Monday, 4 February 2019

Territorial disputes: Brexit (2) [Post 202]



Understanding the economic impact of Brexit

Many different organisations have published estimates already of how Brexit might affect the UK economy in the longer term, including two produced by government: one published officially by the Treasury before the referendum, and a preliminary version of some government analysis leaked to the press in January 2018. All of these analyses have tried to provide answers to the question: “How much larger or smaller will the UK economy be in future if the UK leaves the EU than it would have been, had the UK remained a member of the bloc?”

The answers vary hugely. The vast majority of studies conclude that Brexit will reduce economic growth – although the scale of reduction predicted differs. Only one study (by the Economists for Free Trade, EFT) concludes that the UK economy would receive a significant boost from Brexit. Mostly, the differences are not down to hard-to-fathom variation in the complex underlying economic models. Instead, the different answers largely reflect variation in the assumptions fed into those models.

Looking at the impact across the income distribution, most analysis published so far suggests that all income groups will be hit similarly hard by any negative impact of Brexit. Lower-income households are likely to be more adversely affected by increases in the price of goods (particularly food), but higher-income households are more likely to be adversely affected through lower wages, as they are more likely to work for export-oriented businesses.

Existing studies have reached mixed conclusions about the impact on different areas of the country. It is unclear whether Brexit is likely to exacerbate or diminish existing regional inequalities. At least one study has concluded that London and the South East – with their large service sectors – could be most adversely affected. However, other studies have suggested that the Midlands and parts of the North, which have a greater reliance on manufacturing industries that are heavily integrated into European supply chains, could be most affected instead.

Numerous studies have now been published setting out a range of projections for how Brexit is likely to affect UK economic growth in the longer term (typically up to 2030). The vast majority of these studies predict that the UK economy will be smaller following Brexit than it would have been, had the UK remained a member of the EU.
This is because most studies predict that Brexit will increase trade barriers between the UK and other countries on average – and there is an extensive body of economic evidence which demonstrates that stronger trade, investment and migratory links in the past between countries have been associated with faster economic growth.

The differences between the studies’ predictions are driven mainly by differences in the assumptions fed into the models, rather than major differences in the structure of the underlying economic models. In particular, assumptions about how large non-tariff barriers might be, how migration policy could be changed, and how foreign investment might be affected, can have a large impact on the predictions obtained.

The next posts will introduce in detail the four fundamental freedoms related to the European Union law, with particular emphasis on free movement of persons and free movement of goods.



Tuesday 05th February 2019
Jorge Emilio Núñez
Twitter: @London1701

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