Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 12 February 2019

The economic cost of the Brexit decision that Leaver voters do not get to see


Those promoting Brexit are fond of saying that it’s not about economics. Gary Younge in the Guardian tells us that there is nothing wrong with poorer people voting to be worse off, and of course he is right if that is what they knowingly do. But polling evidence suggests that only a small proportion of Leavers think the economy will be worse because of Brexit. Here are the results from three consecutive ORB polls (via here) where the respondents are only Leave voters.

As a result of leaving the EU, the UK’s economy will be
Date of poll
Better
Same
Worse
May 2018
42%
41%
16%
Nov 2018
39%
43%
18%
Jan 2019
26%
47%
27%

In May of last year, only 16% of Leave voters thought the economy would be worse off after Brexit, and incredibly 42% thought it would be better. As the table shows this view has only begun to shift in the last few months, and as John Curtice points out this has coincided for the first time with more Leavers than Remainers changing their minds about Brexit.

This tells us two important things. First, the Project Fear mantra worked. The Leave campaign, with the essential help of the Brexit press, managed to convince people that all this talk that the economy would be worse off after Brexit was false. Second, when the small percentage who think Brexit will damage the economy increases, support for Leave falls. Correlation does not prove causation, but this evidence suggests we should be sceptical about claims that Brexit is all about values and not about the economy.

So why are some Leave voters only now realising that Brexit will have a negative impact on the economy, and three quarters still think otherwise? After all, everyone was made worse off as inflation increased following the collapse in sterling immediately after the vote. According to one study, by the third quarter of 2017 the average consumer was worse off by £400 as a direct result of paying higher prices for imported goods following that depreciation.

The problem of course is that those price rises didn’t have a ‘made by Brexit’ tag attached to them. If you read the Financial Times of course you understood the connection, but if you read a Brexit newspaper and watched the 10 o’clock news those connections will not have been made, or if they were they would be muddled by Brexiters claiming the depreciation would be great for exports. It wasn’t great for exports, for straightforward reasons. I suspect some Leavers are only now changing their mind about Project Fear because they are seeing on the news iconic UK companies either cancelling investment projects or threatening to leave because of Brexit.

The problem is that there is no mirror image of the UK economy that didn’t vote for Brexit that voters can easily look at and see how much they are currently worse off. People cannot easily see that they are already paying a price for Brexit because firms and markets are anticipating what will happen after we leave. But it is possible to do the next best thing, and try to create a synthetic UK economy that didn’t vote for Brexit by looking at how other similar economies are doing. We know the UK has moved from around the top to around the bottom of the international growth league, but what does that actually mean for individual households?

That is the exercise that John Springfield at the Centre for European Reform is regularly doing, and he calculates that GDP was 2.3% lower in September 2018 as a result of the Brexit vote. That roughly translates into the average household losing almost £2000 worth of resources (mainly lower private consumption, but also lost public spending and investment). This number is broadly consistent with estimates the Governor of the Bank of England gave in May, using a different method.

To get a handle on how much public resources we are currently losing as a result of Brexit, Springfield calculates that GDP loss would amount to taxes being lower by £17 billion a year. Given the way this government runs its fiscal policy, that means we could have had tens of thousands more police officers and nurses if Brexit had not happened. This isn’t a forecast, but an estimate of what Brexit has already cost us.

Why has Brexit slowed the economy by enough to lose the average household resources worth almost £2,000 before we have even left? The answer is down to anticipation and uncertainty over what Brexit will mean. The foreign exchange markets had to anticipate the impact Brexit would have on future UK trade, and that was a major reason why there was an immediate collapse in sterling after the vote. Uncertainty about which kind of Brexit the UK would choose has mainly affected investment. In the chart below the Bank of England show how business investment has flatlined since the referendum, when the evidence from previous recoveries suggest it should have shown strong growth.



In addition the number of foreign direct investment projects coming to the UK, which was on a rising trend until 2015, has been falling since the 2015 election when it became clear there would be a referendum.

