One of the most strongly debated issues in recent British politics, Brexit has dominated the headlines since 2015. To counteract the ‘Brexit fatigue’ we moved away from the well-trodden ground of any predictions and voting advice. Instead, we addressed the following questions facing business leaders:
Can the senior conservative leadership heal the rifts that are now there for all to see?
What are the implications for the prime minister and other senior politicians under the various outcomes?
What are the matters that business leaders will have to plan for should the vote be to leave?
What are the long-term economic implications of Brexit?
Marc Woolfson is a Director at Westminster Advisers, a public affairs agency providing companies and investors with public affairs, reputation and communications management, and political due diligence services. Marc leads the political due diligence service.
Marc is an award-winning public affairs consultant, advising investors, boards and management teams on how developments in politics, policy, regulation and in the media impact their organisations.
Ian Mulheirn is the Director of Consulting at Oxford Economics, a global leader in economic forecasting and quantitative analysis, working with some of the world’s largest companies, as well as the Bank of England, HM Treasury, the Federal Reserve, the IMF and the World Bank.
Ian worked as the Director of the Social Market Foundation, a Westminster public policy think tank, and an economic adviser at HM Treasury where he advised on a range of policy areas. In 2014 he was awarded the Society of Business Economics’ Rybczynsky Prize.
The event was co-hosted with Charles Russell Speechlys law firm, and following the presentations, a lively Q&A was hosted.
Opening the seminar, Marc Woolfson analysed the polls and politics of the referendum campaign, focusing on the longer term implications for UK government. Marc offered a snapshot of the political landscape from the 1975 EC referendum, when the government successfully renegotiated the UK’s EEC membership, to the current stark divide in the ruling party leadership.
Marc reviewed the respective milestones of the Remain and Leave campaigns with the latter rapidly gaining popularity in the last couple of weeks as UKIP and the Conservative Party Eurosceptics join forces to dismiss their opponents’ campaign, branded ‘Project Fear’. The Remain camp benefited from strong endorsements from international leaders including Barack Obama, Mark Carney and Christine Lagarde. Both campaigns were punctuated by alarming forecasts of economic turmoil, plummeting house prices, rising unemployment, increased risk of terror attacks and even fears of World War III. The political smears and scaremongering left the general public confused and disengaged – an aftermath most likely to affect the Remain campaign, reliant on mobilising the younger voters – many of whom, Marc quipped, will be revelling at Glastonbury on the fateful day.
According to the latest polls the pro and against campaigns are going head to head with a marginal lead by the Remain camp but the gap is closing daily as the tension rises. The key considerations are the economy, immigration and a greater control over British law - ‘sovereignty’. Notably, Ipsos MORI revealed that a majority of people (58%) think their own standard of living over the next five years will not be affected if Britain leaves the EU.
Marc left us to consider the key factors that will determine the outcome of the referendum:
Will the young Remain campaign supporters turn up to vote?
Will grassroots Conservatives follow Cameron?
Does Corbyn’s relative silence weaken Labour voters’ support for the pro-Europe campaign?
Is the debate too London-centric and failing to galvanise the electorate beyond the South East?
Economic analysis of leaving the EU
Bringing the long-term view to the table, Ian Mulheirn presented Oxford Economics’ recent Brexit analysis study examined the economic implications of nine different post-Brexit trade and domestic policy combinations and what they could mean for the UK economy by 2030.
Ian stressed that the long term economic impact of Brexit is as much about how domestic policy responds as about the type of trade deal the UK is able to secure. In particular, how will the government pull policy levers on trade, regulation and migration and what would it do with the initial savings from no longer contributing to the EU budget? Westminster will face just two years to conclude a new deal covering trade and market access that will govern the UK’s relationship with the EU.
Oxford economics’ research shows that two major factors will determine the impact of Brexit on GDP, levels of EU immigration and the trade deal reached.
Cutting back on immigration will have a substantial effect on the size of the UK economy by 2030, with measures to halve net immigration reducing GDP by around 1% compared to current forecasts. However the impact of reduced immigration on GDP per capita – the key determinant of individual prosperity – is minimal.
Almost half of the UK’s trade is done with the EU. So maintaining a good trade deal with the EU after Brexit is essential to future UK prosperity. In the worst case scenario where the UK is unable to reach a preferential trade agreement with the EU, trade is expected to fall by almost 10%. If the government also clamps down on EU immigration, UK GDP could be almost 4% lower in 2030 than it would otherwise be, a per person loss of around £1,000 per year.
On the other hand, if the UK adopts a more liberal, pro-business policy —no new restrictions on EU immigration, deregulation and removal of all tariffs on imports from the rest of the world,— the fall in GDP could be limited to around 1%. Whether these types of policies will be viable in a country that would have just voted against heavy EU immigration is an open question.
The case is often made that leaving the EU would allow the UK economy to pursue a deregulatory agenda and therefore boost the economy. However the Oxford economics study suggests that room for improvement here is limited. If the UK were to deregulate labour and product markets to match the least regulated countries in the OECD, the boost to UK productivity by 2030 would add just 0.1% to GDP in 2030. This reflects the fact that despite EU membership the UK is already among the most lightly regulated advanced economies in the world.
When it comes to fiscal policy, the UK’s net contribution to the EU in 2015 was some £8.5bn. Leaving the EU would therefore provide an immediate boost to the public finances. But in most cases this initial saving turns out to be a false economy by 2030: as the UK economy grown more slowly after Brexit, lost tax receipts will tend to outweigh any initial savings. Indeed in the worst-case scenario, the UK is forced to reduce spending by 1.7 percent of GDP by 2030.
The impact of Brexit will be felt differently across various industries and is highly dependent on how UK policymakers respond after Brexit. Manufacturing is highly dependent on achieving a deep trade deal with the EU, meanwhile the success of the service sector is more dependent on continued access to EU migrant – particularly high-skilled - labour. . Equally, the financial services industry is highly exposed, facing the likelihood of losing its ‘passport’.
In summary, the analysis shows that in any plausible scenario the UK economy will be smaller in 2030 after Brexit. The negative impact can be mitigated, however, with a good trade deal and continued EU migration policies close to the EU status quo. This is an unlikely set of policy outcomes if the UK votes to leave.
Putting it all together
There are obviously pro’s and con’s to both eventualities but, given the significant noise and conflicting forecasts for both referendum outcomes, businesses will need to be ready to react to each outcome, to plan ahead and adjust accordingly. This flexibility and agile response to the changing economic environment are vital to capitalise on arising opportunities as well as challenges that come with the possible change.
Political and constitutional change will inevitable cast a lot of uncertainty on the UK’s consumers and businesses alike but we are yet to know if our departure from the EU rule book could pave the way to new lucrative trade agreements with other global economies.
For any TAX, accountancy or business advisory services to help your business prepare for the outcome of the referendum, speak to your usual contact at BDO or email Paul Russell, BDO Partner [email protected]
For expert legal advice on the potential implications of Brexit, contact Michael Lingens, Partner at Charles Russell Speechlys [email protected]
For further analysis of the political fallout of the referendum, contact Marc Woolfson at Westminster Advisers [email protected]