How much will Brexit cost the UK? £75bn a year!

Ok we can’t be sure on this statistic, but if anyone could give us a decent estimate it would be the Institute of Fiscal Studies.

They have calculated, that if we trigger Article 50 and leave the European project once and for all, the cost would be £75bn a year. This would equate to almost three grand per household, a huge figure.

They believe that the country would be poorer by 4 per cent of GDP per annum. If the UK managed to work out a deal with the common market, this figure might come down, but there is no guarantee this is going to happen, and if it would be generous to the UK.

Brexiteers might claim that we can organise trade deals with other countries without EU red tape, but again it is yet to be seen if that would happen.

EU diplomats and politicians have said the UK will not be able to access the single market at all, unless it makes huge payments into the EU and still allows the free movement of labour.

Some hoped that the UK could copy Norway’s agreement with the EU but it seems that the chances of this happening are fading away rapidly.

Many Brexit voters cited stopping free movement of workers as a major part of their reasons for voting to Leave, so this could cause some serious complications and resentment by the 52 per cent of people who opted for Brexit.

The report stated: “The macroeconomic impacts of membership and access are much larger than the importance of direct budgetary issues, even relative to the UK’s full EU contribution.”

The vast majority of economic forecasters believe that Brexit will have a negative impact on the UK economy in the long-term.

The negative impact of the Brexit vote has not been fully felt yet, but there have been numerous indicators that appear to show a slow down in the economy, in both the service and manufacturing sectors, the possibility of a the UK slipping into another recession appears to be growing.

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5 Responses

  1. Freeborn John

    It’s just a made up round number picked out of thin air. Only 9% of UK GDP is accounted for by exports to the EU so it us extremely unlikely that nearly half of that (4%) could be lost by the small tariffs (averaging 3%) the UK would pay on industrial exports. Servive exports are tarrIf free anyway under WTO rules and agriculture, which is the only sector to have tariffs large enough to distort trade only represents 1% of UK exports.

    This claim of £75bn loss is almist in the same realm of fantasy as the earlier claim that 3 million UK jobs would be lost outside the EU.

    1. Richard Philip Tutin

      The response posted on 12 August misses the point that trade and foreign direct investment bring benefits beyond the mere value of exports, such as through improved productivity and innovation, as well as the standard benefits which have long been understood of enhancing well-being through countries specialising according to their comparative advantage – along the same lines of how division of labour has the potential to make everyone better off.

      Far from being “picked out of thin air”, the GDP loss is determined using empirical evidence, with a dynamic reduced-form analysis applied to a data set covering bilateral trade flows between 200 countries spanning the period 1948-2013. I’m thinking of HM Treasury’s analysis in particular; but as the IFS report shows ( I guess the article is referring to this one ), the results are consistent with the results of other independent analyses such as those of the London School of Economics.

      Where the article is problematic is in suggesting a £3,000 per household loss. That contextualises neither by household income nor by trade scenario.

      If 4.0% of household income is £3,000, that implies household income of £75,000; almost three times as high as the actual median household income in 2014/15.

      To use the £3,000 is to fall at the last hurdle – having calculated the implied long-run fall in GDP, it simply divided that fall by the number of households in the UK to work out the loss per household. That doesn’t give a meaningful result because:

      • Firstly, inequality in the UK means that the average household income (mean) is greater than the income of the average household (median). In 2014/15 the mean household income was 23% higher than the median household income (Department for Work and Pensions 2016);
      • Secondly, GDP contains a significant component which is business income rather than household income. While this is, in some sense, attributable to households in that business profits will find their way through to households by way of drawings, dividends and capital gains, these are not significant sources of current income for the majority of households. In 2015, compensation of employees made up only 50% of UK GDP, with 21% being corporate gross operating surplus, 17% self-employed earnings/business profits and 12% taxes on products and production minus subsidies (Office for National Statistics 2016);
      • Thirdly, much profit is retained for business expansion rather than distributed to the owners’ households, which effectively is a timing difference whereby current business income is deferred, from the household point of view, until it is realised by way of future distributions or capital gains on disposal of the business or shares.

      While we might expect a “ratchet effect against the poor”, whereby in downturns wealthy decision-makers protect their income and pass losses onto those with less economic power, it is not realistic to suppose that the extent of this would be sufficient to impose the same nominal cost on every household. Indeed, in “Who Bears the Pain? How the costs of Brexit would be distributed across income groups” (Breinlich et al 2016g) the London School of Economics finds that Brexit would lead to very similar PROPORTIONATE falls across different income groups. (Of course, this is still very significant in that a given proportionate fall in income has a far more significant effect on poorer households who are already struggling to get by).

      A more realistic view might be to specify the annual loss compared with EU membership as follows:

      Under EEA membership (like Norway): midpoint estimate £530 for the median UK household;
      With an FTA with the EU27 (like Switzerland): midpoint estimate £1,900 for the median UK household;
      Trading under WTO agreements: midpoint estimate £2,200 for the median UK household.

