What an AI has to say about Brexit
SmokingCaterpillar March 27 2025 01:18:22 PM
Well you have idle moments now and then. So I asked Gemini's Deep Reasearch model tpo take a look at what Brexit has cost is financially. Depressing. This is what it came out with.The Economic Cost of Brexit to the United Kingdom
1. Executive Summary
This report provides an analysis of the economic costs incurred by the United Kingdom since its departure from the European Union. Assessments from reputable economic institutions such as the Office for Budget Responsibility (OBR) and the Centre for Economic Performance (CEP) consistently point towards a significant negative impact across various economic indicators. Quantifiable impacts include an estimated long-run reduction in the UK's Gross Domestic Product (GDP) of around 4-5 percent. The UK's trade relationship with the EU has been notably affected, with long-term reductions in both imports and exports projected to be approximately 15 percent. Specific sectors like manufacturing, agriculture, and financial services have experienced distinct challenges and adjustments. Brexit has also contributed to increased inflation and a higher cost of living for UK households. Foreign direct investment has seen a decline, and the labor market has faced new pressures, including labor shortages in specific sectors. Different economic models used to estimate these costs show variations in their findings, but a general consensus emerges regarding a substantial adverse economic effect.
2. Introduction
In June 2016, the United Kingdom voted to leave the European Union, culminating in its formal departure in January 2020, followed by the end of the transition period in December 2020. This decision marked a significant shift in the UK's economic and political landscape. Understanding the economic consequences of this departure is crucial for policymakers, businesses, and the public. This report aims to provide an objective, data-driven analysis of the economic costs of Brexit to the UK, drawing upon research and analyses from leading economic institutions and official government publications. The objectives align with the user's query, encompassing the overall macroeconomic impact, trade dynamics with the EU, sectoral effects, inflation and cost of living, foreign direct investment, labor market implications, official assessments, and a comparison of different economic models. The report relies on a comprehensive review of reports and data from sources such as the Office for Budget Responsibility, the Bank of England, the Centre for Economic Performance, and HM Government. The structure of this report will proceed by examining each of these areas in detail, culminating in a conclusion that synthesizes the overall economic impact of Brexit on the UK.
3. Overall Macroeconomic Impact
The departure from the European Union has had a discernible impact on the overall macroeconomic performance of the United Kingdom, particularly concerning GDP and productivity.
Impact on GDP
The Office for Budget Responsibility (OBR), the UK's fiscal watchdog, has consistently projected a significant long-run reduction in the UK's economic potential due to Brexit. Their latest economic forecast assumes that the post-Brexit trading relationship, as defined by the Trade and Cooperation Agreement (TCA), will reduce the UK's long-run productivity by 4 percent relative to a scenario where the UK remained in the EU . This reduction is primarily attributed to the increase in non-tariff barriers on trade between the UK and the EU, which impedes the efficient allocation of resources and the exploitation of comparative advantages. The OBR estimates that approximately two-fifths of this 4 percent impact had already materialized by the time the TCA came into effect in January 2021, driven by uncertainty that weighed on investment and capital deepening . Furthermore, the OBR has cautioned that the long-term economic repercussions of Brexit are expected to be more severe than those of the COVID-19 pandemic, with a predicted GDP reduction of up to 4 percent compared to the pandemic's estimated 2 percent impact . This stark comparison underscores the magnitude of the anticipated long-term economic cost associated with leaving the EU. The Treasury has also referenced OBR forecasts, indicating a 4 percent long-run shrinkage of the UK economy as a consequence of Brexit . This alignment between the fiscal watchdog and government officials highlights the significance of this projection.
