to show £60bn-£70bn hole after Kwarteng’s mini-budget
Predictions handed to chancellor expected to paint gloomy picture for UK economy amid sweeping tax cuts

Richard Partington Economics correspondent

07, Oct, 2022 @5:20 PM

Article image
Cliff edge looms for UK’s financial system
BoE’s move to end bond buying is a big gamble given the magnitude of the bind Britain is in

Richard Partington

12, Oct, 2022 @6:55 PM

Article image
UK in recession and further interest rate hikes probable, Bank warns Kwarteng
Threadneedle Street makes clear on eve of tax-cutting mini-budget that plans risk triggering more rate rises

Larry Elliott, Jessica Elgot and Richard Partington

22, Sep, 2022 @9:30 PM

Article image
The Bank of England governor plans to stick – but it is a gamble
Andrew Bailey’s tough stance fuels the danger that ending one form of emergency intervention creates a need for a bigger one

Nils Pratley

12, Oct, 2022 @6:10 PM

Article image
Pound falls below $1.09 for first time since 1985 following mini-budget
Sell-off as investors take fright at prospect of surge in government borrowing to cover huge tax cuts

Richard Partington and Angela Monaghan

23, Sep, 2022 @2:03 PM

Article image
Government moves to calm markets as pound falls to lowest level against dollar since 1985
New chancellor on charm offensive in Square Mile says Bank of England independence ‘is sacrosanct’

Richard Partington and Kalyeena Makortoff

07, Sep, 2022 @6:23 PM

Article image
UK inflation could fall rapidly as energy prices drop, says Bank boss
But Bank of England’s Andrew Bailey says worker shortage may still pose major risks in cost of living crisis

Richard Partington Economics correspondent

16, Jan, 2023 @6:34 PM