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.

Remain fundamentalism

An argument I have often heard is why are people talking about getting a softer Brexit (by staying in the Customs Union (CU) or Single Market (SM) for example) when what we should be doing is staying in the EU. There is a more extreme version of this which says that attempts to get a soft Brexit are dangerous, because they make the prospect of remaining in the EU less likely. I will call this more extreme position Remain fundamentalism.

I want to argue against Remain fundamentalism by imagining a soft Brexit that involved the UK staying in a comprehensive Customs Union with the EU and staying in the EEA. (For an excellent discussion of what the EEA is and is not, see Ian Dunt here, here and here - in that order.) [1] That is what the current UK withdrawal bill specifies as amended by the Lords, so let me call this the Lords’ Brexit. Compare this to the only hardish Brexit deal that can be done (assuming, as I think is reasonable, that parliament would never pass No Deal), which is something close to what John Springford and Sam Lowe have called the Jersey option: staying in the CU and the SM for goods but not services, perhaps allowing some UK flexibility on freedom of movement.

We have no idea whether the EU would accept either option, because the UK government has been wasting its time (which given they are supposed to be running the country on our behalf is also our time) trying to choose between fantastical solutions to the Irish border problem that the EU will not accept. But for the sake of argument suppose that May ignores her Brexiters, and perhaps with parliament’s help chooses something like the Jersey option and that the EU agrees to it, or instead that May has to go with the Lords’ Brexit and the EU (and EFTA) agree to it.

The Remain fundamentalist argument is that because the Jersey option does more economic damage to the UK than the Lords option (because the EU has a comparative advantage in exporting services, and immigration from the EU is beneficial to the UK), it is more likely that parliament would grant a referendum on it and that people would reject that deal in favour of staying in the EU. I actually think the opposite is the case, We are much more likely to see parliament grant a referendum if we go for the Lords’ Brexit, and that people would reject the Lords’ Brexit in favour of staying in.

The case for a referendum on the final deal is much more clear cut if the deal is the Lords’ Brexit, because the Lords’ Brexit has virtually no advantages compared to EU membership and a clear disadvantage. In practice being in the EEA would mean accepting rules adopted by the EU with no say on those rules. In short, we gain nothing by having no say on the rules we have to obey. I cannot imagine any politician being able to get people to vote for the little bit of wriggle room and influence being in the EEA gives you compared to the having a real seat at the table.

In contrast, with the Jersey option things are much more complex. There will be perceived advantages of this option compared to staying in, such as greater control over immigration. You can be sure that the more Mrs. May can fudge the agreement such that she can pretend these advantages are there even when they are not, she will.

Now add in a powerful group of Brexiters. They would angry that they did not get the hard Brexit they want, but in the Jersey option they would still see hope in ambiguity. More importantly, with the Jersey option there would be plenty of meat for this group to work on, including immigration of course. But with the Lords’ Brexit it is hard to argue a strong case for why this is preferable to be in the EU, even if you are a Brexiter politician or newspaper.

I would be the first to admit that these arguments are not clear cut. But the Remain fundamentalist position only makes sense if you can be sure that a harder Brexit makes a referendum more likely. To me, at least, it is not obvious that it does. The more you can eliminate the economically damaging but superficially attractive aspects of Brexit, the more chance people have to see that the whole thing is a complete waste of time.

[1] There are a lot of differences between being part of the EEA and what is called BINO: the UK being in the Single Market and Customs Union and everything else to do with the EU except being absent from its political structures. I am assuming that there would be no problem being in the EEA and a CU, that agreements with the EU would also be made on agriculture and fisheries that would at least allow a soft Irish border, that the EU and EFTA would allow all this and so on.