When Britain voted to go away the European Union in June, 2016, there was no scarcity of forecasts of financial disaster. Within the occasion, the disaster didn’t materialize, and when the British economic system did crash it did so similtaneously everybody’s else’s on account of COVID-19 and authorities responses to it.
Publish-Brexit, we now have a gradual stream of estimates of the ‘loss’ to the UK’s economic system of leaving the European Union on the phrases that it did. The newest comes from the Centre for European Reform and finds that “Brexit lowered Britain’s GDP by 5.5 per cent by the second quarter of 2022.” “These estimates are primarily based on the ‘doppelgänger’ technique,” the writer notes, “by which an algorithm selects international locations whose financial efficiency intently matches the UK’s earlier than Brexit.”
This can be a putting discovering with putting implications:
The Brexit hit has inevitably led to tax rises, as a result of a slower-growing economic system requires larger taxation to fund public companies and advantages. If Brexit had not occurred, many of the tax rises that then Chancellor Rishi Sunak introduced in March 2022 wouldn’t have been essential. If the UK economic system had grown in keeping with the doppelgänger, tax revenues would have been round £40 billion larger on an annual foundation (if we apply the identical tax-to-GDP ratio as in 2021-2 – 34 per cent). In his March 2022 price range, Sunak introduced tax rises of £46 billion.
However after we look nearer at this estimate, doubts emerge over its robustness.
Chart 2 within the report exhibits imply quarterly actual GDP progress for chosen geographies (the UK, the doppelgänger, the USA, 22 superior economies, G7 minus UK, France, Germany, and Italy) for 3 totally different intervals (Q1 1999 to This autumn 2008, Q1 2009 to Q2 2016, and Q3 2016 to Q2 2022).
If we take a look at the UK’s efficiency since Brexit – the sunshine blue bars – we see that it has performed higher than Italy and Germany and barely worse than France. Comparatively talking, this isn’t a disaster. If we take a look at the crimson bars we see that, within the interval earlier than the referendum, the UK did higher than Italy and France and barely worse than Germany: in different phrases, not a lot totally different.
In fact, the paper doesn’t examine the UK’s post-Brexit financial efficiency to post-Brexit efficiency of those different international locations however to the post-Brexit efficiency of its constructed doppelgänger. We see the financial affect of Brexit, it argues, within the comparability between the 2 left most mild blue bars. And what a niche it’s.
However examine the doppelgänger’s post-Brexit efficiency with the others. It does higher than all three of Italy, Germany, and France, one thing the precise United Kingdom didn’t handle in both of the previous intervals (the darkish blue and crimson bars). Not solely that, however the doppelgänger additionally does higher post-Brexit than the USA, one thing else the precise United Kingdom did not handle in both of the previous intervals (the darkish blue and crimson bars). In different phrases, this report is claiming that, with out Brexit, the UK’s financial progress would, post-2016, have abruptly launched onto a a lot larger path than it had been on beforehand.
Is that this attainable? Sure. Is it seemingly? Not very.
Given the similarity of the UK’s progress document pre and put up Brexit relative to different economies, the assorted estimates of a ‘Brexit loss’ all must posit a counterfactual the place its economic system carried out a lot better than it truly did, not solely relative to its personal put up-Brexit efficiency however to its efficiency pre-Brexit additionally. Was the British economic system in early 2016 actually a tightly coiled spring able to unleash its personal ‘Tiger’? I’m skeptical and we must be skeptical of any estimates of a ‘Brexit loss’ that are primarily based on such an assumption.
John Phelan is an Economist at Heart of the American Experiment.
