Counting the cost of Brexit

The economic impacts of Britain leaving the EU

Thomas Sampson

Economics and finance, Government and governance, Trade and industry, International relations | The World

21 June 2016

With the referendum fast approaching, Thomas Sampson analyses the economic consequences should Britain vote to leave the European Union.

On 23 June the United Kingdom will hold a referendum on whether to remain part of the European Union. The referendum campaign has sparked an intense debate in the UK and opinion polls suggest the vote will be extremely close.

Proponents of Brexit, as leaving the EU has been termed, argue that having to make policies jointly with other EU members reduces the UK’s sovereignty and that European institutions are less accountable to voters than the UK government. Widespread concern at high levels of immigration from other EU countries has also fuelled support for Brexit. By contrast, the Remain campaign has focused on the economic benefits from being part of the European Single Market and the fact that big global challenges such as climate change and terrorism cannot be solved by nations acting alone.

How voters feel about the political consequences of Brexit will inevitably depend on their beliefs about the importance of national sovereignty and the extent to which countries should pool decision-making powers. But the economic consequences of Brexit are less subjective. As an EU member, the UK benefits economically from being part of the European Single Market, which promotes the free movement of goods, services, capital and labour. The EU is the UK’s largest trading partner, accounting for around one-half of the UK’s exports and imports. Being in the Single Market creates new export opportunities for UK businesses and reduces the cost of goods imported from other European countries. This makes UK citizens better off.

Quantifying the economic effects of Brexit is tricky, primarily because of uncertainty over what the UK’s relations with the EU would be in the aftermath. Together with colleagues at the Centre for Economic Performance at the London School of Economics I have analysed the impact of Brexit on the UK’s economy under two scenarios. (i) An optimistic scenario in which the UK adopts the Norwegian model for EU relations after Brexit and remains part of the Single Market. In this case the UK maintains tariff free access to the EU market, but would face some additional trade costs such as rules of origin requirements. (ii) A pessimistic scenario in which the UK trades with the EU under World Trade Organization rules following Brexit and the increase in trade costs is greater.

In the optimistic scenario the effect of Brexit on the UK economy is equivalent to a 1.3 per cent decline in GDP per capita (or £850 per household), while in the pessimistic scenario the loss doubles to 2.6 per cent (£1,700 per household).

These numbers probably understate the true costs of Brexit as they ignore evidence that in the long-run reduced trade leads to lower productivity and do not allow for changes in foreign direct investment into the UK after Brexit. Using an alternative methodology that incorporates these effects we estimate Brexit would reduce the UK’s GDP per capita by between 6.3 per cent and 9.5 per cent. We also find no economic rationale for restricting migration into the UK, there is no evidence that migration has been bad for the UK’s economy.

Economics is not an exact science, so it is right to approach our estimates with a healthy scepticism. But there is a broad agreement among economists that Brexit would harm the UK’s economy. Studies by the OECD, IMF and the UK Treasury department, among others, have reached similar conclusions to our work and in a poll of members of the Royal Economic Society 88 per cent of respondents thought that GDP would be negatively affected in the next five years if the UK left the EU. It is rare to find such a high level of consensus among economists.

Many competing concerns and desires will influence which way the UK votes in the Brexit referendum. Leaving the EU would radically change the UK’s political and economic relations with its closest neighbours and allies and its role in world affairs. But one factor voters cannot ignore is the economic cost of Brexit. The question supporters of Brexit must address is whether this cost is a price worth paying?

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Citation

Sampson, T. (2016). Counting the cost of Brexit - Policy Forum. [online] Policy Forum. Available at: http://www.policyforum.net/counting-cost-brexit/.

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