Economic effects of Brexit

The economic effects of Brexit were a major area of debate during and after the referendum on UK membership of the European Union. The majority of economists believe that Brexit is likely to harm the UK's economy and reduce its real per capita income in the long term, and the referendum itself damaged the economy. It is likely to produce a large decline in immigration from countries in the European Economic Area (EEA) to the UK, and poses challenges for British higher education and academic research.

Immediate impact on the UK economy

Immediate impact of the referendum

According to one study, the referendum result had pushed up UK inflation by 1.7 percentage points in 2017, leading to an annual cost of £404 for the average British household. Studies published in 2018 estimated that the economic costs of the Brexit vote were 2% of GDP, or 2.5% of GDP. According to a December 2017 ''Financial Times'' analysis, the Brexit referendum results had reduced national British income by 0.6% and 1.3%. A 2018 analysis by Stanford University and Nottingham University economists estimated that uncertainty around Brexit reduced investment by businesses by approximately 6 percentage points and caused an employment reduction by 1.5 percentage points. A number of studies found that Brexit-induced uncertainty about the UK's future trade policy reduced British international trade from June 2016 onwards. A 2019 analysis found that British firms substantially increased offshoring to the European Union after the Brexit referendum, whereas European firms reduced new investments in the UK.

Short-term macroeconomic forecasts by the Bank of England and other banks of what would happen immediately after the Brexit referendum were too pessimistic. The assessments assumed that the referendum results would create greater uncertainty in markets and reduce consumer confidence more than it did. A number of economists noted that short-term macroeconomic forecasts are generally considered unreliable, as they are something that academic economists do not do, but rather banks do. Economists have compared short-term economic forecasts to weather forecasts whereas the long-term economic forecasts are akin to climate forecasts: the methodologies used in long-term forecasts are "well-established and robust".

Immediate impact of the end of the transition period

At the end of transition period, a trade agreement was enacted between the EU and the UK. Its implementation was rife with bureaucracy and uncertainty.

Long-term impact on the UK economy

There was overwhelming or near-unanimous agreement among economists that leaving the European Union would adversely affect the British economy in the medium- and long-term. Surveys of economists in 2016 showed overwhelming agreement that Brexit would likely reduce the UK's real per-capita income level. 2017 and 2019 surveys of existing academic research found that the credible estimates ranged between GDP losses of 1.2–4.5% for the UK, and a cost of between 1 and 10% of the UK's income per capita. These estimates varied depending on whether the UK left via a 'hard' or 'soft' Brexit. In January 2018, the UK government's own Brexit analysis was leaked; it showed that UK economic growth would be stunted by 2–8% for at least 15 years following Brexit, depending on the leave scenario.

According to most economists, EU membership has a strong, positive effect on trade and, as a result, the UK's trade would be worse off when it left the EU. According to a study by University of Cambridge economists, under a hard Brexit, whereby the UK reverts to WTO rules, one-third of UK exports to the EU would be tariff-free, one-quarter would face high trade barriers and other exports risk tariffs in the range of 1–10%. A 2017 study found that "almost all UK regions are systematically more vulnerable to Brexit than regions in any other country." A 2017 study examining the economic impact of Brexit-induced reductions in migration found that there would likely be "a significant negative impact on UK GDP ''per capita'' (and GDP), with marginal positive impacts on wages in the low-skill service sector." It is unclear how changes in trade and foreign investment will interact with immigration, but these changes are likely to be important.

In October 2021, the UK government’s Office of Budget Responsibility calculated that Brexit would cost 4% of GDP per annum over the long term. 4% of 2021 UK GDP is the equivalent of a £32bn cost per annum to the UK taxpayer. After rebates, the UK’s EU membership fee in 2018 was £13.2bn.

CIPS has reported think tank Campaign for European Reform's research, which found that UK goods trade was 11.2%, or £8.5bn, lower in September 2021 than it would have been according to the Office for Budget Responsibility's forecast in March 2016.

A 2022 study from research firm Resolution Foundation found that Brexit had reduced the openness and competitiveness of the British economy.

