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May’s Brexit deal ‘could slash growth by 5.5% over decade’

Theresa May No Deal statement

The Prime Minister insists the deal will protect jobs


 

Theresa May’s Brexit deal could shrink the UK economy by up to 5.5% over a decade compared to its growth as part of the EU, according to a study.

The cost to the public finances would be between 0.4% and 1.8% of GDP over the same period and the corresponding figures for a no deal Brexit would be 1% to 3.1%.

The report was published as Mrs May embarked on a UK-wide tour to drum up support for the deal ahead of a vote in the Commons on 11 December.

It also added a further setback to comments from US President Donald Trump who said it was “a great deal for the EU” and would stop the UK trading with the US.

Donald TrumpHe told reporters outside the White House: “I think we have to take a look at, seriously, whether or not the UK is allowed to trade.

“Because, you know, right now, if you look at the deal, they may not be able to trade with us … I don’t think that the prime minister meant that. And, hopefully, she’ll be able to do something about that.”

Research by the London School of Economics, King’s College and the Institute for Fiscal Studies blames its predictions on the imposition of new trade barriers and a fall in immigration.

The report, published by independent think tank The UK in a Changing Europe, assumes that under the prime minister’s deal, Britain will remain in a customs union with the EU but leave the single market and regulatory barriers to both goods and services trade would increase.

The deal will mean an end to free movement, reducing both skilled and unskilled immigration.

Taken together, this would cause GDP per capita to be 1.9%-5.5% lower by 2030 than it would if Britain remained in the EU – the large range reflecting the “substantial uncertainties involved”. However, it said this would rise to 3.5%-8.7% if there was a no deal Brexit.

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, says the report.

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, says the report. 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. 

These results, for both economic and fiscal impacts, are summarised in the table below. The listed GDP per capita impacts sum the effects of both reduced trade and lower migration.

 

GDP per capita (%)

Fiscal impact (% of GDP)

No productivity assumption

 

 

Proposed deal

-1.9%

-0.4%

WTO

-3.5%

-1%

With productivity assumption

 

 

Proposed deal

-5.5%

-1.8%

WTO

-8.7%

-3.1%

 

Professor Anand Menon, director The UK in a Changing Europe, said: “In all the sound and fury over the politics of Brexit, the economic implications have been somewhat lost from sight.

“Obviously, this kind of economic modelling needs to be treated with appropriate caution. However, our estimates provide a clear indication of the broad scale of the impact of the deal negotiated by the Prime Minister.”

Professor Jonathan Portes, senior fellow The UK in a Changing Europe, said: “The Brexit deal would leave us in a customs union with the EU for the indefinite future – but it is a long way from frictionless trade. 

“The additional trade barriers, combined with reductions in both skilled and unskilled migration from the ending of free movement, would leave the UK significantly smaller than it would otherwise have been over the medium to long term. That in turn would mean higher taxes or public spending.”




The research says the results are subject to a high degree of uncertainty, relating both to the inherent difficulties in economic modelling, and to the vague and aspirational nature of the Political Declaration on the future relationship, which mean that some key elements are still to be determined.

The report therefore makes a number of assumptions, some of them subjective, which are set out clearly and transparently. It also analyses the impact of changes in trade and migration both holding productivity constant and allowing for productivity to adjust following Brexit. 

To estimate the implications for the government finances, the report assumes that a 1% fall in GDP per capita reduces government revenue by 0.4% of GDP. The authors say the conclusions of the report are consistent with both economic theory and the empirical literature. 

The report does not model the short-term disruption resulting from no deal, which was the subject of an earlier UK in a Changing Europe report, Cost of No Deal Revisited.

The UK in a Changing Europe, and the authors of this report, do not take any position of which of the three scenarios is preferable, recognising that there are many other considerations than simply economic ones. Nevertheless, it says it is important that Parliament, and the country as a whole, take decisions on the basis of the best available evidence.

A government spokesperson said: “This deal will protect jobs and our economy while respecting the result of the referendum.

“It delivers an economic partnership with the EU closer than any other country enjoys, is good for business and is in our national interest.”

 



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