A 5.5% hit from Brexit? Not so fast

By:

  John Phelan

When Britain voted to leave the European Union in June, 2016, there was no shortage of forecasts of economic catastrophe. In the event, the catastrophe did not materialize, and when the British economy did crash it did so at the same time as everyone’s else’s as a result of COVID-19 and government responses to it.

Post-Brexit, we now have a steady stream of estimates of the ‘loss’ to the United Kingdom’s economy of leaving the European Union on the terms that it did. The latest comes from the Centre for European Reform and finds that “Brexit reduced Britain’s GDP by 5.5 per cent by the second quarter of 2022.” “These estimates are based on the ‘doppelgänger’ method,” the author notes, “in which an algorithm selects countries whose economic performance closely matches the UK’s before Brexit.”

This is a striking finding with striking implications:

The Brexit hit has inevitably led to tax rises, because a slower-growing economy requires higher taxation to fund public services and benefits. If Brexit had not happened, most of the tax rises that then Chancellor Rishi Sunak announced in March 2022 would not have been necessary. If the UK economy had grown in line with the doppelgänger, tax revenues would have been around £40 billion higher on an annual basis (if we apply the same tax-to-GDP ratio as in 2021-2 – 34 per cent). In his March 2022 budget, Sunak announced tax rises of £46 billion.

But when we look closer at this estimate, doubts emerge over its robustness.

Chart 2 in the report shows mean quarterly real GDP growth for selected geographies (the United Kingdom, the doppelgänger, the United States, 22 advanced economies, G7 minus UK, France, Germany, and Italy) for three different periods (Q1 1999 to Q4 2008, Q1 2009 to Q2 2016, and Q3 2016 to Q2 2022).

If we look at the United Kingdom’s performance since Brexit – the light blue bars – we see that it has done better than Italy and Germany and slightly worse than France. Relatively speaking, this is not a catastrophe. If we look at the red bars we see that, in the period before the referendum, the United Kingdom did better than Italy and France and slightly worse than Germany: in other words, not much different.

Of course, the paper does not compare the United Kingdom’s post-Brexit economic performance to post-Brexit performance of these other countries but to the post-Brexit performance of its constructed doppelgänger. We see the economic impact of Brexit, it argues, in the comparison between the two left most light blue bars. And what a gap it is.

But compare the doppelgänger’s post-Brexit performance with the others. It does better than all three of Italy, Germany, and France, something the actual United Kingdom didn’t manage in either of the preceding periods (the dark blue and red bars). Not only that, but the doppelgänger also does better post-Brexit than the United States, something else the actual United Kingdom failed to manage in either of the preceding periods (the dark blue and red bars). In other words, this report is claiming that, without Brexit, the United Kingdom’s economic growth would, post-2016, have suddenly launched onto a much higher path than it had been on previously.

Is this possible? Yes. Is it likely? Not very.

Given the similarity of the United Kingdom’s growth record pre and post Brexit relative to other economies, the various estimates of a ‘Brexit loss’ all have to posit a counterfactual where its economy performed much better than it actually did, not only relative to its own post-Brexit performance but to its performance pre-Brexit also. Was the British economy in early 2016 really a tightly coiled spring ready to unleash its own ‘Tiger’? I’m skeptical and we should be skeptical of any estimates of a ‘Brexit loss’ which are based on such an assumption.

 

 


READER COMMENTS

Scott Sumner
Jan 15 2023 at 11:36am

It’s also worth noting that the gains promised by Brexiteers never panned out.  The voters were sold a bill of goods.

John Phelan
Jan 15 2023 at 1:48pm

Membership of the European Union and Single Market is, quite simply, neither the boon nor the obstacle to Britain’s economic performance either Remainers or (some) Brexiteers said. Britain’s economic performance was and will be driven much more by domestic policy and as that continues unchanged (and it’s mostly bad anyway, IMHO) there isn’t reason to expect much change in outcomes.

robc
Jan 15 2023 at 8:16pm

They got the major gain: being ruled from London instead of Brussels.

Scott Sumner
Jan 16 2023 at 12:48pm

Actually, they did not.

John Phelan
Jan 16 2023 at 10:36am

Membership of the European Union and Single Market were neither boon that Remainers said nor the villain that (some) Brexiteers said. The fact is that British economic outcomes were, are, and will be much more the result of British economic policy than membership of these things and, as policy hasn’t changed much, at least in a positive direction, since 2016, you wouldn’t expect the outcomes to have changed much either.

TMC
Jan 16 2023 at 11:18am

robc is correct

Anders
Jan 16 2023 at 6:22am

Given the blow to goods trade, as the country found itself with virtually no FTA and faced with WTO mfn barriers and long delays at the EU border, the additional friction alone must have amonted to several percent of GDP by now. It is hard to see any clear economic benefits to compensate in the short term. And increased gov spending might account for the growth. One thing it clearly was not was improved productivity.

John Phelan
Jan 16 2023 at 10:33am

If something “must have” have happened you’d expect to see some indication in the data, but, as we see, you just don’t. As some point you have to ask whether that “must have” is all that “mist” at all.

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