Independent analyses from the Centre for Economic Performance (CEP) corroborate these findings. John Springford of the CEP estimated a reduction in the UK's GDP of around 5 percent by the second quarter of 2022 . This estimate is also acknowledged by the OBR . A broader review of evidence suggests that the negative impact of Brexit on UK GDP to date is in the range of 2-3 percent, with another estimate from Springford suggesting a 5 percent negative impact since the 2016 vote . The OBR itself assumes a 4 percent reduction in GDP per capita over a 15-year period starting from 2016. Researchers at the London School of Economics (LSE) suggest that the long-run cost of Brexit could even exceed 4 percent . Cambridge Econometrics offers a longer-term perspective, projecting that annual Gross Value Added (GVA) growth in the UK will be 0.4 percentage points slower between 2023 and 2035 due to Brexit, resulting in a 10.1 percent lower GVA by 2035 . The Governor of the Bank of England, Andrew Bailey, has also publicly acknowledged the negative economic consequences of Brexit, particularly the weakening of trade, which has put downward pressure on the UK's potential supply and, consequently, GDP. He cited independent analyses, including those by the OBR, which estimate a 4 percent economic hit over a 15-year period as a result of Brexit .
The consistency of these estimates from various reputable institutions, including the OBR, CEP, Bank of England, and LSE, within a range of approximately 4-5 percent long-term GDP reduction, points towards a significant consensus regarding the substantial negative macroeconomic impact of Brexit. This convergence of findings, derived from different methodologies and data, strengthens the reliability of the assessment that leaving the EU has imposed a considerable cost on the UK's economic output. The OBR's comparison of Brexit's impact to the COVID-19 pandemic further emphasises the scale of the economic disruption caused by leaving the EU. This suggests that the long-term consequences for economic growth and overall prosperity in the UK are likely to be substantial and enduring.
Impact on Productivity
Productivity, a key driver of long-term economic growth, is also projected to be negatively affected by Brexit. The OBR specifically assumes that the post-Brexit trading relationship with the EU will reduce the UK's long-run productivity by 4 percent compared to remaining in the EU . This anticipated decline is primarily attributed to the increased non-tariff barriers on UK-EU trade, which are expected to hinder the UK's ability to fully exploit its comparative advantages in various sectors. By creating obstacles to seamless trade, these barriers reduce the efficiency with which goods and services are produced. The Governor of the Bank of England has also highlighted that the UK has experienced weaker productivity growth since 2008, suggesting that the impact of Brexit on productivity is occurring within a broader context of existing economic challenges . Furthermore, Cambridge Econometrics projects that Brexit will lead to a widening productivity gap between London and the rest of the UK, with the primary productivity impacts expected to be felt outside of London . This indicates that the consequences of Brexit for productivity will likely not be uniform across different regions of the country, potentially exacerbating existing regional economic disparities. The OBR's explanation that the increase in non-tariff barriers on UK-EU trade will impede the exploitation of comparative advantage provides a clear mechanism through which Brexit is expected to reduce productivity. This suggests that the new trade arrangements established after leaving the EU are inherently less efficient than the previous single market membership in facilitating optimal resource allocation and specialization.
| Table 1: Estimates of Brexit's Impact on UK GDP | |||
| Institution | Estimated GDP Impact | Timeframe | Methodology |
| Office for Budget Responsibility | -4% (Productivity) | Long-run | Assumes impact of Trade and Cooperation Agreement |
| Office for Budget Responsibility | Up to -4% | Long-run | Overall assessment |
| Centre for Economic Performance | -5% | By Q2 2022 | Doppelgänger method |
| Centre for Economic Performance | -2% to -3% | To date | Review of evidence |
| Centre for Economic Performance | -5% | Since 2016 vote | Synthetic counterfactual methodology |
| Office for Budget Responsibility | -4% per capita | 15 years from 2016 | Assumption |
| London School of Economics | > -4% | Long-run | Forecast with trade barriers reducing productivity |
| Cambridge Econometrics | -10.1% (GVA) | By 2035 | Projection based on slower annual growth |
| Goldman Sachs | -5% | Hypothetical model | Comparison with no-Brexit scenario |
4. Trade Dynamics with the European Union
Brexit has significantly altered the trade relationship between the United Kingdom and the European Union, leading to a notable reduction in trade intensity.
