By Adam George
The impact of leaving the European Union on Britain’s economy may be the most heated issue of all as the referendum on June 23rd approaches. Many of those who are uncertain on how to vote say that they will decide on the basis of whether Brexit is likely to make them better or worse off. Some argue the economy will suffer enduring losses on the back of weaker trade and investment. Others say freedom from the rules, as well as the costs, that come with EU membership would make Britain more affluent. The arguments from both sides are hard to assess because it is virtually impossible to predict exactly what would happen if Britain is to leave the European Union on Thursday. The central problem is that there is no counterfactual. The missing counterfactual causes problems in determining the economic effects of Brexit. Nobody can be certain about what access Britain will have to the single market, what its regulatory regime and migration rules will be, or how long any of these may take to negotiate. One thing both pro- and anti-EU voices can agree on is that the short-term impact of Brexit is likely to be negative.
The Remain camp have the backing of most leading economists and financial institutions who believe that Brexit will have a negative effect upon the British economy. So far we have seen the Bank of England call Brexit “the biggest risk to domestic financial stability that Britain faces”. The Institute for Fiscal Studies (IFS) has claimed that Brexit could spark another two years of austerity for Britain. The economic think-tank stated that the decrease of national income that would follow a Leave vote would likely force the government to extend its austerity programme by two years. This is because they believe that a Leave vote would increase uncertainty in the short run and make trade more expensive in the long run, as well as making the UK a less attractive destination for foreign direct investment. The International Monetary Fund (IMF) has also warned British voters about the dangers of Brexit. In its annual United Kingdom economic outlook the IMF called Brexit the “largest near term risk” to the British economy. It added that the net economic effects would probably be “negative and substantial” and could even result in the United Kingdom missing out on up to 5.6% of GDP growth by 2019.
Many in the Leave campaign have rejected these theories and argued that economists tend to favour Britain remaining as an EU member because they are naturally in favour of deeper trading relationships with other countries. The Leave campaign has also countered these arguments by stating that pulling out the EU will allow Britain to retain the money it currently pays in. Brexiteers have argued throughout the campaign that Britain sends £350 million to the European Union each week and this money could be spent inside Britain on our public services if we were to leave. However, this number has been discredited by the fact checking organisation Full Fact. It would be £350 million if it wasn’t for the rebate that Britain gets back and the £85 million the E.U spends in Britain per week. Leave also claims that it would be possible to renegotiate trade deals quickly after Brexit, although it doesn’t specify how snubbed EU partners could be induced into favourable terms. Patrick Minford of Cardiff Business School argues that: “In the long term, Brexit will herald a major growth-boosting period, as the UK breaks free of the over-mighty EU with its protectionist mindset and establishes free trade and intelligent regulation aimed at UK economic interests.” In a similar vein, Leave EU, one of the two main groups campaigning for Brexit, talks of freeing Britain from the EU influence that “prevents the UK from taking full advantage of a surging global economy and capitalising on its unrivalled influence throughout the rest of the world”.
It is impossible to determine exactly what will happen to the British economy if we are to leave the European Union. However it is almost certainly going to damage us significantly in the short-term. Long term prospects are debatable and will depend upon the fallout from Brexit. It is hard to argue with the overwhelming evidence presented by the majority of economists that believe the British economy will suffer outside of the EU but it must be noted that economists have been wrong before. No matter what happens on Thursday, the dynamics of British politics will be changed for years to come.