This comparison between Brexit’s impact and the financial crisis is flawed

“The Government's own research says that Boris Johnson's Brexit proposals would lead to a 6.7% drop in GDP and 6.4% drop in real wages - the kind of hit to the economy experienced in the financial crash.” 

Chuka Umunna, 18 October 2019

Mr Umunna was referencing economic analyses published by the government in November 2018, which modelled the economic outcomes under different Brexit scenarios. But he’s wrong to say GDP and real wages would “drop” according to this analysis and his comparison to the financial crash is misleading.

The government estimated that a hypothetical free-trade agreement (FTA) with the EU where we maintained tariff-free access but there were still non-tariff costs (such as regulatory barriers) would cost the UK between 4.9% and 6.7% GDP growth after 15 years. 

GDP (or Gross Domestic Product) is the total value of everything that happens within a country’s economy—the goods and services made and the money earned. It’s the main way economists measure how well the economy is doing.

The FTA scenario is the most likely scenario following the deal agreed by Boris Johnson’s government and the EU, though the details of the trade deal would not be agreed for a while yet, so this is all still hypothetical. 

However, that aside, it’s incorrect to claim the analysis said that the proposals would lead to a 6.7% drop to GDP, as Mr Umunna said. The analysis said that GDP would be up to 6.7% lower after 15 years than it would have been compared to remaining in the EU. The document said “in all scenarios the economy would be expected to grow.”

It’s worth mentioning that the 6.7% figure assumed that the net migration from the European Economic Area (the EU plus Iceland, Liechtenstein and Norway) to the UK would fall to zero—in other words the number of EU immigrants coming to the UK would be balanced by the number emigrating abroad. Other estimates of the free-trade model with a more liberal migration policy were estimated to have a lower impact on GDP.  

More recently think tank UK in a Changing Europe estimated GDP per person would be between 2.3% and 7% lower under Mr Johnson’s deal than remaining in the EU after 10 years.  

The comparison to the financial crisis is unfair

Mr Umunna claimed that the scale of the impact on GDP would be comparable to the financial crash.

This is an unfair comparison. 

Between the first quarter of 2008 and the second quarter of 2009, GDP fell by 6%. GDP per person fell even more, by 8.5% over that period. 

But the key thing is that GDP is still expected to grow in real terms under the new withdrawal agreement. It’s unfair to compare the tangible loss in incomes and earnings over a period of 15 months during the financial crisis, with a similarly sized loss of potential earnings over a period of 15 years.  

For wages, the comparison is even more problematic. Weekly wages fell, in real terms (adjusting for changes in prices) by 11.2% between the high in February 2008 and the low during March 2014. This covers wages for employees in Great Britain. 

So not only is the comparison between a real cut to peoples’ wages during the financial crisis and a hypothetical loss of earnings due to Brexit, the level of financial loss is fairly different. The government estimates wages to be 6.4% lower over a fifteen year period. During the financial crisis and its aftermath, wages fell by 11.2% over six years.

Putting these figures in context

The new withdrawal agreement is seen to be a “harder” Brexit than that negotiated under Theresa May. As such, economists estimate the impact on the economy to be greater. 

UK in a Changing Europe modelled the impact of Theresa May’s deal, Boris Johnson’s deal and a no deal “WTO” Brexit. 

It estimated that, after ten years, GDP per person would be around £1,500 less under May’s deal, £2,000 less under Johnson’s deal and £2,500 less under no deal, compared to staying within the EU. 

Its analysis took into account two things: the expected direct impact of Brexit on trade volumes and the cost of doing trade, and the knock-on impact that trade can have on productivity (which accounted for most of the costs).

As mentioned before, these estimates don’t necessarily mean that people will be worse off by £2,500 in ten years than they are now. They estimate people will be less well off by that much than if we had remained in the EU.

Economic forecasts over such long periods and where the details of what might happen in the future are unknown must be taken with a large pinch of salt.  

As UK in a Changing Europe says: “As we have emphasised throughout, these estimates are subject to considerable uncertainty, for two reasons.

“First, there is inherent uncertainty associated with forecasting the impact of economic policy choices. 

“Second, there is also political uncertainty as to what those future policy choices will be, both on the part of the UK and the EU. 

“Nevertheless, it should be clear that under any plausible scenario the costs associated with Brexit’s potential economic effects are much larger than the savings from reduced contributions to the EU budget.”