The Confederation of British Industry (CBI) is a UK business membership organisation with around 1,500 direct and 188,500 indirect members. They recently released the results of a survey on the EU referendum in which 80% of the 773 respondents supported continued membership of the EU, against 5% who would vote to leave. Their recent report includes analysis of the future economic impacts of two EU exit strategies relative to continued membership. The analysis itself was conducted by PricewaterhouseCoopers (PwC) – the largest professional services firm in the world.
• The report estimates the potential economic impacts of two EU exit strategies and compares the findings against the predicted economic performance of continued membership of the EU. • The two options pitted against the 'remain' scenario are as follows: o An “FTA scenario” in which we negotiate a free trade agreement (FTA) with the EU ensuring the free movement of goods but not services. It is assumed that this agreement and all other aspects of post-exit uncertainty are resolved within five years of the referendum. They also assume we would adopt all the EU FTAs with non-EU countries, and that we would negotiate an FTA with the US. Under this scenario, the CBI assumes that Britain could restrict the inflow of low-skilled workers by relaxing laws on the inflow of highly-skilled workers. o A “WTO Scenario” in which negotiations prove more difficult, meaning the UK goes on to trade with EU and non-EU countries under World Trade Organisation (WTO) rules. PwC assumes that the inflow of low-skilled migrants could cease in this arrangement. They assume regulatory divergence between the UK and EU could lead to non-tariff barriers to trade. They also assume FTAs with non-EU countries cease to apply, resorting to trade under WTO rules from 2020 – 2026, and that this process would take longer than under the FTA scenario.
• The report provides no economic analysis for “the Norway option” or “the Swiss option”– often cited as the most likely exit strategies. o “We have not modelled these alternative scenarios, however, because they would seem inconsistent with many of the key arguments that have been put forward for voting to leave the EU, notably as regards continued free movement of labour between the UK and the rest of the EU.” • PwC estimates that UK GDP in 2020 could be around 3% - 5.5% lower under the FTA and WTO scenarios than under the remain scenario. This negative impact represents a reduction of around £55-100 billion in UK GDP, at 2015 values. • By 2030, it is estimated that total UK GDP would be 1.2% - 3.5% lower in real terms (adjusted for inflation) in the two exit scenarios compared to the remain scenario. This translates into a fall of GDP per capita of 0.8% to 2.7% in real terms, compared to the remain scenario. • This still means that GDP per capita would be 25% to 28% higher in 2030 than in 2015 following an exit, compared to 30% higher if we remain. • PwC estimates that employment levels could fall by 1.7% - 2.9% relative to the 'remain' scenario by 2020, or 1% to 1.8% by 2030. This translates to a fall in employment of 350,000 to 600,000 by 2030. Unemployment may rise to 7% or 8% in the few years preceding an exit, but would return to around 5% in all scenarios by 2030. • The lower projected employment in the exit scenarios is based on the assumption that we would limit inward migration of workers.
Naturally, the analysis and results here are heavily assumption based and incorporate a degree of uncertainty, especially when looking as far ahead as 2030. Some of the assumptions may seem odd. For example, under the FTA scenario we secure a favourable deal with the US covering both goods and services, but with the EU only manage to secure free movement of goods. In general, the assumptions seem cautious, implying large short-term risks that have little or no long-term effect.
The Norway option is discussed in the report, but is not given significant thought. The CBI admits the economic outlook would not be much different than under continued membership, which is understandable in terms of not analysing the economic impacts. The report also says that: “Such an arrangement would not address any of the main arguments that have been put forward for Britain leaving the EU, notably as regards restricting free movement of people, increasing British sovereignty in relation to laws and regulations now set at EU level, or saving on net contributions to the EU budget.” The Swiss option is also briefly covered, but a similar reason is given for its omission from the economic analysis – that it would require us to retain elements of the single market such as free movement of people. This seems like an oversimplification, as it does not give enough credibility to the very real prospect of Britain negotiating a settlement that basically keeps everything the same. Furthermore, some leave advocates accept that whatever the motive for leaving, these options would be the paths of least resistance in the short term at least, and would allow us to pursue other strategies in the future. The idea of any exit strategy being an interim solution leading to a more bespoke arrangement is not mentioned. The report – in particular the summary and conclusions –skims over these possibilities in favour of the arguably more problematic FTA and WTO options.
That being said, the analysis of the FTA and WTO options is about as good as we can get due to the amount of guesswork involved. The analysis shows uncertainty to be the biggest factor overall, especially in the short run, and that the difference between the leave and remain scenarios become less significant in the long run, as this uncertainty subsides. The economic impacts actually might not be as large as one would expect, especially when looking as far ahead as 2030. Certainly, British GDP and employment is higher in 2030 than today in every scenario. However, this type of analysis cannot account for external factors that may affect our economic performance such as changes within the EU, economic shocks, or changes to policy within Britain. In this regard, the predictions should be taken with a pinch of salt, as the impacts could well be higher or lower depending on the circumstances.