Chancellor Rachel Reeves made headlines this weekend as she addressed the International Monetary Fund (IMF), candidly acknowledging the long-term economic damage inflicted by the United Kingdom’s 2020 Brexit deal. Her remarks, shared at a high-level international economic committee meeting attended by the world’s top finance ministers and central bankers—including the G7, China, India, and the European Central Bank—marked a notable shift in the UK government’s tone on Brexit’s economic legacy. Reeves did not mince words, stating, “The UK’s productivity challenge has been compounded by the way in which the UK left the European Union.” According to BBC, she cited the Office for Budget Responsibility’s (OBR) calculation that the Brexit arrangement has resulted in a 4% long-term hit to the British economy, compared to what would have occurred had the country remained in the EU.
This acknowledgment comes at a sensitive moment for the UK, as ministers prepare for the upcoming Budget on November 26, 2025. The government is expected to spotlight the economic consequences of Brexit, especially as it faces the prospect of further tax rises to counter a persistent downgrade in long-term productivity. The OBR’s forthcoming forecast is anticipated to lay out in detail the causes behind this economic slowdown, with Brexit set to feature prominently.
Reeves’ comments signal a departure from Labour’s previous reluctance to dwell on Brexit’s downsides. Since last month’s party conference, ministers have adopted a more forthright approach, openly discussing the economic headwinds attributed to the 2020 deal. The original Brexit agreement, hammered out by Boris Johnson’s Conservative government, was always contentious. Yet, Labour has recently sought to “reset” relations with the EU, culminating in a deal this May aimed at smoothing over some of the thorniest issues left unresolved in the initial settlement.
External economists have long pointed to a post-referendum fall in investment and an underperformance in goods trade as signs of Brexit’s drag on the UK economy. Some, however, note that services trade has remained relatively robust and that the UK has enjoyed new freedoms to strike trade deals globally. But as Reeves highlighted, the net effect has not been positive for Britain’s productivity or fiscal health.
These economic realities are coming to a head as the government weighs its options for shoring up public finances. Reeves, at her first Budget in November 2024, announced tax rises worth £40 billion a year, including significant increases to payroll taxes paid by employers. At the time, she insisted that such moves would not need to be repeated. Now, with the economic outlook clouded by the ongoing effects of Brexit, she faces the daunting prospect of yet another fiscal repair job.
Meanwhile, the Conservative Party has drawn a sharp dividing line on economic policy. At their recent conference, party leaders pledged to slash public spending by £47 billion a year if they win the next election, promising deep cuts to welfare, the civil service, and foreign aid. This stance sets up a clear choice for voters between Labour’s approach—acknowledging the need for new revenue and potentially higher taxes—and the Conservatives’ commitment to austerity and smaller government.
Across the Channel, the European Union is grappling with its own budgetary drama. As reported by Euractiv, EU countries are forging ahead with the European Commission’s blueprint for the 2028-2034 long-term budget, even as the European Parliament remains bogged down in infighting. A draft document obtained by Euractiv outlines a sweeping overhaul: a simpler, more efficient budget structure with four new headings, and a controversial move to merge agriculture and regional subsidies into national plans negotiated between EU capitals and Brussels.
This draft, which will be debated by European affairs ministers on October 21, 2025, also earmarks €234 billion for an industrial megafund, alongside competitiveness programmes and other horizontal budget issues. The Danish presidency is pushing for a swift resolution, aiming to finalize a “negotiating box” for the European Council by December 18-19, 2025. The hope is that an agreement on the next long-term budget can be reached by the end of 2026, providing much-needed certainty for the bloc.
Yet, the road to consensus is anything but smooth. The most politically sensitive items—such as eligibility criteria for competitiveness funds and the €175 billion Horizon Europe research programme—remain hotly contested. Wealthier member states are insisting that projects be selected strictly on merit, while less affluent countries are pushing for “geographical balancing” to ensure broader access to EU funds. The draft also opens the door to allowing state aid in exceptional and duly justified cases, a move that could have far-reaching implications for the bloc’s internal market rules.
Other thorny issues up for debate include the use of flexibility instruments, the future of the Connecting Europe Facility (which supports infrastructure projects), the AgoraEU media initiative, the Euratom nuclear energy programme, and whether the budget should be adjusted for inflation. The document singles out specific “widening” measures designed to help less developed research ecosystems, reflecting ongoing tensions over the distribution of EU resources.
The process is set to intensify in the coming weeks, with a goal of debating the controversial national plans at a General Affairs Council meeting on November 17, 2025. The most contentious elements will be set aside for final negotiations among EU leaders at the European Council. As the Danish presidency noted, moving quickly is seen as vital to maintaining the EU’s competitiveness and cohesion at a time of rising global economic uncertainty.
Both the UK and the EU now find themselves at economic crossroads. For the UK, the shadow of Brexit looms large over fiscal policy, productivity, and the government’s ability to fund public services without further tax hikes. For the EU, internal divisions over how to allocate resources and support innovation threaten to undermine the unity needed to compete on the world stage. The coming months will test the political resolve of leaders on both sides of the Channel as they navigate these complex, high-stakes budget battles.
As the dust settles, the choices made in London and Brussels will shape the economic landscape for years to come—affecting everything from public services and research funding to the very nature of Britain’s relationship with its continental neighbors.
