Poorer Regardless

23 September 2020

 

Cogito Ergo Non Serviam

Brexit Will Hurt UK Economy More than Covid

 

UK in a Changing Europe (a British think-tank) and the London School of Economics have undertaken a study comparing the economic damage Covid-19 is doing to the UK to the damage expected from Brexit, both with a free-trade deal with the EU and with no deal at all. Throughout the Brexit farago, no one of any real economic credibility has suggest that no deal would be better for the UK economically than a departure that rested on a free-trade deal. What is new here is that the model suggests that both are going to be worse for the UK economy in the long run than Covid-19 will prove to be.

The report states "Our modelling with LSE of the impact of a no-deal Brexit suggests that the total cost to the UK economy over the longer term will be two to three times as large as that implied by the Bank of England's forecast for the impact of Covid-19."

The report admits that, in the short term, the pandemic's effects are vastly greater than those of Brexit. The Covid downward spike takes the GDP index form 100 to 77 in the first year or so, and it then recovers in a couple of years. In the third year, the index plateaus at 97 to 98.

The decline in the index under any version of Brexit is a long 15-year slide before stabilizing at around 95 under a free-trade agreement and at 92 or so without any deal with Brussels.

The Guardian comments, "LSE modelling puts the long-term economic hit from a no-deal Brexit at 8% of GDP, similar to that of the government’s own forecast in 2018 of 7.6%, which amounts to £160bn in today’s money, or ©2,400 per person.

"This compares with the Bank of England’s latest forecast of the impact of Covid which shows a reduction of 1.7% of GDP to the economy up to 2022.

"This amounts to £40bn, or £600 per person, and is dwarfed by cost of a no-deal Brexit, which will have an impact on GDP for years to come."

The report itself also says that the shape of any trade deal with Brussels has yet to gel. "Negotiations have continued and appear to have reached stalemate. A deal may be done. It would likely be a 'thin' one, covering mainly goods, with little for the UK's service businesses and with manufacturers facing new checks and delays at the border. The EU has so far maintained that even this would require concessions from the UK on fishing rights and on so-called level playing field provisions -- most notably on state aid. After eight negotiating rounds between chief negotiators and one high-level meeting, these issues remain unresolved."

As of now, the prime minister has said that October 15 is the day he will decide whether to opt for a no-deal Brexit. The transition period ends on December 31, 2020, preparations for one result or the other have to begin. The thin nature of the Brexit trade deal is almost certainly written in stone. This implies that the free-trade deal will resemble a no-deal Brexit more than it will the status quo ante referendum.

The worst part is that the pandemic and Brexit combined will ensure that Britain has a harder time growing its economy than if only one event occurred. V-shaped, W-shaped, K-shaped or hockey-stick-shaped recoveries do not describe the magnitude of the recovery, and it is the magnitude that matters.

In short, Covid will ensure that the UK economy in the short term is bad. In the medium and long term, Brexit will keep the brakes on things. The result is a poorer Britain.

© Copyright 2020 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.


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