The economic implications of Brexit

by John Reiners

I’m just back at my desk after attending this morning’s launch of Oxford Economics’ report, Assessing the Economic Implications of Brexit. The report models nine alternative Brexit scenarios, looking out to 2030. Two former chancellors of the exchequer responded: Lord Lawson for Vote Leave and Lord Darling for Stronger In. This is the first time I’ve seen the two sides debate the economics of Brexit head to head. You can get a good summary by looking at the video presentation on the OE website. Here’s what I learned:

  • All nine scenarios show an economic cost of Brexit. These range from negligible (a loss of 0.1% of GDP) to very noticeable (a 3.9% decrease).
  • The type of trade deal negotiated with the EU has a significant impact—the most favourable would be to get access to the European Economic Area, like Norway—but on more favourable terms.
  • Liberal policy responses on issues like migration and regulation could mitigate the worst economic effects of Brexit—but it’s questionable whether this would be a likely outcome, in the wake of a vote to leave the EU.
  • Migration is a political and social issue rather than an economic one. Migration has a positive effect on tax revenues, but doesn’t greatly change productivity or living standards.
  • There will be winners and losers—Ireland stands to lose most among the UK’s trade partners. UK manufacturing and construction sectors are big losers under most scenarios—unless particularly favourable trade deals are agreed. Financial services also suffer more than most.

Modelling is not precise, and the report authors acknowledge the many uncertainties. Among the most significant:

  • The speed and outcome of trade negotiations is unknown. Given the length of time it typically takes to negotiate EU trade deals, could the UK negotiate exit terms in two years? Could the UK, with limited experience and less heft than the EU, be an effective negotiator and secure agreements more closely aligned to the UK’s interests?
  • Will businesses leave the UK if it votes out? The UK, and the London area in particular, hosts many global HQs, attracted by the time zone and use of English language. How important is access to the EU in their location decisions?

Ultimately, the economics—particularly in the better-case scenarios—are not conclusive. It will be politics that will determine the decision. The two ex-chancellors did a good job of setting out their respective cases.

For Vote Leave it’s an opportunity to escape a political project and regain control over key areas of policy—to design migration, regulatory, and trade policies in the UK’s best interests. For Stronger In, in an uncertain and interconnected world, our economic and political future is certain to be stronger as a member of the EU, which will always be, for the UK, a purely economic project. To leave would be a needless risk to our prosperity, with no going back.

Going by the lively debate on these issues today among the audience of 250, these issues and uncertainties will be debated in detail over the coming weeks—and for good reason. The issues are complex and the arguments are finely balanced. This is a mightily important, once-in-a-generation decision.