Thursday, 24 November 2016

Brexit - What Economic Return on the Investment?

So now we have it.  The OBR's independent forecast for the UK economy for the next 5 years has been published.  So is Brexit good or bad for the economy?  What's the economic return for any short-term investment?

The OBR (Office of Budget Responsibility), which is independent of the Government but has access to ministers and other civil servants, has concluded:
  1. Growth will be lower under Brexit than it would have been
  2. This translates into the UK having to borrow an extra £15 billion a year from 2018/19. That totals nearly £59 billion over the next 5 years, with potentially more to come
  3. There is is no discernible upturn arising from Brexit within 5 years

To put that in context:
  • £15 billion is some £288 million a week more to borrow, not £350m per week more to spend
  • £59 billion is some £3,400 for each of the 17 million people who voted to leave the EU
So in the next 5 years the OBR is saying that Brexit will be bad for the economy, when borrowings are in any case rising too fast.

"Brexit means Brexit".  Economically it means:
  • Bad for jobs
  • A tighter squeeze on public services
  • And/or higher borrowings to pass onto future generations


The OBR acknowledges that the uncertainty in forecasts is greater than normal.  The adverse amounts could be lower or indeed higher.

It would appear that the OBR has had little more information from the Government than the general public.  "Brexit means Brexit", with of course little knowledge of what the EU will agree for its future relationship with the UK, other than what has been stated publicly.

The OBR has effectively had to pull figures out the hat.  But what they are saying is that the figures they had to choose from reflect that:
  • On balance the OBR believes the negative effects of Brexit will significantly outweigh any positive effects for each of the next 5 years
  • In particular, there is nothing to indicate that the economy will be getting any better as a result of Brexit until sometime after those 5 years, if at all
This is entirely consistent with other forecasters, and reflects:
  • The uncertainty that is likely to result in deferred or cancelled investment by the private sector
  • The devaluation of sterling that has already occurred
  • The years it will take to put any new trade deals in place
We also have to recognise that their forecast may be optimistic, and the actual outcome could be far worse.


The Leave campaign boils down to three potential advantages of leaving the EU:
  1. Freedom to negotiate the UK's own trade deals with USA, China and others.
  2. Control over immigration and the UK's borders
  3. Being able to set our own laws, without the interference of the European Commission or being beholden to the ECJ (European Court of Justice)
As noted above, the problem is that trade deals take many years to negotiate.  In the case of a replacement deal with the EU:
  • The two years after Article 50 notification is to negotiate the terms of the "divorce" not the "re-marriage".  A new trade deal could take years longer.
  • It is unreasonable to expect the EU to agree to a deal which is as good or better than the terms of EU membership.  That would only result in other countries following suit, and the EU disintegrating. The message from the EU is that can't be allowed to happen.  That is also the view of senior representatives of Germany's car industry that sells massively into the UK. 
  • That principle would apply to any interim trade deal.  That is now looking likely to be put in place in the first two years as part of the Article 50 negotiations.
Immigration pros and cons is too big a subject to cover here. But the OBR specifically expects lower immigration and a significant economic hit as a result - some £6 billion in the fifth year:


In economic terms, within five years there is no return on the investment. The jury's out as to:
  • Whether the sunlit uplands of Post-Brexit Britain will ever be better than staying in the EU?
  • If so, how far away will the economy turn for the better?
One has to wonder whether the cost of Brexit could ever be worth the investment.


The OBR, supported by other forecasters, suggests that negative factors resulting from Brexit will significantly outweigh positive factors for at least 5 years, perhaps much longer.

The best estimate, which could be lower or higher, is:

  • Some £288 million a week more to borrow each year from 2018/19, not £350m per week more to spend as had been suggested by the Leave campaign prior to the referendum
  • An investment of some £3,400 over the next 5 years for each of the 17 million people who voted to leave the EU. That's with no indication of any economic upturn, so that figure could increase in further years. Nor is there any clear indication of any return on that investment.
 That means:
  • Brexit is bad for jobs
  • A tighter squeeze on public services
  • And/or higher borrowings to pass onto future generations
So Brexit is clearly bad for the economy.  Whether it is also bad for the UK's "National Interest" is a matter for debate.  But for many people personally affected by lost income or poorer services, that is what matters.

Arguably the economic impact should be put above any other factors put forward in favour of Brexit.  In that respect, the debate goes on. 

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