The Economic Cost of a No-Deal Brexit

Prediction is very difficult,

especially about the future.

attributed to Niels Bohr

The Prime Minister has promised to unleash the potential of Britain as soon as Brexit is ‘done’ on 31 January. Many people outside the Cabinet are sceptical of the benefits of Brexit and extremely concerned about the costs.

What will be the economic impact of Brexit? No-one knows, not even roughly, because we do not yet know what ‘Brexit’ means. But we can see that the cost of uncertainty has already enormous and that a hard Brexit would be a disaster for many people:

• We do not know what ‘Brexit’ means because there is, as yet, no deal;
• The cost of uncertainty post-referendum, pre-Brexit is over £110 billion;
• A hard Brexit would be a disaster for many people – though a great profit opportunity for others.

We do not yet know what ‘Brexit’ means

The prime minister claimed that he had an “oven ready deal”, and Brexit would be “done” by 31 January, 2020. In reality, while there was a Withdrawal Agreement that the EU had agreed to, even the bare bones of the Trade Deal which may (or may not) come into force in January 2021 have not been set out, let alone negotiated.

Assuming that the House of Lords and the EU both accept the government’s revised Withdrawal Agreement, then at the end of January, the UK will formally leave the EU and there will be a transitional arrangement until 31 December, 2020.

Under the transitional arrangement, although the UK will formally cease to be an EU member at the end of January, we will continue to make our budget contributions to the EU as before, the trading relationship will remain the same and the UK will continue to follow the EU’s rules, such as accepting rulings from the European Court of Justice.

In other words, for practical purposes we shall remain in the EU but without any voting rights.

That much is clear. And that is about all that is clear. What happens on 1 January 2021 is completely uncertain.

It could be any one of a large number of possibilities, including:

1. that we extend the transition period, because the trade negotiations have not reached an acceptable agreement;
2. that we manage to agree a deal with the EU which remains very close in trading terms, and would require us to continue to maintain very close alignment in terms of rules and regulations;
3. that we agree a barebones trading arrangement, which allows us to diverge significantly but gives us greatly reduced access to the single market; or even
4. that we exit without a deal.

This is essentially the same range of uncertainty that we faced on the day after the referendum result. There has, in effect, been no progress in terms of the future trading arrangements.

The cost of uncertainty is over £110 billion

For businesses, this uncertainty makes planning – and therefore investment – extremely difficult. An investment which might be sound if our future arrangement resembles scenario 2 above might become hopelessly uneconomic under scenario 4. Indeed, some entire business sectors may become uneconomic under scenario 4.

Take the car industry for example. In the UK, the automotive sector employs approximately 800,000 people. And it could be devastated. Honda, PSA, Ford, Nissan and Jaguar Land Rover have all indicated that, in the case of a hard Brexit, major plants may need to close. And once they are closed, they are unlikely ever to re-open. The industry is in peril. And for every job which is lost in a car plant, a further seven are at risk in the automotive supply chain. But a very close alignment which enabled frictionless trade with the EU to continue would not damage the industry further.

Not every industry faces as much uncertainty as the automotive industry, but as the Harvard Business Review reported, describing research by Stanford University, the Bank of England and others,

“’Anticipation of Brexit is estimated to have gradually reduced investment by about 11% over the three years following the June 2016 vote,’ the researchers write. They also estimate that productivity in the UK has decreased by between 2% and 5%.”

The researchers themselves had three key findings:

“First, the UK’s decision to leave the EU has generated a high, broad and persistent increase in uncertainty…Second, anticipation of Brexit has substantially reduced UK investment…Finally, we estimate that the Brexit process has reduced the level of UK productivity by between 2% and 5% over the three years since the referendum.”

And this has a tremendous impact on growth. Bloomberg estimated that the costs of this uncertainty already exceeded $130 billion and will soon exceed $170 billion.

Being by nature sceptical of everything, the 99% Organisation has conducted its own analysis – and arrived at a very similar figure.

The starting point is to compare growth rates of the G7 economies over time.

As you can see, the UK (GBR) tracked fairly closely the growth rates of the largest G7 economies, USA, Germany and Japan, up until 2016. For the purposes of estimating the value of the post-Brexit slowdown, we can compare the actual growth in the UK against the growth we would have experienced had we tracked these three economies throughout. The picture is striking:

The difference by the end of 2019 amounted to over £1,000 for every man, woman and child in the UK.

In total, over the three years since the referendum, our figure is around $116 billion dollars lost to the UK economy because of the reduced growth due to uncertainty. Similar to the Bloomberg estimate.

Boris Johnson famously claimed that we send the EU £350 million per week. This was repeatedly denounced as a lie, but he stuck to it. As the fact checkers, FullFact said,

“We have never paid the EU £350 million a week and we have never owed the EU £350 million a week. After we leave the EU, that means we cannot take back control of £350 million a week.”

The real figures are as shown below.

Thus, even with our slightly more conservative estimate, the three years of lost growth have already cost us almost 11 years’ net contributions.

But this is not the cost of Brexit; this is the cost of the uncertainty about Brexit so far. We can reasonably assume another year of uncertainty, which would take this cost to around $180 billion.

And then we will come to Brexit.

A hard Brexit would be a disaster for many people

As stated above, we do not yet have any idea what kind of Brexit we are going to have.

But one thing we do know – because virtually all economists agree – is that the harder the Brexit, the greater the economic damage. The government has not released any recent Brexit impact analyses. This is the last official government analysis which has reached the public domain.

While a very soft Brexit might have a negligibly damaging effect, a hard Brexit, and especially no-deal Brexit would do damage comparable to that done by the Global Financial Crisis (from which we have still not fully recovered).

The austerity which the Tory party applied following the Global Financial Crisis was estimated in the British Medical Journal to have cost more than 120,000 lives in the UK. It would be reasonable to assume that a no deal Brexit would have a similar effect.

But some people will make a lot of money out of it.

Conclusion

Brexit will not be done on 31 January – and this is both good and bad. Bad because there is another 11 months (assuming no extension to the transition arrangements) of damaging uncertainty. But good because there is still everything to play for in containing the damage done when we do exit.

We could still be aiming for a minimal amount of damage.

If this matters to you, please do sign up and join the 99% Organisation.