A more balanced economy looks achievable—through us becoming a little bit poorerby Angus Armstrong, Simon Kirby / November 2, 2016 / Leave a comment
The famous baseball player, Yogi Berra, once said that “the future ain’t what it used to be.” Economic forecasters grappling with unprecedented changes brought about by Brexit recognise the nugget of truth in this observation. The new rules for our economic future are yet to be decided. But for the purposes of deciding the right level of interest rates and even the amount the state can afford to spend, a detailed economic forecast is required.
In May this year, the National Institute of Economic and Social Research published analysis that showed that under all of the most likely Brexit scenarios UK citizens would be poorer over the long run as a consequence. It is now six months later and we have published our latest quarterly forecast for the world economy in our “National Institute Economic Review.” This article assesses Britain’s performance and how our forecast has changed throughout this extraordinary period.
Our analysis of Brexit begins in the long-term and works back to the short-term. Whatever our future arrangements outside the EU are likely to be, Brexit presumably means less integration with the EU. We may get equal access to the Single Market, but we will not share the same institutions. Less integration is likely to lead to less trade and investment. Our concern is less for goods, where tariff rates outside the EU are fairly low, but more for services. In terms of domestic wages and profits, services exports are more important than goods exports for the UK. Services exports depend on sharing the same regulations and allowing our companies to set up overseas as if they were in the UK.
If Brexit means lower trade and investment, then this implies less specialisation and lower productivity and therefore output than otherwise would have been the case. How much lower output will be depends on our new economic arrangements with the EU.
In May we provided a range of estimates based on different future economic arrangements. Our most optimistic case of joining the European Economic Area would see output 1.5 per cent lower and the most pessimistic case of reverting to the World Trade Organisation (WTO) of 3.75 per cent lower by 2030, with a Free Trade Agreement somewhere between the two. We…