The OBR estimates that in the long run, both UK exports to and imports from the EU will be approximately 15 percent lower than if the UK had remained a member of the EU . As of February 2025, the OBR indicated that this assumption of a 15 percent reduction in trade intensity appeared to be broadly consistent with available data . This substantial decrease signifies a considerable decoupling of the UK economy from its largest trading partner, which is bound to have far-reaching consequences for businesses and supply chains. The OBR has also observed that the UK's overall 'trade intensity,' defined as the proportion of trade relative to GDP, has fallen significantly more than that of other advanced economies, with the majority of analyses suggesting that Brexit is a primary contributing factor . This comparative perspective underscores the unique impact of Brexit on the UK's trade performance when compared to its peers. Goldman Sachs' hypothetical economic model supports these findings, suggesting that the UK economy is 5 percent worse off, partly due to a 15 percent decrease in total imports and exports to both the European Union and the rest of the world . This independent modelling further validates the OBR's estimate of a significant contraction in trade volumes. Cambridge Econometrics projects that by 2035, UK imports will be 15.8 percent lower, and exports will be 4.6 percent lower than they would have been if the UK had remained in the EU . This projection indicates a more pronounced long-term impact on imports compared to exports, potentially reflecting increased costs and complexities for businesses involved in bringing goods into the UK. Research from the Centre for Economic Performance indicates an immediate sharp drop in trade following the implementation of the Trade and Cooperation Agreement, particularly affecting smaller firms, which experienced a 6.4 percent decrease in exports and a 3.1 percent decrease in imports . This highlights the initial disruptive effects of the new trading arrangements and their disproportionate impact on smaller businesses, which often have fewer resources to navigate new regulatory and logistical hurdles. Furthermore, a 2019 analysis revealed that British firms significantly increased their offshoring activities to the European Union after the Brexit referendum, while European firms reduced their new investments in the UK . This shift in business strategies suggests a response to the altered economic landscape, with potential long-term implications for the UK's domestic production and its attractiveness as an investment destination for European companies. The consistent finding of a substantial reduction in UK-EU trade intensity across various sources strongly suggests that Brexit has indeed created significant barriers to trade, impacting both the inflow and outflow of goods and services and potentially leading to a less interconnected and efficient UK economy. The disproportionate impact on smaller firms and the observed increase in offshoring by UK companies point towards a potential restructuring of the UK economy. Smaller businesses are facing greater challenges in engaging in international trade, while larger firms may be relocating operations to maintain access to the EU market. This could ultimately lead to a less competitive domestic landscape and potential job losses within the UK.
5. Sectoral Analysis
The economic impact of Brexit has varied across different sectors of the UK economy, with manufacturing, agriculture, and financial services experiencing distinct effects.
Manufacturing
The manufacturing sector in the UK has faced significant challenges since the Brexit vote. Growth in manufacturing investment effectively halted following the 2016 referendum . Furthermore, Brexit has caused a sharp decline in trade, particularly affecting smaller manufacturing firms, which have seen a 6.4 percent reduction in exports and a 3.1 percent decrease in imports . Increased complexity and regulation within supply chains, a direct consequence of Brexit, have disproportionately burdened smaller firms in the UK . This rise in bureaucratic hurdles and compliance requirements can diminish the competitiveness of UK manufacturers, especially in international markets. The combination of stalled investment and reduced trade, particularly impacting smaller manufacturers, suggests a weakening of the UK's manufacturing base in the post-Brexit environment. This could potentially lead to decreased output, job losses within the sector, and a slowdown in innovation, which is crucial for long-term growth and competitiveness.
