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‘The Brexit Settlement and UK Taxes’

A £40bn Boost for the UK Economy?
The economics of a ‘no deal’ Brexit.

Publication: Immediate
Link to PDF: The Brexit Settlement and UK Taxes

Politeia’s Director, Sheila Lawlor, discusses the UK options and the economic case modelled in The Brexit Settlement and UK Taxes, by David B. Smith.

For many people the focus for Brexit remains firmly on the March exit date. They want the government to get on with it and to do so boldly. Ministers must be resolute, not constantly swayed by the doubts thrown up at every instance – by unelected peers, ‘remain’ MPs or their own silken tongued Sir Humphreys negotiating God-knows-what in the corridors of Brussels power.

The UK is no humble supplicant, but the world’s 5th largest economy. Its future can be organised without cow-towing to the EU any further. Certainly there is no reason for the UK offer – to pay c. £40bn to the EU for a Brexit Free Trade Deal. No such payment is obliged in law, and if the UK were to walk away, UK-trade with the bloc would continue, painlessly and with profit to both sides under WTO rules and international trade law. This is how most of the world’s trade happens. In fact 96 per cent, with rules that require trade partners to offer most favoured nation (MFN) terms, facilitate customs arrangements and simplify those for land borders.

Although politically it might be claimed that the £40bn might help oil future relations with the bloc with Britain seen as a ‘good neighbour’, economically the case not to pay the EU £40bn but to keep the money in the UK economy after Brexit is compelling.

The economics are explained by the economist David B Smith in a new analysis published today by Politeia, The Brexit Settlement and UK Taxes. Smith’s economic modelling reveals that were the UK to keep the £40bn in the UK’s economy in the years after 2019, there would be a significant Brexit boost, irrespective of whether the Chancellor decided to save the money or use it for tax cuts. Though the academically inclined, former city economist who later taught in the University of Derby, refuses to stray into the political debate, these conclusions have a clear message for ministers.

Those preparing for the post-Brexit economy should be wary of throwing the money at Brussels. Instead it could be used to promote the wealth-creating sector, especially in parts of the country which rely on high levels of government spending.

Many such areas had high ‘leave’ votes and the prime minister pledged to make the economy of the future work for them too. £40 billion could do a great deal of good for the whole economy, but it would be especially useful to promote the free, private wealth-creating sector in such areas and enhance their ability to react to the changing conditions after Brexit.

Smith’s model explains what would happen in three likely £40bn scenarios, where the UK Chancellor:

· Keeps the money in savings
· Uses it for income tax cuts
· Uses it for VAT cuts

He shows that for each of these there would be good results for the UK on a number of counts. £40bn kept here and not paid to the EU would bring a real terms boost to UK GDP (by up to 1.4 per cent), its household consumption (by up to 3.5 per cent), its private investment (by up to 3.6 percent). Meanwhile the unemployment rate would fall (by up to 0.8 per cent), and public sector borrowing (by 1 per cent). Given that enhanced micro-economic flexibility after Brexit is urgent, the first step could be to increase the free, private wealth-creating sector, particularly in those regions where government expenditure accounts for one half to three quarters of regional GDP.

Although the author avoids taking sides in the political decision of whether the UK should leave the EU without a deal and so keep back the EU £40bn, the economic consequences of doing so are very attractive. One doesn’t need to be a Nobel Prize winner to see that the £40bn cash bonus of a ‘no deal’ Brexit would give the UK economy a significant and quantifiable boost.

Sheila Lawlor,
Director, Politeia.

*The Brexit Settlement and UK Taxes by David B. Smith is published by Politeia (7th June 2018).


David B. Smith

David B. Smith is a City economist who worked as a macroeconomic modeller and economic forecaster, predominantly in banks (including the Bank of England) and security houses (1968-2006). He maintains his own macroeconomic forecasting model at Beacon Economic Forecasting. His Politeia publications include Britain's Taxable Capacity: Has it Reached the Upper Limit? (2020), The Brexit Settlement and UK Taxes (2018) and Banking on Recovery: Towards an accountable, stable financial sector (as co-author, 2016).

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