      This is based on taking the following steps and assuming that the proportionate change in income would be the same for all households:

      • For TRADE impact: I have used HM Treasury’s analysis (HM Treasury April 2016), taking their “upper end of the range” figures on the basis that those figures are the outcomes of the reduced-form analysis, while the “lower end” and midpoints essentially assume that “things might not be so bad”. There is no good reason for introducing that bias;
      • For FOREIGN DIRECT INVESTMENT impact: I have disregarded HM Treasury’s FDI analysis on the basis of LSE’s legitimate criticisms that it uses UK-only data at industry level rather than using international data and taking account of cross-industry productivity effects (Dhingra et al 2016d). Instead I have used LSE’s own analysis of FDI impact from Dhingra et al (2016c), which uses bilateral FDI flows between 34 OECD countries from 1985 to 2013. In line with their conclusions I have assumed that the FTA option has the same impact on FDI as the WTO option. For the EEA scenario, I have assumed that there will be no change to FDI, on the grounds that EEA membership will still enable the UK to retain its attractiveness as a platform to the Single Market, for example by allowing it to keep its financial services passporting rights;
      • For FISCAL CONTRIBUTIONS: These are trivial compared to the losses from reduced trade and foreign direct investment. Nevertheless, for the EEA case, I have assumed savings on the basis that the UK’s per capita contributions to the EU will become the same as for Norway (Dhingra et al 2016b); for the FTA case, I have assumed that the UK’s per capita contributions will be the same as for Switzerland (Dhingra et al 2016b); and in the WTO case there will be no fiscal contributions to the EU;
      • For the PERSISTENT EFFECT OF THE BREXIT SHOCK: on the basis that economic shocks can have a persistent effect on GDP, the HM Treasury analysis includes a 1% reduction in GDP under each of its trading-relationship scenarios. I have assumed zero for the ‘shock persistence’ effect because there is no reliable basis for determining a measurement for that shock. I note also that Brexit is qualitatively different from other economic shocks, in that there is relative certainty as to the possible paths which may be chosen going forward;
      • For MIGRATION: The empirical evidence is that immigration has a positive effect on national income per capita; in which case possible reduced immigration could be expected to have a negative effect. However, I have assumed zero impact on GDP from reduced migration, on the assumption that migration policy will be developed in such a way as to avoid negative GDP impact, for example, through a suitably-designed points-based system;
      • For additional impacts from NiGEM: a small part of the total GDP losses determined by HM Treasury’s analysis arises from plugging the number through the National Institute’s Global Econometric Model (NiGEM). It is not clear precisely what mechanisms give rise to that part of the loss, so I have excluded such losses on the basis that their inclusion might give rise to some double-counting, for example if they include an aspect of cross-industry productivity gains from FDI which have not been separately included in HM Treasury’s analysis, but have been in LSE’s FDI analysis (which I have used instead for FDI impact).


      1 Breinlich H, Swati Dhingra, Thomas Sampson and John Van Reenen (2016g), Who Bears the Pain? How the costs of Brexit would be distributed across income groups
      ( )

      2 Department for Work and Pensions (June 2016), Households Below Average Income: An analysis of the UK income distribution: 1994/95-2014/15
      ( )

      3 Dhingra S, Gianmarco Ottaviano, Thomas Sampson and John Van Reenen (2016b), The consequences of Brexit for UK trade and living standards
      ( )

      4 Dhingra S, Gianmarco Ottaviano, Thomas Sampson and John Van Reenen (2016c), The impact of Brexit on foreign investment in the UK
      ( )

      5 Dhingra S, Gianmarco Ottaviano, Thomas Sampson and John Van Reenen (2016d), The UK Treasury analysis of ‘The long-term economic impact of EU membership and the alternatives’: CEP Commentary
      ( )

      6 HM Treasury analysis: the long-term economic impact of EU membership and the alternatives, April 2016
      ( )

      7 Office for National Statistics (June 2016), UK Quarterly National Accounts data tables
      ( )

      8 Office for National Statistics (November 2015), Statistical bulletin: Families and Households: 2015
      ( )

    2. Richard Philip Tutin

      As for the assertion that service exports are tariff-free, that completely ignores non-tariff barriers which are substantial.

      Were we to be outside the EEA, we would lose our “passporting” rights to provide cross-border financial services across the EEA. Goldman Sachs and JP Morgan have flagged up the importance of EU membership in making the UK an attractive platform from which to provide financial services across the EU, and the Institute of Chartered Accountants in England and Wales notes that “Without these rights, there is a risk that global banks could choose to transfer their business through other financial centres in the EEA where they would maintain those rights. Over time, this movement will likely weaken some of the core strengths of London as a principal global hub for financial services, such as the pool of international talent and financial infrastructure, and see the gravity in European financial markets transfer to other key financial centres in Europe” ( )

  2. Richard Philip Tutin

    Here are links to Treasury Committee sessions which you may find interesting.

    The 5th July session considers the implications of Article 50, including an observation from Michael Dougan that the only feasible way to deal with the legal ramifications of Brexit will involve an enormous delegation of power to the executive. So much for democratic control!

    The 13th July session considers the EEA vs FTA vs WTO alternatives, with a focus on negotiation practicalities rather than the economic consequences. In terms of negotiation with Europe, negotiation with third countries and WTO arrangements, there are interdependencies which I hadn’t initially appreciated:

    Although the UK is a signatory to WTO agreements, its rights and obligations under those agreements are tied in to the EU, in the sense that quantitative aspects such as tonnage limits apply to the EU as a bloc rather than member states individually. The UK itself does not have rights under the WTO agreements so separation of the EU parts would have to be negotiated between the UK and the EU27, before ratification by the other WTO nations. In other words, we must conclude our negotiations with Europe before we can finalise our WTO commitments.

    That in turn has implications for other bilateral Free Trade Agreements which we may wish to strike. It would be foolish for a third nation to negotiate with us before our WTO commitments are known, because that might put it in a position of giving concession for something that the UK later gives up for free under WTO.

    So in terms of formalising trade relationships, we must sort out our relationship with Europe first, before we can move on to our relationship with the WTO, and that must be sorted out before we can seek to obtain any decent bilateral Free Trade Agreements.

    Oh, and by the way, for financial services (our biggest export) we won’t get a decent FTA with the USA (by far our most significant trading partner outside the EU – 18% of our exports go there compared with about 2.5% for China which is third on our list) because in the US financial services is a matter of state rather than federal competence, and because financial services is the subject of increasing political sensitivity in the US.

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