Agriculture
The agricultural sector is undergoing a significant transformation following Brexit, primarily due to the need to replace the EU's Common Agricultural Policy (CAP) with new domestic agricultural policies . This transition involves a shift from EU subsidies to UK-specific support schemes that often focus on environmental stewardship rather than direct acreage payments . The reshaping of trade relationships with EU member states and the development of new environmental and regulatory frameworks are also key aspects of this change. Concerns have been raised regarding potential labor shortages in the agricultural sector due to the end of free movement, which historically provided a significant source of seasonal workers . Additionally, sheep and beef farmers may face particular disadvantages under the new trading conditions . While the EU remains the UK's largest trading partner for agricultural goods, Brexit has opened opportunities for trade agreements with other countries, leading to a diversification of the UK's agricultural import sources . The move away from direct subsidies towards rewarding farmers for "public goods," such as environmental benefits, represents a fundamental change in agricultural policy. This shift could lead to environmental improvements but also presents economic challenges for farmers who need to adapt to the new system. The potential disadvantage for specific sub-sectors like sheep and beef farming, along with the reliance on seasonal EU labor, highlights the vulnerabilities within the agricultural sector that require targeted policy interventions.
Financial Services
The financial services sector, a critical component of the UK economy, has also experienced the impact of Brexit. The referendum itself led to a sharp depreciation of the pound sterling and increased volatility in the London Stock Exchange . Some financial activities have been relocated from the UK to the EU as a direct consequence of Brexit, with estimates suggesting approximately £900 billion in bank balance sheet transfers and around 7,500 job relocations . While initial fears of a mass exodus of financial firms and massive job losses have not fully materialised, the UK's financial services sector now faces reduced market access to the EU under the Trade and Cooperation Agreement, as the previous passporting rights have been lost . Access is now governed by equivalence decisions, which are unilaterally granted by the EU and can be withdrawn with short notice, creating ongoing uncertainty . Data indicates a decrease in financial services exports to the EU between 2018 and 2021, coupled with an increase in exports to non-EU countries during the same period . Despite these challenges, London remains a significant global financial center . The fact that the actual number of job relocations was lower than initially predicted suggests a degree of resilience within the UK's financial sector. However, the relatively flat employment growth in the sector since Brexit raises concerns about potential 'missing' jobs and future growth prospects . The reliance on the EU's equivalence decisions for market access creates a persistent vulnerability for UK financial service providers, emphasizing the need for the UK to strengthen its own regulatory framework and pursue new international partnerships to ensure the sector's long-term stability and competitiveness.
6. Inflation and the Cost of Living
Brexit has contributed to an increase in inflation and a higher cost of living for households in the United Kingdom.
One study estimated that the Brexit referendum result pushed up UK inflation by 1.7 percentage points in 2017, resulting in an average annual cost of £404 for British households . This direct impact on inflation has eroded the purchasing power of consumers. The Centre for Economic Policy Research (CEPR) estimated that Brexit raised overall consumer prices, leading to an additional cost of £250 per year for the average household on food alone . This highlights the particularly significant impact of Brexit on food prices, which constitute a substantial portion of household expenditure. Research from the CEP indicates that Brexit has contributed to higher food price inflation in the UK due to increased non-tariff barriers affecting food imports from the EU and the depreciation of the pound sterling . Non-tariff barriers, such as customs checks and regulatory divergence, increase the costs associated with importing goods, which are subsequently passed on to consumers through higher prices. A weaker pound makes imports more expensive, further contributing to inflationary pressures. The London School of Economics (LSE) estimates that Brexit is responsible for approximately one-third of food-related inflation, costing an additional $8.8 billion on groceries . The consistent findings across multiple studies indicate that Brexit has indeed had a significant impact on inflation, particularly concerning food prices. This has directly contributed to the ongoing cost of living challenges faced by households throughout the UK, placing a considerable financial strain on many. The identified drivers of Brexit-related inflation, namely non-tariff barriers and currency depreciation, suggest that these inflationary pressures may persist as long as the current trading relationship with the EU remains in place and the pound's value continues to be influenced by Brexit-related economic uncertainties.
7. Foreign Direct Investment (FDI)
Foreign direct investment (FDI) flows into and out of the UK have been affected by Brexit.
