28 November 2018

UK in a Changing Europe: New research shows economic and fiscal consequences of the Brexit deal

New research by experts at the Centre for Economic Performance at the London School of Economics (LSE), King’s College London and the Institute for Fiscal Studies has modelled the economic and fiscal consequences of Brexit.

They estimate that the Brexit deal negotiated by the Prime Minister could reduce UK GDP per capita ten years after Brexit by between 1.9% and 5.5%, compared to remaining in the EU. The cost to the public finances would be between 0.4% and 1.8% of GDP over the same period. The corresponding figures for a no deal Brexit would be 1% to 3.1%.

The report, The economic consequences of the Brexit deal, published by the academic think tank The UK in a Changing Europe, examines the economic impact of the Withdrawal Agreement and Political Declaration agreed between the UK government and the European Commission.

The report considers three scenarios: remaining in the EU (the ‘baseline’), the deal, and no deal—that is, a situation in which there is no agreement between the UK and the EU and hence, in the long term, we trade with the EU as a third country with no free trade agreement.

Trade

The economic modelling in the report covers trade and migration. For trade, researchers at LSE’s Centre for Economic Performance used a state-of-the-art model of global trade. They assumed that the deal means that the UK remains in a customs union with the EU, but leaves the single market (as per the backstop arrangement), and regulatory barriers to both goods and services trade increase as a result. Under a no deal scenario, such barriers would be considerably higher.

Immigration

For immigration, the deal (or even no deal) means an end to free movement. Professor Jonathan Portes from King’s College London produced illustrative estimates of the impact on both skilled and unskilled immigration, from both within and outside the EU.

Taken together, the estimates imply that no deal would, in the long term (ignoring the impacts of short-term disruption), lead to a reduction in UK GDP per capita, compared to the ‘baseline’ of remaining an EU member, of 3.5% to 8.7%—the large range reflecting the very substantial uncertainties involved. The negative impact of the proposed deal would be smaller, but still substantial, amounting to between 1.9% and 5.5% of GDP per capita.

Public finances

Such a large economic impact would also have major implications for the public finances. These would far outweigh any gains resulting from reduced EU contributions. The Institute for Fiscal Studies has estimated that if the impacts on GDP were as estimated above, then in a no deal scenario the cost to the public finances would be between 1% and 3.1% of GDP, and between 0.4% and 1.8% if the deal was implemented. This is even after taking account of the long-term saving on the UK’s net EU contributions of 0.4% of GDP.

Full report

© UK in a Changing Europe