21 December 2022

CER's Springford: The cost of Brexit to June 2022

My latest update estimates Brexit reduced Britain's GDP by 5.5 per cent by the second quarter of 2022. My model avoids the cherry-picking of data, and performs better than its critics’ methods...Brexit had reduced GDP by 5.5%, investment by 11%, and goods trade by 7% in the second quarter of 2022.

Since 2018, the CER has published estimates of the impact of Brexit on the UK’s economy. In this insight, I update these estimates with data until June 2022, and discuss the critique of my model published by Graham Gudgin, Julian Jessop and Harry Western on the ‘Briefings for Brexit’ website. 

These estimates are based on the ‘doppelgänger’ method, in which an algorithm selects countries whose economic performance closely matches the UK’s before Brexit. The method provides a counterfactual UK that did not leave the EU. Chart 1 shows quarterly estimates of the cost of Brexit to the second quarter of 2022. UK GDP is 5.5 per cent lower than that of the doppelgänger. Investment is 11 per cent lower; goods trade, 7 per cent lower; and services trade is around the same.

The Brexit hit has inevitably led to tax rises, because a slower-growing economy requires higher taxation to fund public services and benefits. If Brexit had not happened, most of the tax rises that then Chancellor Rishi Sunak announced in March 2022 would not have been necessary. If the UK economy had grown in line with the doppelgänger, tax revenues would have been around £40 billion higher on an annual basis (if we apply the same tax-to-GDP ratio as in 2021-2 – 34 per cent). In his March 2022 budget, Sunak announced tax rises of £46 billion.

The shortfalls in GDP and investment are around the same as the last estimates, for the fourth quarter of 2021. This suggests that the impact of Covid-19 is not substantively affecting the results, a concern I raised last time. All of the 22 countries used in the study had almost entirely reopened by June 2022, and yet Britain continued to lag behind the doppelgänger. And, as measured by excess deaths through the pandemic, Britain ranked in mid-table globally – so there’s little reason to believe the long-term scars on the economy are larger than in other countries, on average.

The goods trade shortfall has narrowed from 13.6 per cent last time, but goods trade is volatile, so it is too soon to tell whether UK goods traders have started to shrug off trade barriers. The UK’s services trade lead over the doppelgänger has nearly vanished. This is probably because the UK receives fewer tourists than the countries that make up the services doppelgänger: with tourism – a tradable service – getting back to normal over the past summer, the doppelgänger caught up.

Brexit had reduced GDP by 5.5%, investment by 11%, and goods trade by 7% in the second quarter of 2022.

CER

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