There’s much uncertainty about a ‘No Deal’ Brexit, but what we do know would be bad for living standards

Published on Public Finances and the Economy

Big change, means big uncertainty. Especially when that big change is being brought to the complex beast that is a major developed country in the 21st Century. To complicate the task further, in the case of Brexit Britain while we know big change is coming, we don’t know what form that big change will actually take. Even if it’s for very good reasons, every parent worries about moving their kid between schools because they don’t know quite how they’ll react. They worry much more if they’ve got the added twist of not knowing which new school they’ve managed to secure a place at.

In the face of all that uncertainty it’s not surprising that there’s huge temptation to reach for swift answers – call it home schooling. That is the attraction of the ‘no deal’ Brexit that seems to have returned to the public debate over the last week. The Prime Minister has talked up steps to “prepare for every eventuality” and J.P. Morgan is following the general mood in saying the probability of a no deal on Brexit has increased.

But in periods of huge uncertainty it is worth remembering that lots of people say lots of things – but they can be judged more accurately on what they do. Here what is clear, for all the ‘no deal’ talk, is that what the government wants is a deal. That was the reason for her recent Florence speech and the motivation for travelling to Brussels last night for dinner with a man, in European Commission President Jean-Claude Juncker, who has behaved horrendously towards her.

That’s because she knows that while no deal is possible, it is a long way from the first best outcome. The main reason for that is the sheer uncertainty it unleashes. In many areas of life we simply don’t know what a genuine ‘no deal’ outcome would mean. Far from ending uncertainty it would multiply it.

But just as it is right to highlight the uncertainty about many of the outcomes from a “no deal” Brexit, so too we should show what the effects would be in areas that are more knowable. Last year we said that for all the arguments about the short run economic effects of the Brexit vote, the one thing that was clear was that the major sterling depreciation that followed would feed through into higher prices and a renewed squeeze on living standards. Similarly, making firm predictions about the overall impact of “no deal” is fraught with difficulty. However, some things are much more knowable, or at least quantifiable. And top of that list is tariffs.

That is the focus of a new joint piece of work between the Resolution Foundation and the University of Sussex’s Trade Policy Observatory. The sudden return of debates about trade has to date focused on the macro-economic effects on growth surrounding what UK firms and workers can sell to the rest of the world, but the debate also needs to focus on the much more certain effect of tariffs on Britons as consumers right here at home.

The heart of a “no deal” Brexit outcome is that the UK and EU fails to sign a new trade agreement. In that scenario government policy (and WTO rules) are that we would levy the same, so-called most-favoured-nation (MFN), tariffs on imports from the EU as from other partners where no separate agreement exists. That means either from March 2019 (or after any transition period agreed), tariffs on clothing and drink from the EU would rise from zero to 10 per cent, those on dairy products like milk and cheese by 45 per cent and those on meat by 37 per cent. The level of these new tariffs is as close to facts as we get in current Brexit debates.

Crucially they would feed through into consumer prices. The extent of that impact depends on the size of tariffs imposed on trade with the EU, the extent to which the UK currently relies on imports of that good, and how much of that reliance is in practice on imports from the EU. Our preference for EU built cars means vehicle would see a 5.5 per cent price increase, while the price of clothing would rise by 2.4 per cent, partly because we buy clothes from a wider range of countries outside the EU.

Food would be the area most affected – not only because the tariffs would be substantial but because we both import a lot of it and do so overwhelmingly from the EU. The prices of dairy goods would rise by an average of 8.1 per cent and meat would go up by 5.8 per cent.

While we are only able to do this modelling for goods making up around 40 per cent of our consumption spending we can see that it would mean a significant squeeze on family finances, pushing up costs of current consumption of these goods by an average of 2.7 per cent or £260. Over three million families would see the cost of their shopping go up by more than £500.

Crucially, as with the impact of the fast rising inflation in recent months on the back of sterling’s depreciation, it is lower income households that would likely bear the most significant burden. The impact on those near the bottom of the income distribution would be a third greater than for those near the top as a share of overall consumption.

Some have suggested that rather than imposing most-favoured nation (MFN) tariffs on the EU, Britain should eliminate all tariffs whatsoever with the rest of the world – thus maintaining tariff free trade with the EU but extending it to all other countries. Such an approach would mean lower costs for households, which would fall by 1 per cent across those good affected by the tariff cuts. Lower tariffs with non-EU countries are a desirable objective but achieving them in this way would mean removing the UK’s best leverage in the very future trade negotiations with the likes of the US that are meant to provide a key opportunity from Brexit. Doing so would benefit consumers but also disproportionately negatively affect industry in areas beyond the South-East and London.

There are many other impacts that a no deal Brexit would have. Even within the narrow economic sphere of trade some would argue there would be effects on long run productivity, while more certainly there would be an impact on exports and indeed on goods that include imported components. Intentionally ignoring such effects and focusing on an area where the change is much more certain and quantifiable should help to illustrate that even on this limited measure there is a huge amount at stake – particularly for low and middle income families. It reminds us that for all the bluster of the past week the Prime Minister is right to note that a ‘no deal’ Brexit may be possible but, when it comes to the living standards of working people, it is deeply undesirable.