Insight
What’s the cost of Brexit so far? by John Springford 23 June 2018
New analysis by the CER – which we will update quarterly – estimates that the UK economy is 2.1 per cent smaller as a result of the vote to leave the EU. The knock-on hit to the public finances is now £23 billion per annum – or £440 million a week. Any reasonable observer will acknowledge that the Brexit vote has curbed economic growth. While the economy outperformed expectations in the aftermath of the referendum, since then, the UK has dropped below Italy to become the slowest growing economy in the G7. In the first quarter of 2018, the economy only grew by 0.1 per cent. Despite an acceleration in the pace of global growth from the beginning of 2017, the UK economy has stagnated. But how much has the decision to leave the EU cost the UK economy so far? The CER has conducted a simple modelling exercise to produce an estimate, which we will update quarterly from now on. According to this model, the British economy was 2.1 per cent smaller in the first quarter of 2018 than it would have been if the referendum had gone the other way. How did we arrive at this figure? We have used the same method as a group of economists, led by Benjamin Born of the University of Bonn, who calculated the cost at 1.3 per cent of GDP in the third quarter of 2017. Essentially, we and Born’s group have used a computer program that allows researchers to create a ‘control’, despite the fact that we cannot conduct experiments on the UK economy. Scientists rely on control groups to see if a drug has an effect. One group is given the drug, and the other a placebo, and then scientists measure the difference between them. Obviously, this method is not available to us: we cannot make one Britain vote for Leave and one Britain vote for Remain and then measure the difference. But we can construct a ‘synthetic UK’, which acts like a control group. To do this, we have taken quarterly real GDP, consumption and investment data for 36 OECD countries, starting in the first quarter of 1995. Out of that pool of countries, the computer program selects those whose economic growth most closely matches that of the UK between 1995 and the third quarter of 2016, when the referendum took place. CER INSIGHT: What’s the cost of Brexit so far? 23 June 2018
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