Blog: A 5.5% hit from Brexit? Not so fast – Econlib

When Britain voted to leave the European Union in June, 2016, there was no shortage of forecasts of economic catastrophe. In the event, the catastrophe did not materialize, and when the British economy did crash it did so at the same time as everyone’s else’s as a result of COVID-19 and government responses to it.

Post-Brexit, we now have a steady stream of estimates of the ‘loss’ to the United Kingdom’s economy of leaving the European Union on the terms that it did. The latest comes from the Centre for European Reform and finds that “Brexit reduced Britain’s GDP by 5.5 per cent by the second quarter of 2022.” “These estimates are based on the ‘doppelgänger’ method,” the author notes, “in which an algorithm selects countries whose economic performance closely matches the UK’s before Brexit.”

This is a striking finding with striking implications:

The Brexit hit has inevitably led to tax rises, because a slower-growing economy requires higher taxation to fund public services and benefits. If Brexit had not happened, most of the tax rises that then Chancellor Rishi Sunak announced in March 2022 would not have been necessary. If the UK economy had grown in line with the doppelgänger, tax revenues would have been around £40 billion higher on an annual basis (if we apply the same tax-to-GDP ratio as in 2021-2 – 34 per cent). In his March 2022 budget, Sunak announced tax rises of £46 billion.

But when we look closer at this estimate, doubts emerge over its robustness.

Chart 2 in the report shows mean quarterly real GDP growth for selected geographies (the United Kingdom, the doppelgänger, the United States, 22 advanced economies, G7 minus UK, France, Germany, and Italy) for three different periods (Q1 1999 to Q4 2008, Q1 2009 to Q2 2016, and Q3 2016 to Q2 2022).

If we look at the United Kingdom’s performance since Brexit – the light blue bars – we see that it has done better than Italy and Germany and slightly worse than France. Relatively speaking, this is not a catastrophe. If we look at the red bars we see that, in the period before the referendum, the United Kingdom did better than Italy and France and slightly worse than Germany: in other words, not much different.

Of course, the paper does not compare the United Kingdom’s post-Brexit economic performance to post-Brexit performance of these other countries but to the post-Brexit performance of its constructed doppelgänger. We see the economic impact of Brexit, it argues, in the comparison between the two left most light blue bars. And what a gap it is.

But compare the doppelgänger’s post-Brexit performance with the others. It does better than all three of Italy, Germany, and France, something the actual United Kingdom didn’t manage in either of the preceding periods (the dark blue and red bars). Not only that, but the doppelgänger also does better post-Brexit than the United States, something else the actual United Kingdom failed to manage in either of the preceding periods (the dark blue and red bars). In other words, this report is claiming that, without Brexit, the United Kingdom’s economic growth would, post-2016, have suddenly launched onto a much higher path than it had been on previously.

Is this possible? Yes. Is it likely? Not very.

Given the similarity of the United Kingdom’s growth record pre and post Brexit relative to other economies, the various estimates of a ‘Brexit loss’ all have to posit a counterfactual where its economy performed much better than it actually did, not only relative to its own post-Brexit performance but to its performance pre-Brexit also. Was the British economy in early 2016 really a tightly coiled spring ready to unleash its own ‘Tiger’? I’m skeptical and we should be skeptical of any estimates of a ‘Brexit loss’ which are based on such an assumption.

 

 


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