The UK's exit from the European Union (EU) has had an adverse impact on the economy, according to a new report by the Resolution Foundation. The research warns that a loss of competitiveness will leave the country poorer in the coming decade.
As a result, the UK is set to lose exports and investment to the EU in the long run. In turn, a number of sectors will be hurt, including advanced manufacturing and parts of northern England.
1. Trade
Trade is the exchange of goods and services between people, companies, and countries. It is a key driver of economic growth and innovation.
The EU is a major trade partner for the UK, accounting for around 20% of the country's total trade. As a result, there has been much speculation about the future of UK-EU trading relationships post-brexit.
Many proponents of Brexit argue that the UK will benefit from new trade agreements with third countries after its departure from the EU. But such arrangements will be difficult to put in place. These will need to replace what Britain has lost by removing its unfettered access to the EU market, and will have serious implications for businesses and consumers.
2. Investment
Investment refers to the application of money to produce goods that will be used in the future and/or to create wealth. This includes both direct and indirect investment such as shares, mortgages or savings accounts.
The UK has been the main recipient of foreign direct investment (FDI) from the EU and a number of other countries since it joined the EU. This has helped the UK to become one of the world's largest economies.
But now Britain has voted to leave the European Union, investors are worried that this will have a negative impact on their investments in the UK. This can be because FDI is dependent on the stability of the single market, and the UK is now not a member of it.
Nonetheless, there are some things that can help to reduce the impact of brexit on investments. These include the trade deal that was agreed and the tax changes announced in the March 2021 Budget.
3. Immigration
The UK has a well-established tradition of allowing immigrants to come to the country on both a permanent and temporary basis. These include migrants from Europe, Asia and the Middle East.
As such, immigration is a significant factor in the UK economy, and in particular in the employment market. A number of sectors in the UK have suffered severe labour shortages, which is a significant drag on productivity.
A major challenge for the government is how to balance labour supply with demand. This is a tricky problem because it requires a balance between different skill levels and sectors.
The UK’s migration system has been shaped by two main forces: the government’s commitment to ending free movement of EU citizens and its intention to introduce a new points-based system. This new system will apply to both EU and non-EU migration. It will mean that EU nationals coming to the UK after 1 January 2021 will need to apply for a visa before they can work in the UK.
4. Taxes
Taxes are collected to help fund government works and services. In some countries, governments also use taxation to support specific industries or social causes.
Direct taxes are usually levied on individuals and businesses when they earn or sell goods, or on their property. Other types of taxes include capital gains, property taxes and inheritance tax.
The graph below, from the International Centre for Tax and Development, illustrates that tax revenue is a significant share of total government income in most countries; richer countries collect more tax revenues than poorer ones.
However, taxation is a dynamic process that changes the way people behave, and this change in behavior can cause economic inefficiencies. For example, a high tax rate can discourage labor supply, or induce migration of wealth and talent to a lower-tax country.
