Measuring The Permanent Costs of Brexit

Abstract

We analyse the costs of Brexit. The results show that by 2030 a hard Brexit would reduce cumulative GDP growth by 18 percentage points compared to a situation where the UK continued its EU membership. The economic damage in our FTA and soft Brexit scenarios is less severe than in our hard Brexit scenario, although it will still cost the UK economy roughly 12.5 percentage points and 10 percentage points of cumulative GDP growth by 2030, respectively. We find much larger negative effects than most existing studies that use macroeconometric modelling to assess the effects of Brexit. This is due to two reasons. First, we use an improved tariff version of the macroeconometric model NiGEM, which enables us better to assess the negative impact of cost-push inflation resulting from imposed trade barriers. Second, we estimate a new productivity model for the UK, which allows us to gauge adequately the negative UK-specific effects on productivity caused by Brexit.