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BREXIT
Policy analysis from the Centre for Economic Performance

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CEP BREXIT Analysis
Who Bears the Pain? How the costs of Brexit would be distributed across income groups
Holger Breinlich, Swati Dhingra, Thomas Sampson and John Van Reenen June 2016
Paper No' CEPBREXIT07:
Full Paper (pdf)

Tags: brexit; referendum

Press Release - Thursday 2nd June 2016

Squeezing the poor, not just the rich: The costs of Brexit would be evenly distributed across people of all UK income levels

New analysis by the Centre for Economic Performance

The economic pain of Brexit would be widely shared, with the middle classes being only slightly harder hit than the richest and poorest. Households on average incomes would face losses of at least 4% of their income (£1,637 per year) if the UK left the European Union (EU) and traded as a regular member of the World Trade Organization, compared with remaining in the EU. This is because prices rise across the board, particularly for transport, alcohol, food and clothing.

These are among the findings of the latest in a series of #CEPBrexit reports, published by the Centre for Economic Performance (CEP) at the London School of Economics. The CEP report analyses the distributional effects of leaving the European Union (EU) across different income groups and types of households. It shows that:
  • All serious economic analysis finds that Brexit would have a negative impact on UK GDP per capita. But a popular view is that membership of the EU only benefits elites and has not helped those in the middle or at the bottom of the income distribution.

  • The new research uses data on household expenditure by different income groups combined with estimates of the changes in the prices of goods and services after Brexit to look at who would win and who would lose.

  • Prices would go up most in transport (a price hike of between 4% and 7.5%), alcoholic drinks (4% to 7%), food (3% to 5%) and clothing (2% to 4%). These product groups rely a lot on imports. By contrast, prices for services would rise the least.

  • Looking solely at the 'static' short-run impact of trade, the income (not GDP) of the average UK household would fall by 1.8% (£754) per year in our most 'optimistic' scenario where the UK joins countries like Norway in the European Economic Area. Income would fall by 4% per year (£1,637) if the UK were to trade under World Trade Organization rules (in our more realistic 'pessimistic' scenario).

  • If we also take into account the longer-run dynamic effects of trade on productivity, the average household would lose between 6% and 13.5% of their real incomes per year (£2,519 to £5,573).

  • For the poorest tenth of households (the bottom decile), real income losses would be 1.7% to 3.6% in the short-run and 5.7% to 12.5% in the long -run. For the richest households, the short-run losses would be 1.8% to 3.9% and the long-run losses 6% to 13.4%. So the middle class lose out only slightly more than the rich and poor.

  • Looking at specific households such as pensioners, families with children and single people, we find that the pain would also be widely shared. For example, even in the short-run, pensioners would lose between 2% and 4% of their real income.

  • Adding in the effects of reduced immigration and the differential effects of trade by industry has no discernible effect on our analysis. This is because the evidence shows that EU immigration has not held back the jobs and pay of the UK-born.


CEP director Professor John Van Reenen comments:
"Some supporters of Brexit argue that the economic costs would only be borne by the elite and that most of the population, especially those on lower incomes, would be better off. This claim is plain wrong: our research shows that the pain would be evenly shared across the income distribution. Every group would lose by broadly similar proportions, though those in the middle would lose slightly more than others."

Professor Gianmarco Ottaviano says:
"Brexit would not deliver on its Robin Hood promise of robbing from the rich and giving to the poor. The idea that leaving the EU would help in reducing inequality is simply not borne out by the evidence."

Professor Holger Breinlich adds:
"A UK exit from the EU would lead to significant price increases that would hurt people across the income distribution. If the UK also leaves the European Economic Association as currently suggested by the Leave campaign, the resulting long-run income losses might well reach several thousand pounds for the average household."

Professor Swati Dhingra notes:
"Food prices would rise by 3% to 5% if the UK were to leave the EU. So Brexit won't just make a European holiday more expensive. It will tighten the budgets of households of all incomes."


For further information, contact:

Holger Breinlich, Email: Holger.Breinlich@nottingham.ac.uk

Swati Dhingra on +44 (0)20 7955 7804, Email: s.dhingra@lse.ac.uk

Gianmarco Ottaviano, Email: g.i.ottaviano@lse.ac.uk

Thomas Sampson on +44 (0)20 7955 7408, Email: t.a.sampson@lse.ac.uk

John Van Reenen on +44(0)7803 614137 / +44 (0)20 7955 7049, Email: j.vanreenen@lse.ac.uk

Helen Durrant on +44 (0)20 7955 7395; Email: h.durrant@lse.ac.uk

Romesh Vaitilingam on +44(0)7768 661095, Email: romesh@vaitilingam.com