A 2018 analysis estimated that the uncertainty surrounding Brexit led to a reduction in business investment by approximately 6 percentage points. Furthermore, European firms reduced their new investments in the UK following the referendum . This decline in investment can impede long-term economic growth, hinder innovation, and slow down job creation. The announcement of the Brexit referendum result also increased volatility in the FTSE, reflecting concerns among investors about the potential economic consequences . Such market instability can make the UK a less attractive destination for investment. According to the Goldman Sachs model, overall investment in the UK is down by 5 percent compared to a scenario where the UK had not left the European Union. This negative impact on investment is further exacerbated by a decrease in EU migration, which affects labor availability . Research from the CEP highlights a complete halt in the growth of UK manufacturing investment following the 2016 Brexit vote and specifically examines the impact of the referendum on overall UK foreign direct investment . The consistent evidence of reduced business investment and FDI following the Brexit referendum and the implementation of the TCA suggests that the heightened uncertainty, the introduction of new trade barriers, and the diminished access to the EU market have collectively made the UK a less appealing location for investment compared to a counterfactual scenario where it remained within the EU. Investment is crucial for fostering long-term economic growth and enhancing productivity. A sustained decrease in FDI will likely have adverse consequences for the UK's future economic performance. The connection between reduced EU migration and lower investment, as indicated by the Goldman Sachs model, implies that Brexit's impact on the labor market can also indirectly influence investment decisions. Businesses may be less inclined to invest in the UK if they anticipate difficulties in recruiting the necessary workforce due to restrictions on immigration.
8. Labour Market Implications
Brexit has had notable effects on the UK labor market, including changes in employment rates and the emergence of labor shortages in specific sectors.
Uncertainty surrounding Brexit was estimated to have caused a 1.5 percentage point reduction in employment in 2018 . This immediate impact highlights the sensitivity of the labor market to economic uncertainty. The end of free movement following Brexit has led to negative net immigration from the EU . The primary consequence of this reduction in labor supply has been higher prices and reduced output in affected sectors, rather than significant increases in wages across the board. A survey indicated that 80 percent of Small and Medium-sized Enterprises (SMEs) reported increased costs since Brexit, particularly related to recruiting staff, suggesting the presence of labor shortages . The decrease in EU migration has put additional strain on the UK labor market . Research from the CEP indicates that labor shortages have become widespread across various sectors, with Brexit identified as a contributing factor alongside the COVID-19 pandemic . The cessation of free movement and the subsequent decline in EU immigration have resulted in labor shortages in several sectors of the UK economy. This has increased recruitment costs for businesses and has contributed to inflationary pressures through higher wages in some specific areas. However, the evidence suggests that the main impact has been on overall prices and the level of output in affected industries, rather than a broad-based increase in wages. Addressing these labor shortages requires consideration of various strategies, including upskilling the domestic workforce. As noted by the CEP, upskilling is essential for the UK to recover from the combined impacts of COVID-19 and Brexit . While this is a crucial long-term goal, it may not provide an immediate solution to current labor shortages and may need to be complemented by other measures in the short term.
9. Official Government Assessments
Official government bodies, particularly the Office for Budget Responsibility (OBR), have provided assessments of the economic consequences of Brexit.
The OBR has consistently produced analyses on the economic and fiscal implications of the UK's departure from the EU since the 2016 referendum . These publications include detailed economic forecasts and specific assessments of the Trade and Cooperation Agreement. The OBR's latest forecast assumes a long-run reduction in UK productivity of 4 percent and a long-run reduction in trade intensity of 15 percent . As the UK's official fiscal watchdog, the OBR offers the most authoritative government perspective on the macroeconomic impact of Brexit. Their consistent estimates of significant negative effects underscore the scale of the expected economic costs. In contrast, the Government's own estimate regarding the economic impact of the UK-Australia Free Trade Agreement (FTA) suggests a much smaller positive effect, with an anticipated increase in the UK's GDP of just 0.1 percent over a 15-year period . This stark difference highlights the limited potential of individual trade deals with non-EU countries to offset the substantial negative economic consequences associated with leaving the EU and losing access to the single market. The OBR also references HM Government's [EU exit: Long-term analysis] from November 2018 . Reviewing the findings and underlying assumptions of this specific government publication would provide a more comprehensive understanding of the official assessments of Brexit's long-term economic impact.
