Post-EU trading uncertainty likely to cost £4.4bn this year, says RAND

Prime Minister Boris Johnson may have decided that Brexit is “done” and retired the B-word, but the price tag for leaving the EU is likely to be £4.4billion this year and £11billion by 2025, according to RAND Europe’s latest report.

The political plan was that the UK’s departure from the EU on January 31 would end the Brexit debate but, according to the new RAND Europe study, it has also triggered the first phase of trade uncertainty. Costs to the UK economy are likely to continue during the UK-EU renegotiation period and will increase over time.

The study found that by December 31, 2020 – the end of the current transition period – UK GDP could decrease by £4.4bn, 0.17 percentage points less than if the UK had not voted to leave the EU, because of uncertainty around trading relations with the EU and the expected future increase in trade barriers.

The additional cost of extra borrowing would be almost £1.3bn, based on HM Treasury estimates that one per cent of lost GDP leads to £7.6bn of extra borrowing annually.

The negative economic costs will continue to accrue and, if the renegotiation period lasts longer, UK GDP could be reduced by a further £11bn in 2025, with additional annual borrowing costs of almost £3bn.

Researchers took their calculations out a decade and found economic losses and extra borrowing costs would continue to accelerate as long as the UK’s long-term relationship with the EU and other partners were not settled.

The report, a follow-on to the Cambridge research institute’s 2017 study, examined the possible economic ramifications of uncertainty in the next phase of the Brexit process.

Researchers from RAND Europe and the RAND Corporation used a macroeconomic model to assess the economic implications and drew on estimates from studies on the changes in UK trade and foreign direct investment flows since the Brexit referendum result in 2016.

“We found that the negative economic effects on both GDP and government borrowing are tangible and increase over time,” said Charles Ries, vice president, international, at RAND and lead author of the report. “Uncertainty around the future trading relations with the EU and the expected future increase in trade barriers, either through tariffs or non-tariffs, potentially affects firms’ foreign trade and investment decisions.”

He continued: “Even though the negotiated withdrawal agreement and accompanying transition period will be soon approved by Parliament, the UK economy could be adversely affected until the permanent arrangements are set and agreed to by both sides.”

The report, titled ‘The end of the beginning – assessing the potential economic implications of prolonged UK-EU trade policy uncertainty’, found there would be economic implications for EU countries, though considerably smaller. Other authors on the report were Marco Hafner and Clement Fays from Cambridge-based RAND Europe, and Erez Yerushalmi from Birmingham City Business School.