Brexit ... if you think the worst is over, think again
ECONOMIES constantly evolve as new technologies, innovation or changes in consumer tastes drive new trends and lead to new sectors and industries. The pace of change often reflects external factors and changes in the global economy.
However, we know that institutions also matter crucially in determining the path of the economy. Government decisions can also lead to significant changes over time. For instance, the UK economy went through a significant period of restructuring during the 1980s which was linked to choices about industrial strategy and the macroeconomic policy mix. The UK’s entry to the European Economic Community boosted UK trade and arguably allowed our productivity growth to match that of our European neighbours post-1973.
The outcome of the EU referendum has the potential to be a significant shock to the economy but also a transformational change in how we operate across a range of sectors.
Two months after the vote, I find it curious that some pro-Brexit commentators think the economy has dealt well with the economic fallout of the referendum. It’s worth reminding ourselves that Brexit has not happened yet. In the short run the main impact from the Leave vote is that the uncertainty it has generated could depress consumer and business confidence. Once this macroeconomic shock has been absorbed (and it may, in part, be alleviated by the depreciation of sterling), the real risks lie ahead.
Arguably the long-term implications for Scotland’s economy of the UK adopting an alternative relationship with the EU represents one of the most important questions facing us. Our membership of the EU has been an important driver of growth. As a rule, the smaller your economy, the more important your trade access.
The EU not only provides Scottish companies with unfettered access to EU markets and enables our citizens and those of all other EU countries to live, study and work wherever in the EU they choose. It is also an important factor for foreign companies considering where to invest and grow their businesses. This point is particularly important for inward investment to Scotland as EU access allows them to service this market from Scotland.
Through these channels, EU membership provides Scottish companies with opportunity to expand operations, move into new markets and create jobs. It provides access to the workers companies need to grow. The latter has also been important in arresting the demographic challenge facing Scotland with the influx of migrants reversing projected declines in the Scottish population.
More generally, being an open trading economy linked into other markets facilitates the adoption of new technologies, management practices and innovation which will underpin future productivity growth.
An example from my own sector illustrates these positive effects. Scotland is highly successful at attracting EU-wide university research. Scotland’s universities receive £88.8 million of research funding a year from EU sources, 13 per cent of our total income. This not only leads to the exchange of scientific research which allows us to be global leaders, but also supports jobs and drives ideas and innovation. This type of finance for long-term investment is a key benefit of the EU, and is the bedrock on which future Scottish growth can be built.
Of course, EU membership is not the only factor which will influence Scotland’s long-run economic performance. However, most economists agree a looser relationship with the EU – such as membership of the European Economic Area or a bilateral free trade agreement – is likely to reduce future economic performance compared to full EU membership. The scale of this risk is uncertain given the number of factors at play. Nevertheless, most research suggests the effect could be material. This growth has also been important to Scottish and UK public finances. This is one of the reasons why the UK Government is rethinking fiscal targets and economic strategy.
The impact on Scotland will depend on factors including differences in the structures of the Scottish and UK economies. However, illustrative analysis by the Scottish Government suggests that by 2030, Scottish GDP could be between £1.7 billion and £11.2bn lower.
In the long-run, winners and losers in the world economy are determined in part by good supply-side policies which encourage innovation, investment and productivity. But that alone is not enough. Getting trade arrangements right is crucial. If Brexit means erecting barriers to trade and if it hampers Scotland’s ability to attract skills, investment and talent then it will seriously constrain our longterm economic prospects.
Two months after the vote, I find it curious that some pro-Brexit commentators think the economy has dealt well with the economic fallout of the referendum