January 2018 newsletter – The costs of Brexit – already

Whether the decision by the UK to leave the EU turns out to be a wise one or not is a question for future generations. Even then, we can be pretty sure that economic historians will have plenty to argue about since the strict logic of the the answer involves an appeal to a counterfactual that cannot be known with certainty. That said, in the month before went to press, a number of reports and analyses were published that appeared to show that the effects of leaving have so far been negative.

The CEP, inflation and real wages
On 20th November, the CEP1 released the ‘The Brexit Vote, Inflation and UK Living Standards’, the 11th in its series of Brexit Analysis Papers.2 The paper focuses on the effect of sterling’s depreciation on inflation and real wages. It estimates that the 10 per cent depreciation increased inflation by 1.7 percentage points above what it would otherwise have been. While accepting that the precise figure may be subject to error, the fact of a substantial increase is not. Taking the figure of 1.7 per cent, implies that by June 2017, the Brexit vote was costing the average household £7.74 per week through higher prices. That is equivalent to £404 per year. Higher inflation has also reduced real wage growth. The impact of the referendum is equivalent to a £448 cut in annual pay for the average worker or about one week’s wages for the average worker. Athough households at all income levels and in all UK regions have experienced higher inflation because of the referendum and the costs have been evenly shared across the income distribution, there have been differences in regional impacts. regions. The effect has been lowest for households in London while households in Wales, Scotland and Northern Ireland have been worst hit. Thomas Sampson, leader of the research team comments: ‘Even before Brexit occurs, the increase in inflation caused by the Leave vote has already hurt UK households’.

The Financial Times and GDP
On 20th December3 the FT published its own estimate that ‘…the value of Britain’s output is now around 0.9 per cent lower than was possible if the country had voted to stay in the EU.’ According to the FT the ‘loss’ of 0.9 per cent is the average of losses ranging from 0.6 to 1.3 per cent, drawn from 14 different counterfactals. Converting that 0.9 per cent into an absolute figure produces the irresistible comment that this ‘…equates to almost exactly £350m a week lost to the British economy — an irony that will not be lost on those who may have backed Leave because of the claim made on the side of the bus.’ On the fiscal implications of this lost GDP, the FT quotes Paul Johnson of the Institute for Fiscal Studies: ‘If 0.9 per cent of GDP has been lost over the five quarters for which data exists, there has already been a £9bn hit to the public finances. So even before the UK has left the EU, the referendum result is costing the UK government more than can possibly be recovered by ending net contributions to Brussels.’ The FT’s estimate of the UK’s 2017 growth rate is about 1.5 per cent.

The IMF, experts and growth
1.5 per cent is very close to the 1.6 per cent to which the IMF said on 18th December it was lowering its estimate of the UK’s growth rate.4 In the lead up to the referendum, the IMF had already reduced the UK’s forecast growth rate to 1.7 per cent, accompanied this with prdictions of increased in inflation, a squeezing of real wages and a slowdown in investment. It was this gloomy forecast that provoked Michael Gove’s famous remark that ‘…the UK public had had enough of experts.’ Introducing the IMF’s latest report, its managing director, Christine Lagarde, said: ‘…what we are seeing is that the narrative we identified as a potential risk in May 2016 is actually being rolled out as we speak….This is what we are seeing. It’s not experts talking, it’s the economy demonstrating that.’

1. Available to download from: http://cep.lse.ac.uk/pubs/download/brexit11.pdf 
2. The research was carried out by members of ‘The UK in a Changing Europe’ reserach group, funded by ESRC and based at Kings College London (www.ukandeu.ac.uk)
3. ‘The real price of Brexit begins to emerge.’
4. http://www.imf.org/en/news/articles/2017/12/19/mcs122017-united-kingdom-staff-concluding-statement-of-the-2017- article-iv-mission

From issue no. 180, January 2018, p.7