A “hard Brexit” could cost Scotland up to 80,000 jobs, reduce GDP by £8 billion, and cut average pay by £2,000 ($2,542) a year, according to a new study by a Scottish think tank.
But despite the gloomy outlook, the think tank is predicting a wave of migration into Scotland post-Brexit because the impact will be even worse in the UK.
The Fraser of Allander Institute at the University of Strathclyde, Glasgow, modelled the likely impacts of various Brexit scenarios over a 10-year horizon, looking at the Norway model, the Swiss model, and the World Trade Organisation (WTO) model, better known as a “hard Brexit.”
A “hard Brexit” is looking increasingly likely, with leading Conservative politicians and the Prime Minister all hardening their rhetoric over recent weeks. The government has been signalling that control over immigration is its top priority in the wake of the June 23 referendum, even if that creates pain for the economy.
The most severe scenario is the WTO model, where Britain cuts off all ties from the European Union and simply trades internationally through WTO rule. The Fraser of Allander Institute found that under this model Scottish GDP is expected to be 5% lower, real wages 7% lower, and employment down by 3%.
But all three of the models result in net loss to GDP, wages, and employment. Member of Scottish Parliament Joan McAlpine writes in the paper’s introduction: “Whatever the model that the UK Government settles on, this report paints a grim picture of Scotland’s economy ten years after Brexit.”
Despite the seeming doom and gloom for Scotland, the think tank found that the expected impact on GDP for the UK is actually likely to be worse than in Scotland if Britain plumps for a “hard Brexit.”
The above chart shows that in whatever “hard Brexit” scenario is considered — simple trade under WTO rules, WTO-trade plus reinvestment of EU savings into the economy, and the WTO-trade and reinvestment plus trading tariffs from other nations — GDP suffers in both Scotland and the UK 10 years out. And in each case, in impact is worse on the rest of the UK than it is in Scotland.
The report goes so far as to say: “To a degree, this acts to cushion the impacts on the Scottish economy as the shock induces net migration into Scotland from rUK (the rest of the UK).”
Perhaps the biggest blow to the UK economy could come from the likely loss of passporting rights if Britain plumps for a “hard Brexit.” Passporting rights allow finance firms to operate across Europe from offices in the UK. 5,500 UK companies rely on the rights, with a combined turnover of £9 billion. Collectively, financial services contributes £65 billion to the UK economy.
Here is a summary of the key impacts from each model the Fraser of Allander Institute looked at. First, the Norway model, where Britain retains membership of the European Economic Area (EEA), keeps access of the European single market, is outside of EU trade deals with the rest of the world, has to contribute to the EU and keeps freedom of movement:
- Scottish GDP expected to be 2-3% lower than would otherwise be the case — equivalent to GDP being £3-5 billion lower in 2015-16 terms;
- Real wages expected to be 3-4% lower than would otherwise be the case; for someone on average full-time earnings in Scotland, this would be equivalent to a reduction of £800-£1,200 per year.
- A 1-2% reduction in employment level, equivalent to the loss of around 30,000 jobs in the optimistic scenario.
Next up is the Swiss model, where Britain is a member of the European Free Trade Association but not the EEA, has some access to the single market through bilateral agreements, keeps paying into the EU, and keeps freedom of movement:
- GDP expected to be 3-4% lower than would otherwise be the case in the long term (equivalent to £4-6 billion in 2015-16 terms.)
- Real wages expected to be around 5-6% (£1,200-£1,600 per year) lower than would otherwise be the case and exports 6-8% lower;
- Employment projected to fall by 1-2%.
Finally, the WTO or “hard Brexit” model, where Britain cuts off all ties to the EU and simply trades with member states through WTO rules:
- GDP is expected to be over 5% (£8bn in 2015-16 terms) lower than would otherwise be the case and exports over 11% lower;
- Real wages are expected to be 7% lower, equivalent to a reduction of around £2,000 per year;
- The number of people employed is 3% lower (around 80,000 jobs.)
The Fraser of Allander Institute used a “Computable General Equilibrium (CGE) framework” to come up with these estimates — a technical economic modelling approach widely used by governments and organisations around the world including the Scottish Government, The UK Treasury, and the World Trade Organisation.