Further Trade Uncertainty Related to Brexit Could Cost UK Economy Billions

• By the end of 2020 UK GDP could be reduced by £4.4 billion
• The additional annual cost of extra borrowing would be almost £1.3 billion
• Costs increase over time; by the end of 2025 UK GDP could decrease by £11 billion, with extra borrowing costs of £3 billion.

The UK's departure from the EU on January 31, 2020, would only end the first phase of trade uncertainty owing to Brexit, according to a new RAND Europe study. 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 £4.4 billion, 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 £1.3 billion, based on HM Treasury estimates that 1 per cent of lost GDP leads to £7.6 billion 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 £11 billion in 2025, with additional annual borrowing costs of almost £3 billion.

Researchers took their calculations out a decade and found that 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 RAND Europe's 2017 study “After Brexit: Alternative forms of Brexit and their implications for the United Kingdom, the European Union, and the United States,” 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 found there would be some economic implications for EU economies as well, though considerably smaller.

Funding for this report, “Assessing the potential economic implications of prolonged UK–EU trade policy uncertainty,” was provided by donors and by the independent research and development provisions of RAND's contracts for the operation of its U.S. Department of Defense federally funded research and development centres.

Other authors on the report are Marco Hafner and Clement Fays from RAND Europe, and Erez Yerushalmi from Birmingham City Business School.

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Notes to Editors:

• To arrange an interview with one of the researchers on the project, contact Cat McShane on europeanmedia@rand.org or +44 (0) 1223 353 329 x2560.
• The RAND Corporation is a research organisation that develops solutions to public policy challenges to help make communities throughout the world safer and more secure, healthier and more prosperous. RAND is non-profit, non-partisan and committed to the public interest.
• RAND Europe, an affiliate of the RAND Corporation, is a not-for-profit research organisation whose mission is to help improve policy and decision making through research and analysis.