B. Introduction: The Structural Context of the Post-TCA UK Economy

B.1. Analytical Challenges and Confounding Macro-Factors

Accurately isolating the financial consequences of Brexit presents a substantial challenge due to overlapping global economic shocks. The end of the Brexit transition period on January 1, 2021, coincided with the persistent disruptions caused by the COVID-19 pandemic. This was followed by the inflation shock resulting from the Russian invasion of Ukraine.[1] These simultaneous events, coupled with a pre-existing stagnation in productivity observed since the global financial crisis, make it highly complex for analysts, including the OBR, to definitively disentangle the medium-term effects attributable solely to the new trading relationship with the EU.[1] Consequently, long-term assessment relies heavily on counterfactual modelling that simulates the economy’s trajectory had the UK remained within the EU structures.[8]

B.2. The Core Mechanism: Non-Tariff Barriers (NTBs)

A central finding across institutional research is that the primary economic drag is not tariffs—as the TCA preserved tariff-free and quota-free trade in goods—but the introduction of extensive non-tariff barriers.[9, 10] The UK Conservative government’s decision to prioritise regulatory autonomy (sovereignty) over maximal market access resulted in a trading agreement that mandates customs checks, complex rules of origin requirements, regulatory divergence, and border delays.[9, 11, 12] These administrative costs and frictions act as a permanent impedance to trade, reducing the exploitation of comparative advantage and inhibiting productivity, which the OBR identifies as the source of the 4 per cent long-run reduction in productivity.[1]

C. Macroeconomic and Fiscal Impacts on the UK as a Country

C.1. Deterioration of UK Growth Potential (GDP and Productivity)

The structural shift in the UK's trading relationship has fundamentally altered the long-run trajectory of its economy. The OBR maintains its core assumption that the TCA will reduce long-run productivity by 4 per cent compared to continued EU membership.[1] Crucially, the OBR analysis further estimates that approximately two-fifths of this anticipated 4 per cent impact had already occurred by January 2021, a consequence of heightened uncertainty weighing heavily on business investment and capital deepening immediately following the 2016 referendum and during the subsequent negotiating period.[1, 13] This illustrates that prolonged uncertainty was a significant financial cost long before the TCA was implemented.

This decline in potential translates directly into a smaller overall economy. External consensus estimates reinforce the OBR’s projection. The National Institute of Economic and Social Research (NIESR) estimates that UK GDP will be 5–6 per cent lower by 2035, while analysis from Goldman Sachs suggests a GDP impact of 5 per cent since the referendum.[14] Independent analysis commissioned by the Mayor of London estimated that the UK’s real Gross Value Added (GVA) was approximately £140 billion less in 2023 than it would have been under a Remain scenario.[2] Furthermore, the long-run impact on living standards is significant, with OECD modelling suggesting the cost of Brexit, through GDP reduction, is equivalent to £3,200 per household by 2030 in a central scenario.[15]

C.2. Trade Friction and Divergence in Trade Patterns

The impact of the new relationship is highly heterogeneous across trade types. The OBR assumes that both overall exports and imports will be around 15 per cent lower in the long run than if the UK had remained in the EU.[1] Data compiled by the House of Commons Library validates this trend, particularly for goods.

By 2024, UK goods exports to the EU were 18% below their 2019 level in real terms.[16, 17] Critically, while goods exports to non-EU countries also saw a decline (14% below 2019 levels), the steeper fall observed in EU trade indicates that the TCA introduced a relative degree of friction greater than trade with the rest of the world.[16] Conversely, the services sector has demonstrated robust growth since the pandemic, performing better than the goods sector. Services exports to the EU were 19% above their 2019 level in real terms by 2024, while exports to non-EU countries rose by 23%.[16] This divergence confirms that economic damage is most acute where physical border checks and regulatory alignment are mandatory, distinguishing the high administrative burden on goods from the less disrupted flow of services.[9, 16]

C.3. The Strain on Public Finances

The structural reduction in economic size has a direct, negative flow-through effect on the public finances by depressing the tax base. This fiscal impact substantially outweighs the financial gain realized from ceasing contributions to the EU budget, which was previously estimated at approximately £8 billion per year.[18, 19]

Analysis quantifying this deficit suggests that based on the OBR's 4 per cent productivity loss estimate, roughly £40 billion of the increased tax burden imposed between 2019 and 2024 was necessary specifically to address the fiscal shortfall stemming from the EU withdrawal.[3, 4] The Bank of England Governor and other political figures have acknowledged the "severe and long lasting" impact of Brexit on the public finances, contributing to the need for difficult choices regarding future tax and spending.[20, 21] In the long term, the weakened growth outlook exacerbates the challenge of managing national debt, with the OBR warning that public sector net debt is on course to hit 270% of GDP by 2070 if current fiscal policy parameters remain unchanged.[22, 23]

D. Sectoral and Labour Market Restructuring

D.1. Financial Services (The City of London)

The UK financial services sector, a globally dominant industry, underwent substantial restructuring following the loss of EU "passporting" rights. This forced reallocation of activities to maintain market access to the EU bloc.

