Policy analysis from the Centre for Economic Performance
We analyze the effects of Brexit on the UK economy. The most important economic consequence of Brexit would likely be reduced trade with EU countries. We consider an optimistic scenario with relatively small increases in trade barriers between the UK and the EU and a pessimistic scenario with larger rises. In the optimistic scenario Brexit reduces UK income per capita by 1.1% and in the pessimistic scenario income per capita falls by 3.1%. The effect of Brexit on FDI and migration would impose additional costs on the UK and following Brexit the UK would not benefit from future EU free trade agreements such as the Transatlantic Trade and Investment Partnership currently being negotiated with the United States.
Friday 20th March 2015
The European Union:
Should we stay or should we go?
policy briefing from the Centre for Economic Performance
While staying in the EU may cause political trouble for the major parties, if we leave the EU, the economic trouble will be double. That is the conclusion of a new report from the Centre for Economic Performance (CEP) - the latest in a series of background briefings on key policy issues in the May 2015 UK general election.
The CEP researchers - Swati Dhingra, Gianmarco Ottaviano
and Thomas Sampson
- note that the economic consequences for the UK from leaving the EU (so-called 'Brexit') are complex. But reduced integration with EU countries is likely to cost the UK economy far more than is gained from lower contributions to the EU budget.
They calculate that static losses due to lower trade with the EU would reduce UK GDP by between 1.1% in an optimistic scenario and 3.1% (£50 billion per year) in a pessimistic scenario. The losses due to lower foreign direct investment in the UK, less skilled immigration, and the dynamic consequences of reduced trade could also be substantial - comparable to the decline in UK GDP following the global financial crisis.
The CEP team report that:
- The EU is the UK's most important trade partner, accounting for half of all UK exports and imports. UK exports to the EU correspond to almost 15% of national output (GDP).
- EU membership matters to the UK economy primarily because it leads to lower trade barriers. This makes goods and services cheaper for UK consumers and allows UK businesses to export more.
- Brexit would lead to lower trade between the UK and the EU because of higher tariff and non-tariff barriers to trade. In addition, the UK would benefit less from future market integration within the EU. The main benefit of leaving the EU would be a lower net contribution to the EU budget.
- In our analysis of the consequences of Brexit, we consider an 'optimistic scenario' with small increases in trade costs between the UK and the EU, and a 'pessimistic scenario' with larger increases. In the optimistic case, Brexit reduces UK income by 1.1% of GDP. In the pessimistic case, UK income falls by 3.1% (£50 billion per year).
- In the long run, reduced trade may lead to slower productivity growth. Factoring in these effects could easily more than double the costs of Brexit and lead to a loss in the pessimistic case comparable to the decline in UK GDP during the global financial crisis of 2008-09.
- Leaving the EU would also affect foreign direct investment, immigration and economic regulation in the UK. These effects are harder to quantify than changes in trade, but are likely to lead to further declines in income.
- The EU is currently negotiating major new free trade agreements with the United States (the Transatlantic Trade and Investment Partnership) and Japan. Using estimates from previous EU-negotiated free trade agreements, we estimate these trade deals will lower UK prices by 0.6% and save UK consumers £6.3 billion per year. With Brexit, these benefits would be lost.
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