The price of Brexit for individuals

18 Apr 16

Many people are considering the personal financial impact of EU membership, and LSE academics have crunched the vital numbers

The EU Debate banner

By referendum day on 23 June, all voters will have to weigh up whether to leave the European Union. One factor that matters is the economic impact – whether people are likely to be richer or poorer after a Brexit.

An obvious benefit of Brexit is that the UK will not have to send so much money to Brussels. The net amount of this is around 0.31% of our national income. An equally obvious cost of Brexit is that there will be less trade between the UK and EU if the UK leaves than if it stays.

The degree to which trade costs will be higher if Britain is outside the EU is a big question. Even when countries have comprehensive trade deals (such as Norway’s deal in the European Economic Area), there are still non-tariff barriers due to regulatory differences, border checks, rule-of-origin requirements and anti-dumping actions. This is why Norway has less trade with the EU than would be expected from such a deep level of integration.

The Centre for Economic Performance (CEP) has looked at what the impact of Brexit could be, using a standard trade model with industry-level data on exports and imports covering all sectors of the economy. Since it is hard to know precisely how trade costs will change after Brexit, we will look at two stark scenarios.

An optimistic scenario is that the UK swiftly strikes a deal so that it gets deep access to the EU single market, like Norway. A pessimistic scenario is that the UK is unwilling to accept the free movement of labour and the associated regulations that are part of the access price to the single market so will prefer the usual EU external tariffs; trade will fall more in this case.

 

Calculated effects of Brexit on living standardsOptimisticPessimistic
Trade effects-1.37%-2.92%
Fiscal benefit0.09%0.31%
Total change in income per capita-1.28%-2.61%
Income change per household-£850-£1,700

Source: LSE Centre for Economic Performance

 

The table above shows the results of our analysis. There is a drop in income per person of 1.3% in the optimistic case, which doubles to 2.6% in the pessimistic case. This translates to a fall of between £850 and £1,700 per UK household.

These calculations are narrow. We ignore positive effects that trade may have on productivity through more competition, innovation, foreign investment and migration.

An alternative ‘back of the envelope’ way to estimate the effects of Brexit is to look at what has actually happened when countries have joined the EU, compared with being in free trade areas. The trade effects are big – a jump of a quarter or more.

Combining this effect with estimates of the impact of trade on gross domestic product leads to a fall in UK national income of between 6.3% and 9.5%.

Could the UK negotiate a sweetheart deal much better than Norway or Switzerland? This seems unlikely. About half of the UK’s exports go to the EU, whereas only 10% of the EU’s exports are destined for the UK, so the bargaining power is unequal. What’s more, the EU will not want to be seen to be offering generous rewards for leaving, as this will encourage other members to try the same trick.

Second, could the UK strike better trade deals with non-EU countries? Although the UK will not have to compromise with other EU members when doing such deals, it cannot offer access to the biggest single market in the world as the EU can. The EU is in the final stages of negotiation with the US and Japan on deals estimated to raise GDP by 0.6%.

Finally, being outside the EU would enable the UK in principle to jettison some irritating regulations. However, it’s worth bearing in mind that being in the EU has not stopped the UK from having one of the most flexible product and labour markets in the rich world. Will better regulation really be forthcoming after Brexit?

Eurosceptics have claimed that “the 100 most burdensome EU regulations have been estimated to impose annual costs of £33.3bn”. What they neglect to mention is that these impact assessments also estimate that the regulations bring benefits to Britain worth £58.6bn.

It has been argued that by getting rid of only regulations where costs are deemed to outweigh benefits, 0.9% of GDP could be saved. About half of this is estimated to come from the renewable energy strategy and the working time directive. It’s unclear that tearing up these environmental and employment protections will be politically feasible or economically beneficial.

Many people may decide that knocking a grand or two off their salary or pension is worthwhile to get Brussels off their backs. Some – although probably fewer – might even say the same if the bill rises to over £6,000 a year. These are reasonable positions and every voter will make up their own mind over the price they are willing to pay.

Those who say that leaving the EU is a win-win because Britons will both feel more free and become a lot richer are not being candid about the evidence. Brexit will cost. The only question is exactly how much.

 

This article is a summary of The Consequences of Brexit for UK Trade and Living Standards by the CEP at the LSE. The report has been questioned by campaign organisation Vote Leave. It said the report was EU funded, whereas the work was funded by the UK’s Economic and Social Research Council; as a whole, CEP receives less than 5% of its funding from the EU. Vote Leave also said the authors support the adoption of the euro, which is not the case.

Did you enjoy this article?

AddToAny

Top