The leaked government Brexit analysis is telling in more ways than one. It’s a rather depressing sign of the times that the British Government completing at least some assessment of the broad economic impact of Brexit comes as a shock.
It’s still more dispiriting to see that, even under a “Leave” administration, the opportunities offered by Brexit should be so scant and uncertain. It is reported that the Prime Minister refused to countenance publication of the data because it is “embarrassing”. You can see why.
First, then, the numbers. When, for example, the assessments apparently put the loss of GDP at 5 per cent by 2033, that means output in the economy – goods and services – that would otherwise be produced had the UK stayed in the EU on the existing terms. It would not be 5 per cent for every single year – which would leave the British economy about the size of Eritrea’s.
It is a relative concept. Some 5 per cent of GDP equates to around £75bn. Or, let us say, about £1,500 for every man, woman and child in the country. That, you may or may not agree, is a price worth paying to regain sovereignty, end free migration from the EU, or anything else with a non-monetary value you care to put on the scales. Alternatively, £75bn is about three-quarters of the spending on the NHS in England in a year. You get the picture.
The important bit is that the British economy – and wages – may well grow over this period, especially if there is strong global growth. This was the point made last week by Lord O’Neill, a prominent economist. So this “loss” is a hypothetical, invisible loss – factories in the Midlands not built, offices in the City of London not filled, jobs not created that might otherwise be there from trading with France and Germany. It is also about scenarios, and the comparison with the UK staying in the EU. None definitely provable – but plausible, nonetheless.
That 5 per cent figure relates to a “comprehensive trade agreement” of the kind being talked about by ministers. Under the hard Brexit option of, say, Nigel Farage and Jacob Rees-Mogg, we’d be looking at an 8 per cent loss. That, very roughly, is more like £120bn. So, other things being equal (we’ll come back to this idea), we could have found the equivalent of the NHS budget by 2033 by staying in the EU – in “Brexit battle bus” language. For every Briton it presents a hypothetical loss of say £2,200 or, for a family of four, the best part of £10,000 per UK household – worse than the Project Fear estimate during the referendum campaign of 2016.
Good news? Well, those figures include a new trade deal with Trump’s America (wishful thinking). If we were to conclude, in addition, new accords with the likes of China, India, Australia, the Gulf states, Korea and other emerging and larger developed economies, those will take the edge off the damage – about 10 per cent or so, but not by much.
As for sectors and regions, it is also predictable. Those regions – such as the North East of England and the Midlands, where manufacturing and engineering still depend on strong links to the EU market – will be hit hard. The Nissan factory in Sunderland would be the stand out example. These, by the way, were also big Leave voting areas. The City of London, and with it most of the South East of England, would also be hit hard by erosion of the City’s competitive position.
Northern Ireland would take the obvious hit from any problems with the Irish border.
For those who voted for Brexit, like me, it is sobering stuff, but not overwhelmingly depressing if you think the long term future of the EU as a protectionist undemocratic bloc is bleak. The real opportunity for the UK is not the “other things being equal” option, but a radical overhaul of the UK to make it a globally efficient competitive economy, whatever trade deals get done.
“All things being equal”, or as economists call it “ceteris paribus”, means that no extra variables are factored into an assessment – but this is where the report goes wrong. There are too many other policy adjustments that could overhaul the British economy.
The EU, according to Michel Barnier's speeches and his statements this week, shows that it is wise to this, stressing that it will not, for example, tolerate “tax dumping” – stopping the UK from offering ultra-low corporation tax rates to attract inward investment, for example, or dismantle labour laws. How much of this sort of problem can be overcome (and I am not sure it is legal under World Trade Organisation rules) will ultimately drive British living standards in the long term.
They call these “punishment clauses” for the new UK-EU trade treaty. They were not, sadly, explored in the official impact assessments.
One other factor, which perhaps was not built into the assessment, is the behaviour of the pound: a much lower international value of sterling is inevitable for the transition to new realties – which means higher prices in the shops, possibly an uncomfortable burst of higher inflation and more expensive holidays abroad.
Higher inflation would mean higher interest rates; but lower growth and cheaper houses – so first time buyers and home owners would also experience a change in their wealth or prospects of acquiring a home.
Those with pension funds invested in shares might do better, as earnings from big companies being brought back to the UK from abroad will go up in value in sterling terms and with them dividends to pension funds and shareholders.
Tourism might well do OK out of Brexit, while farming (a very small sector) would be cushioned for a while by Michael Gove’s pledge to keep the subsidies coming.
The option, then, has always been between staying in the warm bath of the EU, protected from the outside world and enjoying the very real benefits that derive from membership, or taking a cold shower and entering the global economy on our own terms. That cannot be modelled economically because it is so uncertain and far into the future – but it could still come true.
In any case, the “transition” between the warm bath and cold shower will be the most traumatic since the 1980s, maybe even the 1930s Depression. The question is whether Britain is ready for it, because it is not yet even aware that that is what is approaching. Too many Brexiteers like to talk of vague “opportunities” – but not the concrete costs.
They have a lot more explaining to do.
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