Disclaimer: The views expressed within this article are entirely the author’s own and are not attributable to Wessex Scene as a whole.
In June, Boris Johnson said that the chance of a no-deal Brexit was ‘a million-to-one against‘. But in early September, he announced in a Cabinet meeting that whilst there was a ‘good chance’ he would be able to secure a deal, there was a ‘high chance‘ he wouldn’t. As we edge closer to the possibility of Britain crashing out of the EU, the potential economic consequences are very real and should not be ignored.
In a meta-analysis of 14 studies by the Institute for Government, only one, by Economists for Free Trade, concluded that the UK trading with the EU on WTO rules would boost growth. To reach this conclusion though, they made the ‘incredibly optimistic assumption’ that the rules could be used to force the EU to treat the UK as a member state in trade, something that will not happen. The other studies range from a decrease of 18% of GDP compared to a world in which the UK remained a member of the EU to a ‘negligible cost’. However,
‘the predictions are more pessimistic for scenarios in which significant barriers to trade develop between the UK and EU – for example, if the UK and EU were to trade with each other on World Trade Organization (WTO) terms’.
Why should we trust this? After all, the Treasury predicted that there would be a recession (a fall in GDP over two consecutive quarters) straight after the referendum in 2016, which didn’t happen.But, as the Institute for Government points out, long term predictions are very different to short term ones as they don’t attempt to ‘pinpoint exactly what the level of economic activity will be in future’. Instead, it is predicted how much higher or lower output is likely to be if the UK is a member of the EU compared to if it is not.
‘To provide a medical analogy, a doctor would struggle to predict accurately when you are going to die, but she could predict with much greater certainty that the date is likely to be sooner if you smoke 20 cigarettes a day than if you do not.’
Further, we shouldn’t simply be ignoring evidence that a hard Brexit would be harmful in the short term – if we leave without a deal, it won’t just be business confidence threatening a recession this time, but infrastructure changes and tariffs.
The Office for Budget Responsibility predicts no-deal would shrink the economy by 2% by 2020, increase unemployment by 5% and decrease house prices by 10%, whilst borrowing would increase by £30 billion a year. The resulting economic slump will be a third as bad as the financial crisis of the late 2000s. By the middle of 2021, GDP is estimated to be 4% lower. The Bank of England’s most recent prediction suggests that GDP would fall 5.5% by 2020, unemployment would reach 7% and inflation would double to 5.5%.
The pound has also dropped in value recently and will continue to if there is a No-Deal Brexit. Whilst most of us only think about the effects of this when we go abroad, it does have a lot of other implications. One is that our exports will become cheaper, as sterling will become cheaper to buy, potentially leading to a boost in our exports abroad.
But at the same time, it will result in higher prices for goods that we buy abroad, such as food. Around 30% of our food comes from the EU and so a weaker pound will mean that certain food items will become more expensive. Even the Government expects this and admit that ‘low-income groups will be disproportionately affected by any price rises in food and fuel’.
Tariffs will also play a role in increased prices as we trade on WTO rules with the EU. Commonly misunderstood, even by the US President, tariffs are taxes placed on a foreign (European) good that is paid by the native (British) importer. This, in turn, would result in higher prices for the consumer to ensure a profit.
Whilst not all products will face a tariff (87% of goods will be tariff-free rather than 80%), tariffs on other imported goods will be enforced on the UK-EU border. Agriculture will be hit hard as exports of beef, eggs and poultry will face tariffs of 84%, 19%, and 48% respectively. Welsh farmers send 40% of their lamb to the EU and some are concerned mass slaughter of livestock will be the only option in the event of a no-deal.
Car manufacturers will also be hit hard. Companies have and will leave the country, with jobs lost in the process.
Of course, we will then be able to make our own trade deals with the rest of the world (just ignore that we would be able to do this if we had a deal with the EU as well). We’ve in fact been making progress on this, as ‘continuity deals’ with 38 of the 70 countries that the EU has a free trade deal with have been made.
But the profitability of future trade deals may not be as impressive as you first assume. For example, a leaked Government analysis predicted that GDP would increase by just 0.1-0.3% through a trade deal with the US in the next 15 years. Trade deals with China, India, Australia, the Gulf countries, and the nations of Southeast Asia would add, in total, only a further 0.1% to 0.4% to the GDP. ‘Overall, new trade deals could, therefore, provide a total long-term increase of 0.2% to 0.7%’. Crashing out is not the way to go if these will be the meagre results, which will certainly not offset the damage caused by a no-deal Brexit (see the table on long-term effects on GDP above).
Lastly, trade deals take years to sign and even longer to implement. On average, it took the US one and a half years to agree on a deal and three and a half to reach the implementation stage with other nations. Can we afford to wait that long after leaving the biggest free trading bloc in the world without a deal?
If Brexit must happen and we can’t dodge our own bullet to the foot, we should at least ensure the wound is only damaging, not crippling.