Will investment bounce back once Brexit uncertainty has been resolved? Certainly not if we leave with no deal, because industry's worst fears will have been realised. Even if we leave on the terms of the current Withdrawal Agreement there are two reasons to think the investment bounce back will be small. First uncertainty does not disappear. Will the government manage to agree a new trade relationship before the transition period runs out, or will we go over another No Deal cliff edge? Second, the decline in investment involves some anticipation as well as uncertainty, with a lot of service sector investment diverted towards investment in the remaining EU economies. All the time investment in the UK remains depressed this eats away at our ability to produce, at our productivity and therefore future living standards. As austerity showed, prolonged periods where the economy is depressed will have permanent negative effects.

Imagine if someone came to every Leavers door demanding nearly £2,000 for their household’s current contribution to Brexit. The evidence suggests that Brexit would quite quickly become about the economics. One of the reasons Brexit can happen is that its economic costs are not immediately visible. It is experienced but not isolated as a Brexit effect. It can be estimated to a reasonable degree of accuracy by experts, but the Brexit press keeps going on about the pre-referendum Treasury forecast and the broadcast media prefers a quiet life to routinely quoting these expert assessments. Brexit is not about the economy only because Leave voters are being kept in the dark about the impact Brexit is already having.


22 comments:

  1. How do you arrive at the £2000 a year figure ? Median household disposable income is about £27500 - 2.3% of that is roughly £630.

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    1. "almost £2000 worth of resources (mainly lower private consumption, but also lost public spending and investment)"

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  2. The remark on £2,000 contribution to brexit is a poor way of putting things. Not every household will end up paying the same price for brexit. Almost everything you've makes a lot of sense, but statements such as this lessen the credibility of the rest of your arguments.

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    1. What else can I do in the absence of a detailed breakdown by household income and type? Why do you think it matters in this case?

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  3. Since you refer to the calculations of household loss, I think it would be highly informative if you could ameliorate your article by detailing HOW the household loss is distributed between for example Exchange rate, energy cost, .... I understand the various overlaps have to be handled with care but it would be interesting and maybe BBC would find it newsworthy.

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  4. Is it possible that the continual citation of the "average" consumer or the "average" person hasn't made a difference because of inequality? If the average number actually breaks down to a large impact on the wealthiest people and a much smaller impact on a large group of poorer people then these kinds of survey results might actually be based on actual experience.

    If there is a large difference in how Brexit actually impacts different income levels/deciles/quintlies/whatever then the "Imagine if someone came to every Leavers door demanding nearly £2,000 for their household’s current contribution to Brexit." question is kind of meaningless. It's like asking everyone to care about the impact of a wealth tax on fortunes over $10 million because the "average" contribution will be millions of dollars.

    I don't know if the impact of Brexit is actually so different across income levels. But if it is, then Brexit is another event resulting from skyrocketing inequality in the western world. The system was changed to benefit a few at the expense of the many even if on "average" things are better. It's not surprising that average change becomes a meaningless metric for determining whether something actually hurts or helps a specific person or group of people.

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  5. The first table is the most important graphic/table of Brexit. The difference between most recent value and (say) May 2018 value (for the 'Better'/'Worse' and later in the 'Same" columns) will serve as objective quantitative assessment of the circle of hell/heaven the Brexiteers will lend up in.

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  6. The main levers for managing the UK economy are directly under UK Government control.

    Currently UK growth is too low. Whether this is due to Brexit or not doesn't matter. There is a lack of demand in the economy and we need Tax cuts and/or Government spending to fix it. The UK needs an immediate fiscal stimulus. The fiscal stance of the UK Treasury is too tight.

    For Government spending I would like to see carefully targeted spending to support a detailed industrial strategy. Since there is an industrial strategy in name only any extra spending will do.

    Counterfactuals can be entertaining, but have limitations for policy determination. We are where we are.

