Views on economic impact

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Consensus view

The consensus of reputable economists (including the Government, HM Treasury and others) was that Brexit would damage the UK economy.

The reason was simple. Giving up the benefits of the Single Market and the Customs Union in exchange for trade barriers meant the UK faced a serious economic shock.

The main ways in which Brexit would harm the economy were:

reduced trade volumes due to new trade barriers
reduced EU migration due to government policy
lower productivity due to reduced trade and investment
reduced employment (or lower wages)
lower foreign investment in the UK due to uncertainty and reduced attractiveness

Offsetting these significant effects, there would be smaller benefits from saving the contribution to the EU budget, future trade deals and reduced regulation. Regional impacts would vary, depending on how much local industry relied on the EU for trade, skills, workforce and investment.

The economy is complex and it would take a long time for the full effects of leaving the EU to work through. However, the relative impacts of the main options for the future UK-EU trade arrangement were well understood:

EEA (like Norway) – low economic impact
FTA (like Canada) – medium economic impact
WTO (no trade agreement) – high economic impact

An FTA can be ‘shallow’ (like the TCA) or ‘deep’ (like EU-Canada). The shallower an FTA is, the higher the trade barriers. Johnson’s TCA falls between an average FTA and WTO. Theresa May’s earlier Chequers proposal fell between the EEA and an average FTA.

There were originally two WTO options: with a Withdrawal Agreement (WA) or without. This section looks at WTO with a WA. Please see the section on No deal for a fuller discussion of what became known as a ‘WTO Brexit’.

Methodology

Economists estimated a ‘Brexit delta’: the difference between economic growth for the UK as an EU member (the ‘base case’), and with Brexit. With Brexit, the UK economy was expected to continue to grow over the long run but more slowly.

There are two types of economic impact – short-term and long-term. Most economists assessed the economic impact over around 10 years. Shorter term impacts of major changes are more difficult to predict. The long-term estimates used well-tested models of the UK economy and extensive data on the effects of removing trade barriers. To model WTO terms or an FTA compared to EU membership, economists reverse-engineered the economic benefits of trade liberalisation from previous trade deals. They used extensive historic data that quantified the benefits of liberalising trade through the removal of trade barriers.

An important methodological point to note is that the uncertainties in any base-case forecast of the economy were less important than the reliability of the estimate of the difference between the base case and the revised forecast. It was essential to have a robust evaluation of the Brexit delta – the incremental impact on the economy of trade barriers and other Brexit factors, such as immigration, foreign direct investment and productivity.

The switch to a Brexit trade deal with the EU would cause short-term disruption, costs and uncertainty. However, as the impact of these short-term effects are difficult to predict, most economist assessments focused on the long-term steady state. Two notable exceptions were the Office for Budget Responsibility’s (OBR’s) November 2020 evaluation and the Bank of England’s earlier assessment of ‘no deal’.

Note that different economists may consider different factors. For a thorough evaluation of studies, please see: Gemma Tetlow and Alex Stojanovic, Understanding the economic impact of Brexit, October 2018.

Range of estimates

Before Brexit was finalised, economists had agreed on the ranking of the economic harm of the potential Brexit options. Figure 8.1 show seven views of the impact on the size of the economy compared to staying in the EU. Small percentages involve large sums of money: a 1% reduction in UK GDP costs about £20 billion a year (about £400 million a week).

The predicted outcomes for the three main options were:

EEA: fall in GDP of 1.3% to 3.8% – average 2.2%
FTA: fall in GDP of 1.2% to 6.2% – average 3.9%
WTO: fall in GDP of 3.5% to 8.5% – average 6.7% (excluding outlier)

The EEA option had the narrowest range of 2.5% indicating that its outcome was the most certain. The ranges for FTA and WTO were wider (at ~5%) indicating that their outcomes were less certain. There was one notable outlier – Economists for Free Trade – who believed that a WTO Brexit would benefit the economy. Other economists thought their assumptions were unrealistic (to put it politely).

Even before Covid-19, economic forecasters expected the underlying rate of UK economic growth post-Brexit to be low, so the economy would have little resilience to deal with the Brexit shocks.

Figure 8.1: Economic impact of Brexit options

A word on the outlier

Economists for Free Trade (previously known as ‘Economists for Brexit’, which no longer exists) forecast that a hard Brexit will cause long-run GDP to rise by 6.8%. This included 4% from trade effects and 2.8% from reduced regulation. Most economists challenged the EFT assumptions for being unrealistic and questioned the validity of their conclusions.

Their work rested heavily on modelling by Professor Patrick Minford of Cardiff University. Other members of Economists for Brexit included Roger Bootle, Tim Congdon, Professor Kevin Dowd, Gerard Lyons, and Allister Heath.

EFT made assumptions that other economists regarded as unrealistic:

unilateral abolition of all trade barriers and much EU regulation would boost Britain’s trade;
the “gravity” effect does not apply to UK trade, whereby close neighbours trade more with each other;
any fall in trade with the EU will automatically be made up elsewhere;
all price differences are caused by protection through tariffs.

In addition, EFT excluded some key considerations:

tariffs matter less than non-tariff barriers, especially for services but also increasingly for goods.
- the Single Market did away with many of these to benefit trade for all member states;
most price differences reflect differing quality or regulatory standards and are not due solely to tariffs;
in negotiating trade deals with other countries, unilateral abolition of tariffs and non-tariff barriers would mean that the UK would have no bargaining power in future trade negotiations.

EFT acknowledged that the trade liberalisation strategy that they proposed would be politically unpalatable for the current UK government. As the EFT also acknowledged, unilateral liberalisation of trade would seriously damage the British farming and manufacturing industries because the UK market would be flooded by cheaper imports.

Trade liberalisation could benefit consumers but would cause thousands of jobs to be lost. The public would also be concerned that abolishing much EU regulation would greatly weaken protections for the UK environment, workers and consumers.