The Economic Aftermath of Brexit Vote

Mr Johan Van Reenen JVR, the director of the LSE’s Centre of Economic Performance predicts serious economic and political damage. In his opinion there were multiple reasons for the Brexit vote, but by far the most important one was immigration. In the last few weeks before the vote, the leave campaign was ruthless in focusing on the issue.

The European Union is the UK’s largest trade partner. Around half of the UK’s trade is with the EU. EU membership reduces trade costs between the UK and the EU. This makes goods and services cheaper for UK consumers and allows UK businesses to export more. Leaving the EU he predicts will lower trade between the UK and the EU because of higher tariff and non-tariff barriers to trade. In addition the UK will benefit less from future market integration within the EU. The main economic benefit of leaving the EU would be lower net contributions to the EU budget.

All EU countries lose income after Brexit. If the UK were to unilaterally remove all its tariffs on imports from the rest of the world after Brexit the UK income would fall by 1% in the optimistic view and 2.3% in the pessimistic view. In the long run reduced trade will mean lower productivity. Being outside the EU therefore means that the UK will not automatically benefit from future EU trade deals with other countries and that would mean missing out on the current US and Japanese deals which are forecast to improve real income. After Brexit it is not clear if the UK can obtain better trade deals with non-EU countries. The UK it is predicted would lose bargaining power as its economy makes up only 18% of the EU single market.

It is unclear whether there are any substantial regulatory benefits from Brexit. The UK already has one of the OECD’s least regulated conduct in the labour market.

Although it is hard to assess what the economic future may bring, it is safe to assume that reducing trade would lower UK living standards. Importantly the fall in income per capita resulting from lower trade, more than offsets any savings that the UK obtains from the reduced fiscal contributions to the EU budget.

Mr Van Reenan states that Brexit also does not necessarily mean that the UK would make zero contributions to the EU budget. In return for access to the single market, EA members such as Norway make substantial payments to the EU.

Brexit also has an effect on the UK economy through changes in investment, migration and regulation. For Brexit to have an economic benefit the research states says “These channels must have sufficiently large positive effects on the UK economy to outweigh the negative effects”. Brexit is likely to reduce strong investment which has been found to lead to higher productivity. If the UK were to accept higher trade costs by giving up high levels of access to the EU markets there would be more scope for regulations being loosened. However, many of these regulations implement policies that the UK Government is committed to follow inside or outside the EU. The conclusion is that the economic consequences of leaving the EU will depend on what policies the UK adopt following Brexit. Lower trade due to reduced integration with the EU countries is likely to cost the UK economy far more than is gained from lower contributions to the EU budget.