19 October 2018

Institute for Government: 'No deal' will lead to more upheaval than long-term economic projects suggest

Government and independent forecasts of the economic impacts of Brexit focus on the long-term effects and do not provide a guide to the immediate disruption from ‘no deal’, warns a new report by the Institute for Government.

This is one finding from Understanding the economic impact of Brexit, a new report that examines 14 studies on the long-term impacts of Brexit carried out by a range of organisations, from the UK and Dutch governments to the London School of Economics and city banks.

These forecasts project how the UK economy is likely to be affected by around 2030 because of Brexit. However, the report says long-term estimates are not a guide to what might happen immediately if there is a disruptive no deal Brexit. Long-term estimates are based on current economic interactions between the EU and other countries with which it does not have a free trade agreement, like the USA. But the USA has well-established systems in place to handle this relationship, as well as crucial side deals (covering, for example, aviation and data). But none of this would be in place immediately in the event of a disruptive no deal.

The report also highlights that it is differences in the assumptions used in economic models – rather than the models themselves – that drive the large variation in predictions of the long-term impact. For example, studies that conclude the impact will be more negative, such as those by Rabobank and the Treasury’s pre-referendum forecasts, assume that Brexit will lead to a large increase in trade barriers with the EU and a clampdown on migration, leading to a reduction in innovation and lower productivity growth.

The only study to predict a substantial gain, carried out by the Economists for Free Trade, assumes there would be no increase in trade barriers with the EU, a large reduction in trade barriers with non-EU countries and that the UK Government would make widespread changes to regulatory policy.

The report says it is ultimately the Government’s responsibility to bring clarity to the public debate around the long-term impacts of Brexit. It makes nine recommendations for information the Government must publish alongside its final assessment of the economic impact of the proposed Brexit deal, from regional and sector impacts to migration and regulatory policy, so that others can see what assumptions they are working off and judge whether these are reasonable. [...]

Full report

© Institute for Government