Government assessment

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DExEU assessment

The government assessment was published by the Department for Exiting the European Union in November 2018. This cited mid-range GDP losses from just the trade effects of:

1.4% for an EEA-style agreement (£0.5 billion per week)
4.9% for an FTA (£2.0 billion per week)
7.7% for the WTO (or ‘no deal’) option (£3.0 billion per week).

These losses were greater for the FTA and WTO options when migration effects were taken into account (see Table 8.1 below). Under EEA, they assumed zero impact from migration because the UK economy would continue to benefit from the free movement of labour (in both directions).

In late 2019, the Johnson government refused to produce an economic assessment of its proposals, despite Parliament requesting one to inform the Commons debate.

Component impacts on GDP

DExEU analysed the component impacts on GDP relationships for trade effects plus immigration and regulatory flexibility (see Table 8.1). They used five components:

tariffs
non-tariff barriers
UK trade deals
regulatory flexibility
immigration on GDP of the different Brexit trade options (from the report’s Table 4.12).

DExEU found that:

the biggest impact was new trade barriers (tariffs, customs barriers and regulatory barriers) created by leaving the EU Customs Union and Single Market.
- non-tariff barriers (NTBs) would lose 1.5% to 6.5% of GDP
  - NTBs apply in all three scenarios but were highest in the FTA and WTO (‘no deal’) options
  - in particular, UK-EU services trade would suffer from NTBs (such as regulatory standards and rules over market access).
- tariffs apply under the WTO option.
  - the weighted average tariff for UK goods trade with the EU would be around 3.8%:
  - many sectors would carry low or zero tariffs but tariffs for some would be high (such as automotive and agriculture).
migration effects had the next biggest effect – a loss of 1.8% of GDP from loss of freedom movement
impact of new trade deals was expected to be small with central estimates at 0.1 to 0.2%.
- government assumed that all EU trade agreements with third countries would continue as UK-specific arrangements (so, no effect)
- a trade deal with the US (the UK’s next largest trade partner after the EU) was expected to increase long-term UK GDP by about 0.2% (according to the Cross-Whitehall briefing of January 2018).
- trade deals with other non-EU countries and blocs would add a further 0.1- 0.4% to GDP.
- deals with China, India, Australia, the Gulf states and Southeast Asia would take many years to negotiate.
changes to regulation after Brexit would be limited and have a small effect of 0.1% of GDP.

Note that the EEA-type scenario was effectively an estimate of the costs of leaving the EU Customs Union (i.e. 1.5% of GDP). Post-Brexit, it is a rough estimate of the benefits of rejoining the EU Customs Union and removing the associated NTBs.

Rejoining the EU Customs Union would mean losing the benefits of any new post-Brexit UK trade deals (estimated at 0.1% GDP at the time), if the terms of rejoining did not compensate the UK accordingly. The UK would also benefit from any better EU trade deals.

Table 8.1: DExEU estimates of long-run economic impacts

Impact on jobs and income

To make the GDP results more tangible, the long-run impacts on GDP can be translated into employment effects. A rule of thumb is that a long-run 1% loss of GDP will lead to a long-run 1% loss in jobs – assuming wage rates and productivity remain unchanged. The UK economy provided 35 million jobs in 2017.

Using the rule of thumb, the employment effects of the Government’s November 2018 central estimates could be equivalent to reduced employment of:

EEA – 0.5 million jobs
FTA – 1.7 million jobs
WTO – 2.7 million jobs

Given the flexibility of the UK labour market, the employment effect would be likely to be lower. For example, some employers could choose to reduce wages to protect jobs, or they might be willing to accept reduced productivity. If employers’ responses limit the fall in jobs, real wages would fall, which would squeeze households in a different way.

Impact on household income

Average disposable household income for 2017 was £33,000. As movements in GDP flow through to households, the annual percentage impacts on households mirror the changes in GDP. The effects on disposable income of the GDP impacts in Table 8.1 would be: