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The last week has seen a number of comprehensive reports on the economic impact of Brexit released. Superficially, the reports argue that Brexit will be quite negative for the UK economy. But how credible are the assumptions underlying the reports and are there more nuanced messages to be found? Open Europe’s Raoul Ruparel investigates.
23 March 2016
Our view remains as laid out in our Brexit report from last year – the impact of Brexit is not predetermined but depends on choices the UK takes afterwards. The long term economic impact is likely somewhere between -2.2% of GDP or +1.6%, with a more realistic range between -0.8% and +0.6%. The key factors in determining the cost will be in our view: whether the UK strikes a free trade agreement (FTA) with the EU, the impact of leaving the customs union and imposing a border between the UK and the EU, how successful the UK is in opening up to trade with the rest of the world, the choices it takes on migration, the savings from a reduced EU budget contribution and potential deregulation. So how do these latest studies compare to our assessment and where do they differ?
The two studies I will focus on here will be the PwC report commissioned by the CBI and Oxford Economics own assessment.
There are plenty of questions one can ask about the underlying motives and views which lie behind these reports, but there has been plenty of playing the man not the ball in this debate so far. As such, I feel it more important that I focus on the content of the reports.
I won’t rehash all the findings of the report here but the key findings are that Brexit would lead to a decline in GDP of between -3.1% and -5.5% (-3% and -5.4% in GDP per capita terms) in the short term (up to 2020). In the longer term the decline falls to between -1.2% and -3.5% of GDP (-0.8% and -2.7% in GDP per capita terms) by 2030.
So what can we conclude about this report? Well, it’s certainly far more serious than the CBI’s previous interventions thanks to the work of PwC. Nevertheless, the short term estimates are necessarily very speculative and unfortunately received the most attention. Ultimately, the report actually shows that the impact in a likely scenario where the UK strikes an FTA would be fairly small at -0.8% of GDP. Furthermore this could be boosted by potential gains to trade outside the EU and by less pessimistic assumptions on fiscal/regulatory savings. All told though, if I were looking at this from the Leave camp, the core findings of this report aren’t all that bad particularly once you tally with non-economic arguments for leaving. Of course, it does once again raise the fundamental question of what approach they want to take outside the EU.
This report does not examine the short term impacts but looks through to the longer term, finding the economic impact of Brexit would be somewhere between -0.1% of GDP to -3.9% of GDP.
Clearly, economic modelling (including our own) should always be viewed cautiously and the outcomes should be judged on the credibility of the assumptions and inputs –I have tried to assess these above. What we can see is that there are some assumptions which could be questioned especially around the short term effects and some of the long term gains.
Nevertheless, the fundamental conclusion I draw from these reports is that in all likelihood the impact of Brexit in a scenario where the UK strikes an FTA with the EU will be around than -1% of GDP in the longer term. This impact might be even lower in per capita terms and does not include some of the potential upside – though realising said upside is not a given and would not come easily. I think the reports also highlight that taking a more open and liberal approach helps reduce some of the potential negative shock. Much of this fits with our own analysis. There will also undoubtedly be some short term uncertainty post-Brexit and people will try to factor this in, but these analyses confirm my view that it is incredibly difficult to estimate. Finally, they also drive home that we still don’t know exactly what life might look like outside, or even what the broad policy preferences are – this means it’s hard to know when any potential benefits might accrue and how significant they might be since the trading relationship we have with the EU will matter for the economic impact.
A couple of questions arise from all of this. Firstly, why was the coverage of these reports so heavily on the negative side? Well, I think the reports themselves include a huge amount of info which makes it hard to get to the crux of the findings, but their summaries also focus on some of the more negative parts. Secondly, is this really that bad for the Leave side? I’m a bit surprised by the Leave response as in the end the results show a pretty minimal economic impact from Brexit in some of the more likely core scenarios.