The UK and Europe

What does the UK government think about the economics of Brexit?

Tim Durrant / Jan 2018

Image: Shutterstock

Nearly a year into negotiations, the UK Government is only just beginning the process of deciding what kind of future relationship it wants with the EU. As the reaction to the Chancellor’s remarks in Davos showed, this is a lively debate that is far from settled. The discussion needs to be informed, amongst other things, by a proper economic assessment of the different potential options. But the Government, split politically and burned by the pre-referendum experience of so-called ‘Project Fear’, has been unwilling to publish its own assessments. That leaves a gap in the debate that needs to be filled.

Various universities, think tanks and others have published their own studies of the potential impact of different Brexit outcomes on the UK economy. These include work from the Scottish Government, and the Mayor of London Sadiq Khan, both of whom are opposed to a hard Brexit. RAND Europe have made their own contribution, which also considered US interests in the UK-EU deal. And from the academic world, the UK Trade Policy Observatory at the University of Sussex has considered various aspects of the UK-EU trading relationship, including its impact on the cost of living for UK households. From an alternative point of view, Economists for Free Trade have published a study looking at the benefits of a looser UK-EU relationship.

The conclusions of these reports vary. But that is not surprising – as any economist will tell you, forecasting is notoriously tricky. These studies are based on economic models which, though complex, will never be able to fully represent the various building blocks and interactions of a modern economy. What’s more, the results of any economic model are dependent on the assumptions that the modellers use.

But that doesn’t mean that there aren’t common themes in what these studies find. At a recent Institute for Government event, Charles P. Ries of RAND and Professor Alan Winters of the UK Trade Policy Observatory both presented a firm conclusion: the more barriers to trade between the UK and the EU that are put up, the more damaging it will be for UK economic growth.

They found that a move to trading with the EU on World Trade Organisation (WTO) rules, the most basic trading arrangement possible, would have the most significant negative impact. While the exact figures differ, this finding is replicated across most of the economic studies of Brexit.

There are some, albeit a minority, who disagree. The third speaker at the Institute for Government event, Liam Halligan of the Daily Telegraph, said that a move to WTO rules would not be problematic for the UK. Economists for Free Trade go further, saying that moving to WTO rules would lead to a significant boost in UK economics growth, compared to any of the other options that leave us more closely aligned with the EU.

But there is one voice missing from this debate. The last time the Government published anything on the potential economic impacts of Brexit was before the referendum, in the spring of 2016. Their publications at the time included the much-maligned Treasury analysis which predicted an immediate recession following a ‘Leave’ vote. The failure of this recession to materialise led many to discount the Treasury’s assessment of the long-term impact of leaving the EU, even though the results of that study were broadly comparable to most other, more recent assessments.

The split in Cabinet is also complicating matters – some Ministers want to maintain a very close trading relationship with the EU, others want to be free to pursue a more global approach. This divide means that any assessment is unlikely to get the blessing of the full Cabinet, as each faction will want to use it to reinforce their own proposal.

But, without a clear assessment of the costs and benefits of different options, the UK as a whole will struggle to agree what kind of relationship it wants. The public debate on the future relationship between the UK and the EU is only just beginning. The Government has an opportunity to lead the conversation for the country and show that it is making decisions in the national interest. There are other factors to consider beyond economics, but it is essential that people are given the facts to be able to make a properly informed decision.


Tim Durrant

Tim Durrant

January 2018

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