    On June 6 1944 landing craft of US 4th Infantry Division drifted badly off course during the assault on Utah beach. Gathering his battalion commanders on the beach General Theodore Roosevelt Jr said. “We’ll start the war from right here!”

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  7. “That is the exercise that John Springfield at the Centre for European Reform is regularly doing, and he calculates that GDP was 2.3% lower in September 2018 as a result of the Brexit vote.”

    Yes but in June he calculated it as 2.5%. Furthermore 50%, of his synthetic comparison economy comprises the USA, an economy which has been artificially boosted by a one-off unfunded tax cut subsequent to the referendum. The other 50% are countries whose economic cycles are not necessarily in phase with our own, if we assume say they are one year behind us then their performance is quite similar to ours.

    Yes prices have risen but so have wages ‘UK pay growth rises to 3.1%, the highest in almost a decade. Competition for workers helps push up wages, as unemployment stays at 4%.’ https://www.theguardian.com/business/2018/oct/16/uk-pay-growth-unemployment. The decrease in immigration from its 2015 peak following the referendum appears to have had a positive impact on salaries. If salaries are rising faster than they would have otherwise done, then this has to be taken into account when determining households are worse off or not.

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  8. Reference to the comment above about a fiscal stimulus. It's not appropriate to comment about Macroeconomics under this blog post it's all about Brexit.

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  9. Please explain the seeming discrepancy between "this evidence suggests we should be sceptical about claims that Brexit is all about values and not about the economy" and your prior post "the Leave vote represented the votes of two groups: social conservatives who felt threatened by immigration, and the group often referred to as the left behind"

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    1. There is a difference between a prime motivation (which may not be economic), and the contention that economics does not matter. It is the second that I dispute.

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  10. Their treatment of the weighted group of countries ignores their fiscal positions completely. They have mainly not done fiscal contraction in recent years and we have. Obviously this is bad for investment too. So the picture is muddled.

    The loss can be "estimated to a reasonable degree of accuracy by experts"? Well not here it can't. "We cannot distinguish statistically between 3.2% difference and a 1% difference (at 95% confidence). A 3.2% gap, given there hasn’t been a recession is rather unbelievable but carries the same statistical status as the 2.1% or 1% gap. Hardly confidence inspiring (excuse the pun)." -- http://bilbo.economicoutlook.net/blog/?p=39672

    Please address these points before citing the CER study again.

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    1. I do not understand your point. All estimates are uncertain, and I'm happy to receive a better one. But the standstill in investment is clear, and the number could be much greater if consumers start saving at more normal levels.

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  11. Simon, approving comments only after doing another 3 blog posts means the many people who read your blog will not see comments when the see the article, and they may not visit again ten days later! Readers are denied the chance to see the comments in a timely fashion (for good or ill) and the commenters are denied the chance to debate. This isn't a good stance for an influential blog.

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  12. I take issue with the WWII reference from anonymous above.

    Macro economics is not like war. Analogous to dentistry one day hopefully.

    One problem with the UK is too many people have their heads full of rubbish from John Wayne films.

    For the UK economy to work sensibly hundreds of thousands of people will have to start making different decisions independently. The Governments job is to get the incentives right. Education must also play a role here.

    No place for John Wayne.

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  13. The comment above about General Theodore Roosevelt jr makes a good point about leadership.

    Brexit is notable because of the total lack of leadership by all concerned.

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  14. There isn't much point commenting on this blog post. The world needs another comment about Brexit about as much as it needs yet another cowboy film.

    Brexit, as with much of British politics, has boiled down to an argument among different groups of Oxbridge types. All we can hope is the Labour Oxbridge types will win out over the Tory Oxbridge types.

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    1. I've met people who I might describe as an Oxbridge type. Most people are not like that. I'm much the same type as I was when I worked in Exeter, Glasgow and London.

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  15. Wanted to simply express my appreciation for your blog. Not only are your posts unfailingly informative and well-argued, but you are also amazingly productive! Keep up the good work.

    ReplyDelete

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