The economic consequences of leaving the European Union were naturally a central focus of the referendum campaign. Those consequences will be substantial, and negative.
That conclusion does not represent only my views, or those of scholars at the research center I’m affiliated with, the Centre for Economic Performance at the London School of Economics. They reflect the work of almost all those who have looked seriously at this issue. In my lifetime, I have never seen such a degree of unanimity among economists on a major policy issue.
The precise effect, in terms of a numerical percentage, is of course uncertain. But it is almost certainly true that we will be financially worse off outside the EU than in it.
Analysis by the Centre for Economic Performance and the National Institute of Economic and Social Research suggests that if we leave the EU, the economy will be between 1 and 3 percent smaller by 2020, and between 2 and 8 percent smaller by 2030, than if we stay in. A 1 percent drop in GDP is a fall of £19 billion, equivalent to £720 for each household currently in the UK.
The reasons to expect lower national income when the UK leaves the EU are well-established: prolonged uncertainty, reduced access to the single market, and reduced investment from overseas. Each of these would be highly likely, and the overwhelming weight of evidence is that each would be damaging for the living standards of UK households. As a result of the decision to leave, we should expect to see:
- Lower real wages
- A lower value of the pound — and hence higher prices for goods and services
- Higher borrowing, lower public spending, or higher taxes
- In the short run, higher unemployment
Let’s take some of the biggest economic claims made by each side in the recent campaign, one by one:
There will be £10 billion more to spend on public services and tax cuts
Almost certainly untrue. While we would get to keep our current net £8 billion contribution to the EU budget, overall the public finances would almost certainly be weakened by leaving the EU as a result of a negative impact on the economy. Hence in the long run, taxes would have to rise, spending would have to fall, and/or public borrowing would have to rise.
Households would be £4,300 a year worse off by 2030
Uncertain. The effect might be bigger or smaller and will fall unevenly across households. And they would not be worse off than they are now. But households would in all likelihood be, on average, significantly worse off if we left the EU than if we stayed.
The UK will be able to trade with other EU nations on equally good terms to those we currently have
Almost certainly untrue. Membership of the single market on something like current terms might be available if we continue to make budget contributions and accept free movement of labor. It would not be available otherwise — and the "Leave" camp explicitly wants to avoid those obligations. Trade with EU countries will continue, but course it would become more difficult and costly, there would be less of it, and we would be worse off as a result.
There would be immediate big tax increases
Unlikely. The public finances, even accounting for the return of the net contribution to the EU, would be badly affected, as the economy would likely be smaller. That would require tax rises or spending cuts at some point. But the consensus judgment of economists is that the government would allow borrowing to rise in the short term rather than implement further tax raises or spending cuts immediately.
In other bad news: Banks will be particularly hard hit by Brexit, as they will lose their "passporting" rights to conduct business anywhere in the EU. Many American banks set up in London as a platform for trading across the continent. Frankfurt will be keen to grab a slice of this action.
Clearly non-economic arguments mattered in the Brexit debate. Leaving the EU will allow us more freedoms over some aspects of sovereignty, such as lawmaking, as well as possibly greater control over immigration. But the economic effects cannot be denied, although some voters appear to have been in denial.
In the end, voters rejected the economic consensus. The Leave campaign’s unremitting focus on reducing immigration at all costs seems to have won them over, despite the lack of any real evidence of the economic harm of EU migrants. Hard hearts have triumphed over cool heads. There is perhaps a salutary a lesson here for Americans in the runup to the November presidential election.
John Van Reenen is a professor in the department of economics and director of LSE’s Centre for Economic Performance. He received the European Economic Association’s Yrjö Jahnsson Award in 2009 (jointly with Fabrizio Zilibotti), as the best economist in Europe under the age of 45.