A general election has been called in the UK for 12 December. Central to the debates between the parties will be their policy on Brexit.
They range from the Liberal Democrats’, Plaid Cymru’s and Sinn Féin’s policy of cancelling Brexit and remaining in the EU, to the Scottish Nationalists’ and Greens’ policy of halting Brexit while a People’s Vote (another referendum) is held, with the parties campaigning to stay in the EU, to the Conservative Party’s policy of supporting the Withdrawal Agreement and Political Declaration negotiated between the Boris Johnson government and the EU, to the DUP which supports Brexit but not a version which creates a border between Great Britain and Northern Ireland, to the Brexit Party and UKIP which support leaving the EU with no deal (what they call a ‘clean break’) and then negotiating individual trade deals on a country-by-country basis.
The Labour Party also supports a People’s Vote, but only after renegotiating the Withdrawal Agreement and Political Declaration, so that if Brexit took place, the UK would have a close relationship with the single market and remain in a customs union. Also, various laws and regulations on environmental protection and workers’ rights would be retained. The referendum would take place within six months of the election and would be a choice between this new deal and remain.
But what are the economic costs and benefits of these various alternatives? Prior to the June 2016 referendum, the Treasury costed various scenarios. After 15 years, a deal would make UK GDP between 3.4% and 7.8% lower than if it remained in the EU, depending on the nature of the deal. No deal would make GDP between 5.4% and 9.5% lower.
Then in November 2018, the Treasury published analysis of the original deal negotiated by Theresa May in July 2018 (the ‘Chequers deal’). It estimated that GDP would be up to 3.9% lower after 15 years than it would have been if the UK had remained in the EU. In the case of a no-deal Brexit, GDP would be up to 9.3% lower after 15 years.
When asked for Treasury forecasts of the effects of Boris Johnson’s deal, the Chancellor, Sajid Javid, said that the Treasury had not been asked to provide forecasts as the deal was “self-evidently in our economic interest“.
Other forecasters, however, have analysed the effects of the Johnson deal. The National Institute for Economic and Social Research (NIESR), the UK’s longest established independent economic research institute, has estimated the costs of various scenarios, including the Johnson deal, the May deal, a no-deal scenario and also a scenario of continuing uncertainty with no agreement over Brexit. The NIESR estimates that, under the Johnson deal, with a successful free-trade agreement with the EU, in 10 years’ time UK GDP will be 3.5% lower than it would be by remaining in the EU. This represents a cost of £70 billion. The costs would arise from less trade with the EU, lower inward investment, slower growth in productivity and labour shortages from lower migration. These would be offset somewhat by savings on budget contributions to the EU.
Under Theresa May’s deal UK GDP would be 3.0% lower (and thus slightly less costly than Boris Johnson’s deal). Continuing in the current situation with chronic uncertainty about whether the UK would leave or remain would leave the UK 2% worse off after 10 years. In other words, uncertainty would be less damaging than leaving. The costs from the various scenarios would be in addition to the costs that have already occurred – the NIESR estimates that GDP is already 2.5% smaller than it would have been as a result of the 2016 Brexit vote.
Another report also costs the various scenarios. In ‘The economic impact of Boris Johnson’s Brexit proposals’, Professors Anand Menon and Jonathan Portes and a team at The UK in a Changing Europe estimate the effects of a decline in trade, migration and productivity from the various scenarios – again, 10 years after new trading arrangements are in place. According to their analysis, UK GDP would be 4.9%, 6.4% and 8.1% lower with the May deal, the Johnson deal and no deal respectively than it would have been from remaining in the EU.
But how much reliance should we put on such forecasts? How realistic are their assumptions? What other factors could they have taken into account? Look at the two reports and at the articles discussing them and then consider the questions below which are concerned with the nature of economic forecasting.
- UK’s new Brexit deal worse than continued uncertainty – NIESR
- Brexit deal means ‘£70bn hit to UK by 2029′
- Boris Johnson’s Brexit deal worse for economy than Theresa May’s, new analysis shows
- Boris Johnson’s Brexit deal ‘would cost UK economy £70bn’
- UK economy suffers ‘slow puncture’ as general election is called
- Boris Johnson’s Brexit deal ‘would deliver £70bn hit to economy by 2029’
- Boris Johnson’s Brexit deal won’t cost Britain £70bn by 2029
- Boris Johnson’s Brexit deal would make people worse off than Theresa May’s
- How Boris Johnson’s hard Brexit would hit the UK economy
- Boris Johnson’s Brexit deal is worse for the UK economy than Theresa May’s, research suggests
Reuters, David Milliken (30/10/19)
BBC News, Faisal Islam (30/10/19)
Politics Home, Matt Honeycombe-Foster (30/10/19)
The Guardian, Richard Partington (30/10/19)
ITV News, Joel Hills (30/10/19)
Sky News, Ed Conway (30/10/19)
The Spectator, Ross Clark (30/10/19)
The Guardian, Anand Menon and Jonathan Portes (13/10/19)
Financial Times, Chris Giles (13/10/19)
CNBC, Elliot Smith (19/10/19)
- UK economy 3.5 per cent smaller under latest Brexit deal
- The Economic Impact of Prime Minister Johnson’s New Brexit Deal
- Brexit Negotiations
- The economic impact of Boris Johnson’s Brexit proposals
NIESR Press Release (29/10/19)
National Institute Economic Review No. 250, Arno Hantzsche and Garry Young (November 2019)
The UK in a Changing Europe, Anand Menon, Hanwei Huang, Jonathan Portes, Thomas Sampson, Matt Bevington and Jill Rutter (October 2019)
- What are the arguments in favour of the assumptions and analysis of the two recent reports considered in this blog?
- What are the arguments against the assumptions and analysis of the two reports?
- How useful are forecasts like these, given the inevitable uncertainty surrounding (a) the outcome of negotiations post Brexit and (b) the strength of the global economy?
- If it could be demonstrated beyond doubt to everyone that each of the Brexit scenarios meant that UK GDP would be lower than if it remained in the EU, would this prove that the UK should remain in the EU? Explain.
- If economic forecasts turn out to be inaccurate, does this mean that economists should abandon forecasting?