10. Comparison of Economic Models and Methodologies
Various economic models and methodologies have been employed to estimate the cost of Brexit to the UK, each with its own assumptions and findings.
Several studies have utilized different approaches to quantify the economic impact of Brexit, including estimations of costs as a percentage of GDP and the effects on inflation and investment . It is generally acknowledged that long-term economic forecasts tend to be more reliable than short-term predictions. The OBR's methodology involves calibrating its estimates of trade reduction to align with the average findings from a range of external studies, enhancing the robustness of their conclusions . The synthetic control method has been applied to subnational economic activity data to estimate the overall economic impact of the Brexit vote and its distribution across different regions of the UK . This econometric tool creates a counterfactual scenario to isolate the effect of Brexit. John Springford of the CEP has employed the "doppelgänger" method, which uses an algorithm to identify countries with pre-Brexit economic performance similar to the UK's. By comparing the UK's post-Brexit performance to this constructed counterfactual, the method estimates a significant negative impact on UK GDP, investment, and trade . This approach has been subject to debate and rebuttals within the economic community. Goldman Sachs has also developed a hypothetical model that compares the UK's economy after leaving the EU with a scenario where it remained a member, estimating a 5 percent worse economic outcome attributable to Brexit . Estimates of the negative impact of Brexit on UK GDP vary, ranging from 2-3 percent to around 5 percent . These variations often reflect different assumptions, particularly regarding the impact on productivity. Jonathan Portes suggests a plausible range for the cost of Brexit to be between 1 and 5 percent of GDP . It is important to recognise the limitations of purely quantitative models and to supplement their findings with qualitative considerations of other factors that may have influenced the UK's economic trajectory since 2016 .
| Table 2: Comparison of Economic Models Estimating the Cost of Brexit | ||||
| Model/Institution | Methodology | Estimated GDP Impact | Key Underlying Assumptions | Timeframe |
| OBR | Assumes impact of TCA, calibrates to external studies | -4% (Productivity) | Increased non-tariff barriers reduce comparative advantage | Long-run |
| CEP (Doppelgänger - Springford) | Compares UK to algorithm-selected similar countries | -5% | Economic performance of comparator countries reflects no Brexit | Post-Brexit |
| Goldman Sachs | Hypothetical model comparing exit vs. no exit | -5% | Impact on trade and investment | |
| Synthetic Control Method | Compares UK regions to constructed counterfactuals | -8.11% to -10.68% (GVA for regions) | Regional economic activity data | As of 2022 |
11. Conclusion
The analysis of available evidence from reputable economic institutions and government publications consistently indicates that Brexit has imposed a significant economic cost on the United Kingdom. Estimates suggest a long-run reduction in GDP of around 4-5 percent, reflecting declines in both productivity and trade intensity with the European Union. The UK's trade with the EU is projected to be substantially lower in the long term, impacting businesses and supply chains across various sectors.
Manufacturing has experienced stalled investment and reduced trade, agriculture is undergoing a major policy shift with potential challenges for specific sub-sectors, and financial services, while remaining robust, faces reduced access to the EU market and some relocation of activities. Brexit has also contributed to higher inflation and a consequent increase in the cost of living for UK households.
Foreign direct investment has seen a downturn, and the labor market has faced new pressures, including notable labor shortages. While different economic models offer a range of estimates depending on their methodologies and underlying assumptions, a consensus emerges that Brexit has had a substantial adverse economic effect on the UK.
The long-term implications of these costs suggest a less prosperous and competitive UK economy compared to a scenario where it remained within the European Union.
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