Counting the Cost of Brexit

At the time of writing, just as the UK Supreme Court unanimously ruled that Prime Minister Johnson’s prorogation of parliament was unlawful, the range of potential Brexit outcomes remains shockingly wide. More than three years have passed since the UK people voted narrowly to exit the European Union, yet it is still possible that there will be a no-deal Brexit at Halloween, that there will be no Brexit at all, or that sooner or later they will leave with a deal.

Yogi Berra is known not only for his baseball exploits for the New York Yankees around the middle of the 20th century, but also for his way with words. He famously asserted that “it’s tough to make predictions, especially about the future.” At the best of times, economists often convey a false sense of certainty about their own forecasts. What economists do is make certain assumptions, such as how they expect a “shock” will impact on variables like trade, investment and consumer behavior. At times like these, facing an unprecedented event such as Brexit, even making accurate short-term forecasts becomes next to impossible.

What we can say with a degree of certainty is that Brexit – if and when it comes – will hurt the Irish economy. There will be less growth, jobs, tax revenues than would be the case if the UK were to remain in the EU. Because we are relatively smaller and more trade-dependent, Ireland is likely to suffer even more than the UK. Within the UK, however, Northern Ireland is likely to be hit worst of all, and could take a bigger hit even than the more prosperous Republic.

Any outcome that sees the UK leave the customs union, whether immediately (in the case of no-deal) or after a transition period (as would have been the case with Theresa May’s thrice-rejected deal) will have the greatest geographic impact around the border and the greatest economic impact on the agri-food sector, which stands to face high WTO tariffs (averaging more than 35% for dairy products, for example) on exports to what is still its single most important market. Some sectors will become financially unviable overnight. These will need government support to transition to the new normal.

In fact, uncertainties around Brexit have already led to lower investment and growth in the UK and a fall in the value of sterling. This has already had a knock-on effect on Ireland, with less UK-based tourists, less exports to the UK, and therefore less growth and jobs in some sectors than would have been the case had there been no referendum in 2016. First, this is the tip of the iceberg, since Brexit hasn’t happened yet. Second, driven forward by a dynamic multinational sector, an up-tick in construction activity and continued post-crisis recovery, the economy has been growing so strongly that the Brexit impact thus far has been hardly felt. Irish mushroom farmers were among the early victims, and shopping in Newry is resurgent. But overall, the economy has surged ahead.

A Halloween no-deal Brexit is the worst-case scenario, and one that has become increasingly likely over the course of 2019. Far from a forgone conclusion, I would put the probability not far from 50/50. Although preparations for no-deal are more advanced in both jurisdictions than they were in March, there is still likely to be chaos in early November. Whether at or away from the border, checks on goods will become inevitable, even if temporary forbearance is forthcoming from the EU and WTO. Such checks would be inevitable even were Northern Ireland to remain in the customs union, but were to exit and pursue regulatory differentiation to the Single Market. For what it’s worth, the Central Bank has guesstimated that a no-deal Brexit would knock nearly 4% off GDP growth, nearly 2% off job growth, nearly 1% (off GDP) off the exchequer balance next year. But, GDP and job growth would still remain in positive territory and the budget balance only modestly negative: a big deal, but not the end of the world.

Whether during October, or later, it is still quite possible that the UK leaves with a deal. This is likely to be a tweaked version of May’s deal, with a backstop in all but name, and possibly with more Northern Ireland specific arrangements now that the DUP’s parliamentary support is no longer pivotal. Even then, however, it would not be impossible, for example, that a newly elected Labour government under Jeremy Corbyn would seek to amend the political declaration and pursue a closer post-Brexit relationship with the EU. If Johnson wins an overall majority, however, one can expect a much more distant arrangement. Even if a Johnson-delivered deal were to minimize the visibility, intrusiveness and political cost of any checks on goods in Ireland, the reality is the economic cost would be delayed, but essentially unchanged compared to a no-deal scenario.

In the relatively unlikely event that Brexit is permanently cancelled, of course, one would expect a modest improvement in Irish economic prospects, since the baseline of most forecasters is still that the UK leaves with a deal this year. However, damage to the British constitutional framework and to diplomatic relations between Ireland and the UK may prove more challenging to undo.

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