Ahead of the vote to leave EU, some predictions were made on the likely impact of the UK leaving the EU. These have been broadly categorised into positive and negative impact with current evidence on whether the predictions will materialise or not in 2019 and 2020 as provided below:
a) Positive Impact
Public Finance Effect
The UK is a net contributor to the EU – which means it gives more funds than it receives. A vote to leave the EU will mean that the UK will save on that net contribution holding all else constant. For instance UK’s gross contribution in 2014 was £18.8 billion, which is about 1% of GDP and this can be broken down into £350 million a week (Emerson et al, 2016).
The gross contribution reduces to a net of about £275 a week (£14.4m a year or 0.8% of GDP) once rebates are considered. Looking forward into the future, a net contribution of £150 per week is expected to be made. (See Table 1 for details of UK’s contribution in 2013, 2014 and what was expected going forward).
The UK will have additional £8bn a year or £150 per week available to boost its public finance following Brexit. One of the key objectives of the UK Government is to reduce public spending with the aim of reducing its deficit (UK Government’s Public Finance Plans and Fiscal Targets, 2015).
This additional fund is likely to go into increasing public expenditure especially on issues that will reduce any negative impact of Brexit within those two years.
Income effect (1) – positive
The income effect of Brexit is uncertain, however if the economy were to expand by 1%, then borrowing as a share of national income could be around £14 billion less (Emerson et al, 2016). Given the uncertainty associated with Brexit, if the economy expands as a result of positive outlook – possibly following a good post Brexit deal, then the reduction in borrowing will materialise.
Economists for Brexit predicted a 1.6% increase in GDP in the short run. Following the referendum on 23 June, 2016 to leave the EU, GDP growth rate has hovered around 1.7% to 1.9% in 2017 and a reduction to 1.4% and 1.5% up to June 2018 (see chart 1 for details).
b. Negative Impact
The short term negative impacts of Brexit is primarily driven by increase in uncertainty following a vote to leave the EU. Some of these negative impacts are:
Income effect (2) – negative
The flip side of a positive income effect as discussed above, is a negative effect following a shrink in the economy in response to Brexit. For instance if the economy were to shrink by 1%, then borrowing as a share of national income could be around £14 billion more. Hence the slightest reduction in national income will be enough to outweigh the benefits of improved public finance (Emerson et al, 2016). Given the uncertainty associated with Brexit, it is more likely that the economy will shrink in the short term. The impact of Brexit is already being felt on the economy with GDP growth rate declining from 1.7%/1.9% in 2017 to 1.4%/1.5% up to June 2018 (see chart 1). This declining growth rate can be worsened in 2019 and 2020 if a good deal is not reached with the EU.
Fall in the value of the Pound Sterling
A vote to leave the EU was likely to see the weakening of the Pound Sterling (Emerson et al, 2016). The Pound Sterling has been declining for the most part of 2016 (after the vote) and 2017 with some partial recoveries in 2018. The pound is currently on the decline until there is certainty in agreement with EU.
Rise in inflation
Inflation has been on an upward trend since 2016 and this may continue in the near future. A rise in inflation is an indication of macro-economic instability which does not promote investment. See chart 3 below for inflation trend between 2016 and 2018:
It can be noted from Chart 4 below that even though cost of borrowing was lower for most of part of 2017, it is currently on the rise which can be attributed to the uncertainty associated with Brexit:
Reduction in investment
Foreign direct investment in the UK was predicted to fall. The reduction was however not seen immediately following the vote in June 2016 until mid-2017 where there was a sharp decline in investment through to 2018. July 2018 however saw some recoveries. Hence if the uncertainty prevails, investment will keep declining in 2019 and 2020.
2. If the UK were to come to have the same trading relationship with the EU as does the US or Japan today would this be harmful to national income and prosperity?
US is a member of WTO (likewise Japan) and if the UK were to join the WTO, the following will be the advantages and disadvantages (Dhingra, S and Thomas Sampson, 2016):
• The UK will have more sovereignty to be able to negotiate its own trade deals separate from the EU;
• As a net contributor to the EU, the UK will be able to save on the funds it would have otherwise contributed; and
• The UK will have no obligation to adopt EU economic policies.
• The UK can trade with EU but this will be subject to ”Most Favourable Nation” tariffs and any other nontariff barriers in line with WTO agreements;
• There will be no freedom of movement of people from UK to EU and vice versa;
• Though goods could be covered, there will be no right of access for service providers into EU;
• Goods exported to the EU will still be required to meet the EU standards.
From the above, the downsides of leaving the EU to join WTO are more than the benefits UK stands to gain. In addition to this, when it comes to trade, proximity is important and hence the EU would have been a better option to advancing trade than WTO.
As once said by the prime minister ‘If we leave the EU, ”we cannot of course leave Europe. It will remain for many years our biggest market, and forever our geographical neighbourhood’ (Cameron, 2013).
The factors discussed above make it difficult for the UK to negotiate any better deal with WTO after leaving the EU which is geographically closer.
3. Is there much evidence that the high levels of immigration of the past 10 years have boosted the living standards of the population that was already in the UK?
The impact of migration on the UK has been positive. Specifically, European migration has helped to raise economic performance and public finance (Financial Times, 2018) as these migrants pay more in taxes than they receive from public services. An improved economic performance and public finance from the positive impact of migration translates into better lives for the population.
Also, the impact of immigration on crimes have been mixed (see chart 6 below), however, more households are happier with their neighbourhood.
For instance between 1992 and 2015 an additional 5% of British household respondents indicated they are happy with their neighbourhood which is an indication of improved livelihood.