As the government searches desperately for ways to boost growth, rejoining the EU customs union and single market looks increasingly appealing. There might be a political price to pay for breaking a manifesto commitment. Whether it would be worth it depends on the balance of costs and benefits.<\/p>\n
To judge that, you need to know how big the hit from Brexit was. We\u2019ll never know for certain, because we don\u2019t have a parallel universe in which Brexit didn\u2019t happen. But economists have ways of modelling such questions and the research papers are piling up. They\u2019re not a fun read, and nor is this column, but at least it\u2019s short.<\/p>\n
Forecasts and earlier estimates of the damage have tended to put it at 2 to 4 per cent of GDP. That\u2019s significant rather than huge. But the latest, published last month, says that GDP per head, the best measure of prosperity, is 6 to 8 per cent lower than it would have been had Brexit not happened. That\u2019s around \u00a33,000 for each of us. It\u2019s not surprising that the number is larger than in earlier papers, because if Brexit has put us on a lower growth path, the gap would tend to grow over time.<\/p>\n
This new paper has an excellent pedigree. It\u2019s published by America\u2019s National Bureau of Economic Research (NBER) and was written by economists from Stanford University, the Bank of England, King\u2019s College London, the German central bank and the University of Nottingham. Yet not everybody is impressed.<\/p>\n
\u2022 Leaked files \u2018show US wants to persuade four nations to leave EU\u2019<\/b><\/a><\/p>\n The paper uses two methodologies. The first is top-down, macroeconomic analysis. It looks at the size of the UK economy before 2016 and now, compares that with other countries and calculates where Britain would be if it had taken a different path. It uses the referendum rather than the date we left the EU because firms and people started to change their behaviour once they knew it was going to happen.<\/p>\n The factor that most affects the result of such a calculation is which countries you use as comparators. Other rich countries? The neighbours? This paper takes the \u201cdoppelg\u00e4nger\u201d approach, comparing us with countries whose economies were performing most like ours before the referendum. It produces a slightly odd group: the US, Estonia, Greece, Italy, Ireland, Latvia, Iceland and Hungary. This choice increases the size of the gap between where we are and where we might be.<\/p>\n Julian Jessop, an economist who has worked in government and the City and was head of the Brexit unit at the Institute for Economic Affairs think tank, says the calculation fails the \u201csmell test\u201d. He argues that the right comparators are France and Germany. They are our neighbours, they are large and they have not left the EU. Britain has done marginally worse than France and marginally better than Germany since the referendum, which suggests that Brexit has had little effect. The real outlier, argues Jessop, is not Britain but the US, whose economy has grown stonkingly fast over the past decade. Comparing Britain\u2019s performance with a metric heavily weighted towards America is in his view misleading.<\/p>\n The paper\u2019s defenders (who tend to be Remainers, or perhaps Returners) counter that we should not judge ourselves against high-tax, state-heavy European economies. Britain\u2019s economy is \u2014 or was, before we stopped growing and raised taxes to pay for public services \u2014 more like America\u2019s. Britain used to be on a similar growth path to America\u2019s, and might have stayed on it had we not damaged our prospects by leaving the EU. To which its Brexity critics say that we couldn\u2019t have kept up that growth rate, because it was based on an over-inflated financial sector, which was blown up not by Brexit but by the financial crisis. The argument could go on.<\/p>\n But the macro picture is not the only one the NBER paper relies on. It also employs bottom-up microeconomic analysis, looking at the impact of Brexit on companies. It uses the Decision Maker Panel, which surveys the bosses of about 7,000 companies, accounting for nearly a tenth of the UK workforce. The paper compares the performance of companies that were more exposed to the EU<\/a> with those that were less exposed, and from that derives an estimate of the impact on the whole economy.<\/p>\n The second set of results is lower than the first, but still high. On GDP per head, macro analysis suggests an 8 per cent gap and micro 6 per cent. On business investment, macro suggests an 18 per cent reduction, micro 12 per cent. On productivity and employment, they\u2019re similar, at 3 to 4 per cent. Jessop says he finds the idea that employment would be 4 per cent higher had we not left implausible when unemployment is a mere 5 per cent. I don\u2019t, because economic inactivity (people not working but not registered as unemployed) is 21 per cent.<\/p>\n You can still find economists who defend Brexit but they do so in much the same way as the hard left used to defend communism. It\u2019s a great idea, which would work in practice if only it were properly implemented. What you won\u2019t find is a single serious economic paper arguing that Britain has benefited from Brexit.<\/p>\n