October 15, 2018 0

Cost of Brexit

Cost of Brexit

 The latest analysis by the CER which is updated quarterly has estimated that the UK economy is 2.1% smaller as a result of the vote of the UK government to leave EU. The rest of the world knows this as the Brexit vote. It has become quite apparent that the Brexit vote has slowed down economic growth. During the initial stages of the referendum, the economy showed considerable growth but has shown a steady decline over the passage of time. Now the UK has become the slowest growing economy in the G7, dropping below Italy. In the first quarter of 2018, the economy grew by only 0.1%. Despite the strong and rapid growth of the global economy, the UK economy continues to suffer.

Is UK’s decision affecting its economy?

The burning question is how far the decision to leave the EU has affected the UK economy? The CER has created a modelling exercise which comes up with an estimate which is updated quarterly. According to the model, the UK economy was 2.1% smaller in the first quarter of 2018 than what would have been if the UK had voted to stay back in the EU. Experiments cannot be done on the UK economy but many control groups have been relied upon to document the effect of the decision. Most of the control groups were not effective as the difference between the Britain which wants to stay in the EU and the Britain which wants to leave cannot be measured.

The synthetic UK model

A “synthetic UK” model has been built which resembles a control group. For the model to work, information such as the quarterly real GDP, consumption and investment data of 36 OECD countries was collected. This data extended from the first quarter of 1995 till the first quarter of 2016 when the vote took place. The countries which had economies similar to that of Britain were selected. Most of countries selected were outside the Eurozone, like Canada for instance. The group of countries becomes the control group and the performance of “synthetic UK” after the vote and the real UK after the vote was compared. It was observed that the economic performance of “synthetic UK” was similar to the real UK until the referendum. After the vote the economy of the synthetic UK deviated from the real UK by 0.5 percentage points and the economy of the real UK was smaller by 2.1%. It was made clear that the real UK performed worse than the synthetic UK. The countries in the control group share similar economic growth with the UK until the referendum after which the economy of UK starts sliding downhill. However, some aspects cannot be changed even if the UK remained in the EU. An example of this would be the increase in global exports of some of the countries in the group which was not enjoyed by the UK.

The decline in growth has affected UK’s public finances. At the time of the vote, the government promised that the exit would bring about fiscal benefits and the resulting “Brexit dividend” would be used to increase spending on health services. What has happened is certainly not the case. It was earlier predicted that the onset of the referendum would raise the UK’s deficit and debt thereby increasing taxes and this prediction has come to pass. This is mainly because the tax revenue of the government would reduce due to limited trade, investment and migration opportunities as a consequence of the departure from the EU.

Brexit’s Effect on Public Money

It has been ruled that there is no “Brexit dividend”. According to analysis, Brexit is actually damaging the public finances by 440 million pounds a week. This has been based on a detailed account of taxes raised from different sectors of the economy and how the Brexit options would negatively impact them. The government has to increase additional borrowing to meet expenditure. There has been one percent loss of GDP growth which has resulted in 11 billion pounds of additional borrowing. On top of all this, the government must pay a 40 billion pound Brexit bill to the EU in the coming years. These are the estimates and economics have been close to the truth in this regard.

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