The "Divorce Bill"

Since fiscal impacts will play a major role in the outcome of Brexit, Theresa May has stated that money will be taking first place as the key importance surrounding Brexit, the others being borders and laws. The Brexit divorce bill is essentially a financial settlement in which the United Kingdom must pay off their liabilities to the EU. This includes, for example, unpaid contributions to the EU's multi-year finances. There is no current set figure for the bill but estimates have shown it to be at least £39bn which could see increases as far as 2022. First year costs (2018–2019) are expected to be close to £14bn and decreasing to £7bn by 2022–2023.

Movement of companies

Following the Brexit referendum, many companies shifted assets, offices, or businesses operations out of Britain and to continental Europe and Ireland.Peter S. Goodman
For Many British Businesses, Brexit Has Already Happened
''New York Times'' (1 April 2019). By the beginning of April 2019, banks had transferred more than US$1 trillion out of Britain, and asset management and insurance companies transferred US$130 billion out of Britain.

A March 2019 report from the independent research institute New Financial identified 269 companies in the banking or financial services sector that had relocated portions of their businesses or staff following Brexit; of these moves, 239 were confirmed as Brexit-related.William Wright, Christian Benson & Eivind Friis Hamre
The New Financial Brexitometer
New Financial (March 2019). The greatest number of moves were to Dublin (30%), followed by Luxembourg (18%), Frankfurt (12%), Paris (12%), and Amsterdam (10%).

Contributions to the EU

Supporters of withdrawal argued that ending net contributions to the EU would allow for tax cuts or government spending increases.The end of British austerity starts with Brexit
J. Redwood, ''The Guardian'', 14 April 2016 On the basis of Treasury figures, in 2014 the United Kingdom's ''gross'' national contribution (ignoring the rebate) was £18.8 billion, about 1% of GDP, or £350 million a week. Because the UK receives (per capita) less EU spending than other member states, a rebate was negotiated; net of this rebate, the contribution was £14.4 billion, approximately 0.8% of GDP, or £275 million a week. If EU spending in Britain is also taken into account, the average ''net'' contribution for the next five years is estimated at about £8 billion a year, which is about 0.4% of national income, or £150 million per week. The Institute for Fiscal Studies have said that the majority of forecasts of the impact of Brexit on the UK economy indicated that the government would have less money to spend even if it no longer had to pay into the EU.

Single market

According to economist Paul Krugman, Brexit supporters' assertions that leaving the single market and customs union might increase UK exports to the rest of the world are wrong. He considers the costs of Brexit might be around 2 per cent of GDP.

Foreign direct investment

European experts from the World Pensions Council (WPC) and the University of Bath have argued that, beyond short-lived market volatility, the long-term economic prospects of Britain remain high, notably in terms of country attractiveness and foreign direct investment (FDI): "Country risk experts we spoke to are confident the UK's economy will remain robust in the event of an exit from the EU. 'The economic attractiveness of Britain will not go down and a trade war with London is in no one's interest,' says M Nicolas Firzli, director-general of the World Pensions Council (WPC) and advisory board member for the World Bank Global Infrastructure Facility ..Bruce Morley, lecturer in economics at the University of Bath, goes further to suggest that the long-term benefits to the UK of leaving the Union, such as less regulation and more control over Britain's trade policy, could outweigh the short-term uncertainty observed in the ountry riskscores."

The mooted importance of the UK's membership of the EU as a lure for FDI has long been stressed by supporters of the UK's continued involvement in the EU. In this view, foreign firms see the UK as a gateway to other EU markets, with the UK economy benefiting from its resulting attractiveness as a location for activity. The UK is certainly a major recipient of FDI. In 2014, it held the second largest stock of inward investment in the world, amounting to just over £1 trillion or almost 7% of the global total. This was more than double the 3% accounted for by Germany and France. On a per capita basis, the UK is the clear front-runner among major economies with a stock of FDI around three times larger than the level in other major European economies and 50% larger than in the US.

Property market

The BBC
...