On June 23rd, the UK votes on whether it should remain part of the European Union. Several economists have analysed the impact of such a move. However, there still seems to be some confusion about the economics of Brexit: economists aren’t always the clearest communicators, and in any case it’s hard to know how we should weigh economic factors against other relevant considerations.
As someone who has studied Economics, but who would hesitate describe myself as an economist (I would say I am pretty fluent in the language of Economics, if not a native speaker), here’s my attempt to make sense of the various reports and projections.
1. Britain would almost certainly be economically worse off for leaving the EU
The vast majority of experts agree that the negative economic effects of leaving the EU outweigh the positives. It’s not quite unanimous, but it’s not far off. Respected economic forecasters, including the Treasury, OECD, LSE and NIESR have all predicted that leaving the EU carries a financial cost. Around 200 professional economists have signed an open letter, making the same case. Surveys of businesses show that they overwhelmingly favour staying in the EU. It is impossible to know for sure what would happen if Britain left so all these people could be wrong, but it seems pretty unlikely to me.
2. There’s less certainty about how much worse off the country will be: best guesses are that national income will fall by 3-10%
If the only thing you care about is the economy, or if the only argument for leaving the EU you find tempting is that it will make you richer, point 1 should be enough and you should vote to remain. But many people will be drawn towards Brexit for other reasons, such as sovereignty or immigration. For these people, it might be best to think about the economic costs of leaving the EU as a ‘price’. If you want to leave the EU so that the UK is not bound by EU regulations, how much would you be willing to pay for that right?
Unfortunately, while economists are confident about their ‘analysis’ that incomes will be lower outside the EU, they are less sure of their ‘forecasts’ of how much lower. Giles Wilkes says: “I can’t forecast what my weight will be next year. I can accept analysis that eating s pound of butter a day will make me much fatter. Similarly, we can’t predict the size of the economy, 2030. We do know Brexit will make it significantly smaller”. But if you like eating butter, then it is not enough to know it is bad for you – you need to know how bad, so that you can decide whether it is worth the risk to keep eating it.
Different economists come up with different numbers about how bad leaving the EU would be for the economy. In part, this is because we do not know what sort of trade agreements would replace the EU (see point 4). The official government estimates suggest the best case scenario is that national income would fall by 4% (£2,600 per household), while in the worst case it would fall by 8% (£5,200). In general, the estimates range from 3-10%.
Is that a lot? One way of thinking about it is to take your typical income and divide it by 20. Would you be willing to pay that to leave the EU?
3. Leaving the EU might ‘only’ mean getting rich less quickly, rather than actually losing money
An important thing to understand about these economic forecasts is that they mostly relate to 2020 or 2030, not the day after leaving the EU. But because of economic growth, by 2030 British people can expect to be 23% richer than they are today. Leaving the EU might therefore only mean that British people get rich less quickly: it might mean that instead of having an extra £4,000 in 15 years’ time, you only have an extra £3,000.
To an economist, this just means you are £1,000 worse off and it is little different from losing £1,000 from your pay packet tomorrow. But that’s not how most people operate. Most people don’t care about losing hypothetical money that they probably don’t know they could have had, they care about whether their actual pay packet is going up or down (Psychologists are attuned to this phenomenon as loss aversion). If you need any proof, consider that the Government’s austerity policies slowed the recovery by at least 5% of national income, but because people’s incomes still grew they see them as a success).
This means that it is really important to know whether people’s incomes will fall as a result of Brexit (i.e. whether there will be a recession). The answer to that is most likely not, as the chart from NIESR below shows. However, it does increase the risk that income will go down and the country will go into recession.
4. The more power you want to bring back to the UK, the more it will cost you
Another point that is clear from the various economic analyses is that there is a trade-off between sovereignty and prosperity. If Britain negotiates a trade deal like Norway’s or Switzerland’s, it will be better off than if it negotiates one like Canada’s because it will be able to trade more freely with the EU. But Norway and Switzerland, unlike Canada, cannot keep out immigrants from the EU, have to pay money to the EU and are bound by many EU regulations.
In other words, the more power that Britain brings back from the EU, the more money it will cost it. Imposing restrictions on EU migrants, in particular, is likely to be particularly expensive – on the Government’s estimate, this might be around a third of the total cost of Brexit, around 2% of national income.
5. In practical terms, leaving the EU will mean unemployment, higher prices, and slower wage growth
The Brexit reports could have been better in explaining exactly what these economic costs would mean for ordinary people in their everyday lives. For some of the 3 million people whose jobs are linked to trade with the EU the danger is clear: unemployment and lower wages. For everybody else, the first thing they’d be likely to notice is a weaker pound, leading to more expensive holidays (in fact, this has already happened to some extent). Then prices would go up on many goods from abroad, from supermarkets to car showrooms, as a result of the exchange rate and tariffs being introduced. Finally, the less direct problems of living in a weaker economy: it will be that bit harder to move jobs, or start a business or get a pay rise. This last set of effects won’t hit everybody, and won’t all be obviously linked to the EU, but they’ll still likely happen.
Brexit would probably be costly. In my view, it’s not worth it, but hopefully this post clarifies what’s at stake.