Quantifiable asset migration has been tracked: research by New Financial identified over 440 financial services firms that have moved parts of their business, staff, assets, or legal entities from the UK to the EU.[24] Crucially, this included the relocation of more than £900 billion in bank assets, representing approximately 10 per cent of the total UK banking system, primarily moving to new European hubs like Frankfurt, Dublin, and Paris.[24, 25] The consequence has been an erosion of London's competitive standing in specific activities, such as euro-denominated trading. For instance, London lost its status as Europe's largest equity market to Paris in late 2022, as equity trading shifted to continental hubs.[25, 26] UK firms are adapting by prioritizing outward Foreign Direct Investment (OFDI), specifically through greenfield projects and M&A deals within the EU, substituting physical presence for cross-border trade which is now subject to regulatory barriers.[6] This strategy, while securing market access, necessitates costly "double running" of regulatory functions, dissipating the prior efficiency gains centralized in London.[27]

D.2. Manufacturing and Supply Chains

The manufacturing sector has borne significant administrative costs associated with new customs and regulatory divergence, consistent with the OBR's forecast of reduced trade volumes.[28] Evidence suggests that the imposition of NTBs has proven particularly onerous for smaller firms (SMEs) operating within supply chains, who often lack the scale and expertise to navigate complex rules of origin documentation and administrative procedures.[11, 29] These rising trade costs contributed to a period of disrupted production and reduced investment.[30] Modelling indicates that long-term business investment will remain 1.2 per cent lower solely due to the elevated non-tariff trade barriers, inhibiting capital deepening necessary for productivity improvements.[31] While some proponents argue that a weaker sterling and the freedom to pursue new trade deals offer long-term opportunities for manufacturers, these potential benefits have not yet offset the immediate and persistent challenges related to trade friction and supply chain integration.[32]

D.3. Labour Supply and Staff Shortages

The transition from EU free movement to a points-based immigration system has delivered a severe financial shock to labour-intensive sectors. Analyses confirm a resultant shortfall of approximately 330,000 workers across the UK economy, concentrated in less-skilled sectors such such as social care, hospitality, and transport.[7, 33, 34] This reduction in labour supply has contributed directly to labour market tightness, identified by the Bank of England Governor as a risk factor contributing to inflation via sustained wage growth in these constrained sectors.[33, 34]

In public services, particularly the National Health Service (NHS), the impact is evident in recruitment and retention. There has been a significant decline or stagnation in new registrations of EU doctors and nurses in shortage specialties like paediatrics and psychiatry since the referendum.[35, 36] The end of free movement exacerbated pre-existing staffing issues.[37] Furthermore, beyond quantifiable vacancies, academic research using difference-in-differences methodology has documented a reduction in job satisfaction among NHS workers—an average drop of 1.39%, with physicians (2.6%) and nurses (2.4%) reporting the largest declines—suggesting a correlation between the post-Brexit environment and increased strain on the existing workforce.[38]

E. Financial Impact on Households and Individuals

E.1. Brexit's Contribution to the Cost-of-Living Crisis

The economic friction generated at the UK-EU border translates into a tangible cost imposed directly on UK consumers, significantly contributing to the cost-of-living crisis alongside global factors.[2, 39] LSE researchers estimated that the increase in non-tariff barriers on EU food imports resulted in a cumulative welfare loss of £6.95 billion to UK households between December 2019 and March 2023.[5] This quantified impact represents an average increase of approximately £250 on food bills per household over that period.[5, 40]

Detailed analysis of consumer prices provides robust evidence of the mechanism at work: price increases were concentrated entirely in food products subject to high NTB exposure (such as meat and cheese imported from the EU), which saw prices rise about 10 percentage points higher relative to similar products not subject to these barriers.[5] This demonstrates a clear causal link between Brexit-induced trade friction and domestic inflation, operating independently of general macroeconomic shocks.[5] The resultant food insecurity and higher cost of living disproportionately impact low-income households, potentially leading to increased demand for health services over time.[41, 42] Overall, the Resolution Foundation estimated that reduced growth potential puts the average worker on course to suffer a loss of more than £470 in annual lost pay by 2030, even after accounting for rising living costs.[42]

E.2. Agricultural Sector Funding Transition and Border Costs

The UK agricultural sector is undergoing a profound financial transition following the termination of the EU’s Common Agricultural Policy (CAP). Prior to Brexit, UK farmers received approximately £3.5 billion annually in CAP payments.[43] For certain sub-sectors, such as upland farms grazing livestock, CAP direct payments constituted an average of 61% of total farm profits, making the change a significant financial shock.[43]

The UK government is phasing out these CAP-style direct payments over a seven-year period, replacing them with Environmental Land Management Schemes (ELMS) that fund the provision of "public goods," such as environmental improvements.[44, 45] This transition generates financial uncertainty, particularly for farmers in regions like North and West Wales that were heavily dependent on the former system.[46] Furthermore, the introduction of the Border Target Operating Model (BTOM) imposes new financial risks. Food importers face new costs, estimated between €140 and €260 per shipment for certificates, alongside potential fees for physical checks.[47] This disruption risks the supply of perishable and crucial inputs, such as seeds and young plants necessary for UK glasshouse horticulture, threatening domestic production yields and overall food security.[48]

E.3. Key Economic Indicators Post-TCA Implementation

A comparison of key performance metrics relative to the pre-pandemic baseline (2019) illustrates the selective nature of the economic impact:

Table of UK Trade Performance Post-TCA (2024 vs. 2019 Levels, Real Terms) [16]

The data reinforces the finding that the trade relationship with the EU has deteriorated relatively more significantly than trade with the rest of the world for physical goods, directly reflecting the administrative costs and friction embedded in the TCA for high-NTB trade items.[16, 17]