How economically damaging will Brexit be? by John Springford
Economic forecasts are complicated to understand, serially abused (with campaigners picking the best or worst numbers they can find), and uncertain by their very nature. There is a wide range of estimates for the long-term hit from a UK-EU free trade agreement of the type Boris Johnson wants. The National Institute for Economic and Social Research says 3.5 per cent, the Treasury, 5 per cent, and UK in a Changing Europe, 2.3 to 7 per cent. So what is the economic impact of Brexit likely to be a decade from now? The answer hinges on one crucial piece of analysis: whether higher barriers to trade result in a one-off, ‘static’ hit to the economy before growth returns to normal – or whether there are second-order, ‘dynamic’ effects: that is, whether barriers will reduce competition, innovation and productivity growth. Economists divide into two camps. Those that think the hit to growth will be static say that higher trade barriers with the EU will make the British economy less efficient. Goods and services that could have been imported from the EU will become scarcer or more expensive, especially if the UK diverges from EU regulations. And UK exports will cost more in the EU. Consequently, demand for traded products will fall, and demand for domestic products will rise, despite domestic producers making them less efficiently. But once the British economy has adjusted to the higher barriers, it will grow at something like its previous pace: the growth rate is largely determined by innovation, investment
by companies to realise the gains from new production techniques, and improvements in education and training – which, in this view, have little to do with higher trade frictions. Believers in Brexit’s dynamic effects agree, but argue that more open economies are also subject to greater competitive disciplines. After Brexit, weaker competition from EUbased companies will lessen incentives for UK managers to invest in equipment and training that raises the productivity of their workforce. Also, in the single market more competition encourages companies to specialise in particular products, often in supply chains; higher barriers will do the opposite. This debate is not settled. As the UK’s fiscal watchdog, the Office of Budget Responsibility, notes, most of the evidence for dynamic gains comes from studying developing countries that are opening up to trade, where it is difficult to disentangle the effects of openness from those