Brexit and the economy: Government analysis of the long-term impact

How could Brexit affect the economy? And what did the Government’s analysis of the potential impact over the long-term show? Here we answer these questions, providing a summary of the Government’s long-term economic analyses of Brexit, including the assumptions and scenarios used.

Future trade arrangements are important

Brexit and the terms of the new UK-EU relationship could affect the economy through trade and investment, immigration, regulations and EU budget contributions.

The UK’s future trading arrangements with the EU – the UK’s largest trading partner – and the rest of the world will play a crucial role in determining Brexit’s economic impact. At present, the UK is in the EU Single Market and Customs Union, ensuring very low barriers to trading within the EU. Most economic research suggests that Brexit will lead to higher trade barriers with the EU, but we won’t know the degree to which this is the case until the future UK-EU trade relationship has been negotiated.

What’s the relationship between trade barriers and GDP?

Generally speaking, previous economic modelling exercises from the government and others find that higher costs to trading with the EU lead to larger negative impacts on the UK economy. In other words, a scenario where the UK leaves without a trade deal with the EU and reverts to ‘WTO rules’ is likely to result in UK economic output (GDP) being lower in the long-term than a scenario where there are fewer barriers to UK-EU trade, such as in a comprehensive free trade agreement.

These “losses” could be mitigated by agreeing new trade deals with other non-EU countries and from other policy areas (such as growth-enhancing changes to regulation for instance). However, the vast majority of economic studies show that these potential benefits do not make up for the higher trade barriers with the EU (given its importance to the UK).

The Government’s long-term analysis

On 28 November 2018, the Government published its analysis of the long-term impact of Brexit on the economy. It compares how big the economy will be – as measured by GDP – in five different future trading scenarios relative to a ‘baseline’ scenario of the UK staying in the EU. This is not a forecast as such as it doesn’t look at all the factors that affect GDP, just those related to Brexit.

What are the scenarios covered?

  • Government’s proposed deal (‘Chequers’) – based on the Government’s July 2018 White Paper and its preferred option. In this scenario, the UK is essentially in a customs union with the EU. Barriers to trade with the EU are fairly limited.
  • ‘Chequers minus’ – similar to the ‘Chequers proposal’ but incorporating greater trade barriers with the EU. Many commentators argue this is more in line with the parameters of the Political Declaration and therefore a more realistic outcome of a future UK-EU trade deal.
  • EEA (European Economic Area) – where the UK is a member of the EEA inside the Single Market (including free movement of people) but not in a customs union with the EU.
  • Free Trade Agreement (FTA) – a scenario where the UK and EU sign a free trade agreement. It is assumed there are no tariffs on goods and non-tariff barriers are equal to those in an average trade deal with the EU.
  • No deal – the future UK-EU trade relationship is based on World Trade Organisation (WTO) rules, rather than a bilateral trade deal.

The Government do not use the terms ‘Chequers’ or ‘Chequers minus’, instead referring to a ‘White Paper’ scenario. The Government assessed all five scenarios listed above with two different migration assumptions, neither of which is Government policy:

  • No change to rules – this assumes the current projected flow of EEA workers with no policy changes.
  • Zero net migration from EEA – assumes that there is no net migration of workers from EEA countries.

What’s the economic impact of each scenario?

For each scenario estimates are made of how much higher or lower the level of GDP will be in the long-term, compared to the baseline of staying in the EU. The main outcome of the analysis is that the higher the barriers to UK-EU trade, the lower GDP is. This is in line with other studies examining the potential impact of Brexit on the economy.

Government analysis estimates that in the long term GDP be lower in trade scenarios with greater UK-EU trade friction

The results show that of the five Brexit scenarios modelled, the Chequers outcome leads to the smallest long-term negative impact on GDP, compared with staying in the EU.

Under the more restrictive migration scenario, Chequers minus results in GDP being 3.9% lower – this figure has been used by some economists and commentators as the scenario closest to what is contained in the UK-EU Political Declaration.

Government analysis estimates that UK GDP will be lower in scenarios with greater UK-EU trade friction

The biggest single influence on GDP comes from non-tariff barriers to trade. This includes regulatory and administrative requirements that make it more difficult for businesses to export and import goods and services.

Do you want to read more?

The Library’s briefing paper Brexit deal: Economic analyses goes into the Government’s analysis in more detail including Brexit’s estimated impact on the public finances and UK countries and regions. We also explore the Bank of England’s short-term analysis of Brexit.

Danial Harari is a Senior Library Clerk at the House of Commons Library, specialising in UK and international economies.

Picture credit: EU and UK flags / image cropped.  Licensed under CC0 Creative Commons – no copyright required.