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Myths on the Impact of Brexit

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Written by Catherine McBride

The editorial team at Briefings For Britain will be publishing a series of rebuttals to some of the most often repeated Brexit myths. We have all written about them before, but it looks like our politicians need a refresher course before the election.

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Anyone who watched last Friday’s political debate on the BBC may have been surprised to hear Stephen Flynn, representing the SNP, claim that Brexit had cost the UK £40 billion in lost tax revenue. This is not true, and even Full Fact pointed this out after the debate. But no other politician did during the show. Nor did the moderator, Mishal Husain. Unfortunately, these Brexit Myths have been embedded in the minds of many journalists and politicians.

Myth #1: Brexit has cost the UK economy 4% of GDP.

There is so much wrong with this myth. Firstly, it is mostly misquoted. The OBR’s chairman, Richard Hughes, claimed in October 2021 that the impact of Brexit ‘would reduce our long-run GDP by around 4%’. By ‘long-run’ he meant over 15 years, but many people repeating his claim usually leave out the ‘long-run’ bit and some have even claimed this would be an annual cost. But even the original prediction is unlikely to come true while the misquotes are just ludicrous.

I have written about the history of this claim in a paper for the IEA, entitled Has Brexit really harmed UK trade? Chapter 5 covers the history of the OBR’s shifting claims. But here I will analyse another aspect of this prediction – is it true?

In April 2023 the OBR qualified its original statement to: Brexit ‘will reduce long-run productivity by 4% relative to remaining in the EU’ and has continued to use this qualification in its May 2024 report. The benefit to the OBR of this qualification was the lack of a counterfactual to compare how the UK would have fared had it stayed in the EU. Even if UK GDP increased, the OBR could still claim it would have increased even more had we stayed in the EU.

However, there is a counterfactual – France. France is still in the EU, it has a very similar sized population to the UK. France has more land, farmland and nuclear power while the UK has more oil and gas. However, the UK and French GDP are remarkably similar.

image 2024 06 11 183032596

United Kingdom and France, GDP, PPP (constant 2021 international $ Trillions)
  2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
UK 3.2 3.3 3.37 3.44 3.53 3.58 3.64 3.26 3.54 3.7
France 3.39 3.42 3.46 3.49 3.57 3.64 3.71 3.43 3.65 3.74

Does anyone look at the graph above and think UK GDP is below where it would have been had we stayed in the EU? France remained in the EU and their GDP is little different from the UK’s.

Brexit detractors also like to extrapolate from the UK’s growth rate before Brexit and claim that we are falling behind where we should be. But if we do the same extrapolation for France, it would have a GDP of over $3.8 trillion, but it doesn’t. (see Graph below) So maybe there is another explanation, other than Brexit, for the change in the GDP growth rate in both countries.

image 2024 06 11 183105852

But despite the lack of GDP disparity between the UK and France, the OBR continues to claim Brexit will reduce UK long-run productivity by 4% relative to remaining in the EU because of an increase in non-tariff trade barriers. The OBR’s May 2024 Brexit analysis continues to claim:

image 2024 06 11 183130175

We now have trade figures for 2023 so seven years of post-Brexit referendum trade data, (see the Graph below) which shows no signs of the OBR’s predicted 15% drop in trade.

image 2024 06 11 183154412

Since 2016 both exports and imports were UP by 11.2% and 11.0% respectively, using ONS Chained Volume Measures (CVM) to account for inflation. We are almost halfway through the OBR’s 15 years, 7 years on from the Brexit referendum and very little has changed in UK EU trade, other than in products that fall outside the UK EU Trade and Cooperation Agreement’s (TCA’s) Rules of Origin requirements.

You may wonder why I am using 2016 rather than 2020 when the UK left the EU, or 2021 after the end of the transition period for UK and EU trade. But the OBR  believes that the decline in UK GDP started in 2016, due to lower investment in the UK. They believed this so strongly that they estimated that 40% of the impact had occurred by Jan 2021:

However, this estimate was also wrong. UK GDP increased by 3% using ONS CVM figures to account for inflation, between the referendum in 2016 and the UK–EU TCA coming into force in 2021. So the OBR’s assumption that GDP would fall due to lower investment was already false by 2021.

image 2024 06 11 183215481

Additionally, as Brexit uncertainty diminishes, any investment which was postponed is returning. This has further undermined the OBR’s predictions. The United Nations (UNCTAD) figures show record levels of greenfield foreign direct investment (FDI) into the UK, i.e. investment in new projects and excludes mergers and acquisitions. (The UK’s very high FDI in 2016 was mainly due to three very large M&A deals.) In 2022, the UK attracted 8.4% of global greenfield FDI despite having only 3.3% global GDP, or 2.3% in PPP terms. Greenfield investment in 2022 was well above the pre-referendum average, second only to the USA, and nearly double the combined level of Germany and France. So much for Brexit.

Supporters and apologists for the OBR, now claim that the OBR didn’t mean that imports and exports would fall by 15%, although the OBR did publish exactly those words as you can see above, but rather that the OBR meant that UK trade intensity would fall by 15%. Unfortunately for the OBR’s apologists, they haven’t thought through their excuses very carefully.

Trade intensity is total trade, imports plus exports of goods and services, divided by GDP. If as the OBR predicts, UK GDP fell by 4% and UK trade fell by 15%, then UK trade intensity would fall by 11%.

If the OBR’s apologists are right and the OBR really meant trade intensity would fall by 15%, then UK total trade would have to fall by 18.4%, assuming GDP fell by 4% as predicted. As UK trade with the EU was only 48% of total UK trade and only EU trade is affected by Brexit, then EU trade would have to fall by a massive 40% to reduce UK trade intensity by 15%. Seriously? The OBR should stop digging.

So far, halfway through the OBR’s long-run prediction, UK total trade was up by 11.5% between 2016 and 2023 after accounting for inflation. Even excluding precious metals, it was up by 11.1%. Some very dramatic trade barriers would have to be introduced if, during the next seven years, trade between the UK and EU were to plummet by 40.0%.

Whole sections of the EU’s economy would close down if that were to happen. This isn’t impossible, the EU has done a good job of destroying its industry with excessive regulations, carbon taxes and now a Carbon Border Adjustment Mechanism. For example, if Brussels managed to drive Airbus assembly plants out of the EU, then the UK’s exports to the EU of aircraft engines, wings, landing gear and seats would fall dramatically, but this wouldn’t change total UK exports, just their export destination. Presuming that Airbus’s new aircraft assembly location also needed engines, wings, landing gear and seats. Similarly, if Brussels makes EU car manufacturing uncompetitive, and the UK continues with its EV targets, then the UK’s massive vehicle imports from the EU would divert to China. But again it won’t change total UK imports, just our import supplier’s location.

However, even a collapse of the EU’s manufacturing sector wouldn’t get the OBR out of its statistical hole as economic predictions are done assuming ceteris paribus, that all other things remain equal. So collapsing EU manufacturing doesn’t count, only Brexit-related trade barriers and lower investment.

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About the author

Catherine McBride