Before the EU referendum in June 2016, there were dire warnings that a vote to Leave would be catastrophic for the UK economy. Immediately after the vote, the predictions seemed to be coming true: sterling fell by 10 per cent overnight as financial markets panicked. In August 2016, the Bank Of England cut interest rates and restarted quantitative easing.
But the anticipated recession never happened. Instead, the UK economy performed better than expected. Sterling’s fall raised inflation temporarily, but it also boosted exports, shrinking the country’s trade balance. Brexit, it seemed, wasn’t bad for the economy after all.
At that time, there was a general expectation that the UK would negotiate a good deal with the EU which would ensure a smooth orderly departure with minimal disruption. And afterwards, the UK’s new-found freedom would enable it to strike trade deals with countries all over the world. The UK’s future looked rosy.
But three years later, there is still no deal. The government is warning people and businesses to prepare for No Deal Brexit, while also doing its best to terrify them about its costs: the hard Brexit lobby, meanwhile, is busy talking up the merits of a “WTO rules” exit from the EU and insisting that the costs will be minimal. It is difficult to know which to believe.
Most people now agree that Brexit will cause some disruption to the UK economy, though the scale of this disruption is disputed: hard Brexiters tend to think it will be limited and short-term, while Remainers tend to think it will be widespread and long-lasting. But the real costs of Brexit arise not from the actual act of leaving the EU, but from preparing for the new reality beforehand and adjusting to it afterwards. And – above all – from uncertainty.
The direct costs of implementing Brexit arise mainly from the need to prepare for what could be a seriously disruptive event. For example, many businesses have had to employ additional staff to prepare for leaving the European Union. Government, too, faces additional costs: The Institute For Government estimates that Brexit could cost the UK government £2 billion, of which by far the largest proportion will be remuneration of additional staff.
Direct costs of Brexit also include the cost to businesses of additional red tape. If the UK was to leave without a trade deal, the cost to British businesses from administering new tariffs and non-tariff barriers could total as much as £27bn. If the UK were to remain in a customs union, the cost would fall to £17.5bn.
These costs are not insignificant. But they are potentially dwarfed by the economic impact. In its latest World Economic Outlook, the IMF predicts Britain’s economy will be significantly smaller over the longer term than it would have been as an EU member. The scale of the loss varies from three per cent for an orderly departure with a deal to nearly six per cent for a disruptive No Deal Brexit. This is due to higher costs of trade with EU countries and any non-EU countries with which the UK fails to renegotiate existing EU trade deals; reduced investment due to lower returns on capital; and a smaller labour force due to lower immigration.
Other forecasts of long-term GDP losses range from three to ten per cent. But Brexit-supporting Patrick Minford from Economists For Free Trade says that, far from the UK economy being smaller in the long-term because of Brexit, it would be about seven per cent larger after 15 years, due to increased trade with non-EU countries, deregulation and lower welfare spending on immigrants.
Unsurprisingly, Minford’s estimates have been questioned by other economic experts. But Brexit supporters point to the failure of previous expert forecasts and insist that Brexit will be good for the UK. And as no one has a crystal ball, neither side has any reason to change its views.
But one thing is already clear. The uncertainty caused by the political wrangling over Brexit is itself costly. Business investment fell by 0.4 per cent in 2018, the largest fall since the recession of 2008-9. This will follow through into reduced growth in the future. And the UK’s apparently strong growth rate in the first quarter of 2019 was driven largely by stockpiling in expectation of a No Deal exit that didn’t happen. Meanwhile, both government and businesses continue to spend money preparing for Brexit – money diverted from other, more productive purposes. Even if Brexit never happens at all, Britain will suffer.
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