The authors claim to have provided a unique insight into the local economic impacts of the UK’s exit from the European Union, including ‘the first comprehensive assessment of Brexit across key indicators and sectors at a sub-national level’. This is based on five different scenarios, ranging from a status quo to an extreme ‘no-deal’ outcome. The results are said to ‘show that Brexit will not only reduce the size of the UK economy (compared to what may have happened if the UK remained in the single market and customs union), but also put it on a slower long-term growth trajectory’.
If that sounds familiar, it’s because the report adopts the same approach as many others before it, including the Treasury’s analysis of the long-term economic impact of alternatives to EU membership. Indeed, the report draws extensively on the ‘existing literature’. In that respect, it’s quite a useful summary of the thinking of those whose views on the immediate impact of the referendum have, for the most part, already been proved wrong. But does the report really add anything? Unfortunately, no.
For a start, the five scenarios considered do not include the one that the UK government (and the EU) are actually working towards, namely a two-year transition followed by a preferential EU/UK trade agreement. The closest to this in the report is a transition followed by ‘falling back’ on WTO rules.
The results from this ‘harder Brexit’ scenario (and a variation without a transition period) are very sensitive to the assumptions made. Two stand out. First, it is taken as given that net migration would be much lower if the UK leaves the Single Market. That’s plausible, of course, but future policy in this area would be in the hands of the government of the day to decide.
What’s more, even if this assumption is correct, the main impact of lower migration would be felt on GDP, rather than on GDP per head, which is arguably more important. Put another way, if the economy is x% smaller only because there are x% fewer people, would it really be right to say that UK households are x% worse off?
Second, the ‘harder Brexit’ scenarios assume that the UK satisfies the requirements of the WTO’s ‘most favoured nation’ rules by imposing new tariffs on trade with the EU. This is a common assumption in all the more pessimistic assessments. It has even led to claims that households could be as much as £930 a year worse off. But as we have discussed elsewhere, the UK could maintain the level playing field by eliminating tariffs on trade with the rest of the world instead, with positive results.
More generally, the report makes little attempt to address the potential benefits of Brexit. For example, a footnote on page 19 acknowledges that ‘this study does not consider that, following Brexit, the UK might negotiate more preferential trade agreements with non-EU countries than the existing deals’. Nor is there any serious discussion of the potential gains from reforming or replacing EU regulations and programs, such as the Common Agricultural Policy (CAP).
These omissions might be excused on the basis that these sorts of benefits are all too difficult to model. To be fair, neither the UK nor the EU have provided much clarity. But similar difficulties have not prevented the authors from making heroic assumptions about the potential costs. For example, the assumed negative impact on investment until 2030 is largely based on simple extrapolations of the trend since the referendum, which has been a relatively short period of exceptional uncertainty.
The much-hyped ‘sector analyses’ don’t really add much, either. They typically assume that the government messes everything up, for example by allowing skills shortages to grow, or by failing to protect or replace valuable EU funding in areas such as education, science and infrastructure investment. Admittedly, the track record to date here hasn’t been great. Uncertainty about the status of nationals from the rest of the EU living and working in the UK has been allowed to persist for too long.
But again, the outcomes after Brexit will depend on decisions which are yet to made. The UK government is increasingly recognising the importance of EU labour in key sectors, as well as committing to remain engaged with EU programs that do have a clear benefit. In the meantime, the UK economy, including London, is continuing to defy the doomsayers.
In summary, the report does underline a few good, if rather obvious, points, such as the importance of a sensible migration policy. However, it is not the game-changing evidence that the Remain spin-doctors and leader writers would have us believe.