Austerity and Brexit not to blame for sluggish UK economy, new Institute of Economic Affairs analysis finds

• There is little evidence that the period of relative spending restraint in the 2010s did long-term damage to growth or productivity, but it was necessary for fiscal credibility 

• Brexit has largely been a non-event in macroeconomic terms, which makes sense because relatively little has actually changed   

• The UK's output per head has continued to perform similarly to that of countries with similar characteristics, such as France, Germany and Canada. 

New research from the Institute of Economic Affairs (IEA) by economist Julian Jessop examines two of the most widely blamed causes of the UK's poor economic performance over the past decade and a half: fiscal "austerity" after 2010 and the 2016 vote to leave the European Union. It concludes that the evidence for either being a major drag on growth is much weaker than commonly assumed. 

Austerity: necessary restraint, not "savage cuts 

Claims of lasting damage to growth or productivity caused by austerity' are not well supported by the evidence. The 2010s is widely mischaracterised as a decade of savage cuts that undermined the foundations of the economy. But the degree of cuts is overstated; spending restraint was necessary to protect fiscal credibility; and there is nothing to suggest that spending more would have been growth-enhancing.  

Public spending was held broadly steady in real terms between 2010-11 and 2019-20. The fall in spending as a share of GDP simply took it back to the levels which were normal before the Global Financial Crisis. Moreover, this was a period of relatively rapid growth in public services productivity. 

Fiscal consolidation succeeded in bringing borrowing under control. The annual budget deficit fell from 8.7% to 2.6% of GDP, and the cyclically-adjusted current budget deficit was nearly eliminated.  

Jessop does show that capital budgets took a bigger hit and argues that some of the cuts to environmental protection, defence and justice now look short-sighted. But he also argues that a major programme of public works in the 2010s could have been just as wasteful as HS2 is proving to be now. 

Brexit: a "bewildering range" of estimates 

The paper presents similar scepticism of claims about the economic cost of Brexit. It shows that the OBR's assumption of a 4% long-run hit to productivity was a crude average of 13 external studies, nine of which suggested a smaller impact, and that the OBR's assumption of a 15% fall in the UK's total trade in goods and services has simply not happened. 

More recent "top-down" studies fare no better in the paper's assessment. A 2025 NBER paper estimated Brexit had reduced UK GDP per head by 8% using economic "doppelgänger" comparisons, and by 6% using firm-level survey data.  

The paper argues these approaches simply cannot separate out the impact of Brexit from other reasons why some economies have grown more quickly (or slowly) than the UK since 2016, including the impact of Covid and the energy crisis. Some of the UK's peers, notably the US, Italy and Spain, have benefitted from local factors that have nothing to do with Brexit. 

It is more helpful to compare the performance of the UK to individual countries with similar characteristics and at similar stages in the economic cycle, such as France, Germany and Canada. This approach shows that Brexit has largely been a non-event in macroeconomic terms. 

Moreover, while Brexit has had some upfront costs, including disruption to labour markets and weakness in business investment, these headwinds are already fading as the initial uncertainty has eased and firms adapt. 

Indeed, the real story is how little economic impact that leaving the EU has had. This makes sense, because relatively little has actually changed. 

This briefing is part of a series published by the IEA on Britain's 'Great Stagnation', diagnosing Britain's growth problem. The next briefings in the series will be published in the coming weeks and will be compiled into a full book published in September. 

Paper author and Economics Fellow at the IEA, Julian Jessop said: 

"Austerity and Brexit have become convenient scapegoats for problems that have much deeper roots. The data show that public spending was never cut as savagely as claimed, and that most of the economic harm attributed to Brexit simply hasn't materialised. It's time we stopped blaming these two shocks and had a more honest conversation about what's really holding the UK economy back." 

Great Stagnation Briefing No. 7: 'Austerity and Brexit' can be accessed here

This publication was made possible through the support of grant [#63661] from the John Templeton Foundation. The opinions expressed in this publication are those of the author(s) and do not necessarily reflect the views of the John Templeton Foundation.