Why Brexit if it ain’t broke, SA may ask

IT IS not often there is as much consensus among economists as there is on Brexit, the prospect of Britain leaving the European Union (EU). But voters don’t necessarily make the economically rational decisions economists expect they should. Polls continue to show that about as many Britons would vote to leave as to remain, even after at least four weighty pieces of economic analysis concluded that British households would be worse off outside the EU than inside it.

The latest study, launched at the London School of Economics (LSE) last week, comes from the Organisation for Economic Co-operation and Development (OECD), which argues that a UK exit would be major negative shock, akin to a tax that would impose a consistent and rising cost on the economy. Worse, OECD president Angel Gurria argued at the LSE last week that the Brexit tax would be “pure deadweight loss” — a cost incurred with no benefit in terms of service delivery or the fiscal deficit, and Britons would be paying it for many years.

The OECD study estimates that exiting the EU would cut the UK’s gross domestic product (GDP) 3.3%, equivalent to £2,200 per household, by 2020, and 5%-8% by 2030.

In the shorter term, the uncertainty would hit investment and growth, as would the impact on financial markets, while in the longer term, lower exports, foreign direct investment and productivity would weigh on growth. Real exports could drop by as much as 8% if the UK were to lose its direct access to the EU market and the free trade agreements the EU has with many other countries. The UK’s financial sector would be hard-hit. And the cost of borrowing is expected to rise in the short term, with financial market shocks as bad as during the 2011-12 euro crisis, although smaller than the global financial crisis.

The growth, trade and financial market shocks would spill over to other European countries, the OECD warns. It plans to look also at the possible effects on the global economy and financial markets when it publishes its economic update on June 1.

Economists are already watching Brexit as one possible risk to global growth, and the possible spillover effects for emerging markets, SA included, are clearly of interest to us, given that the EU is SA’s largest trading partner and a major source of foreign investment.

British voters can’t necessarily be expected to make their decisions based on global economic factors, but it is striking how little they seem to be swayed by the compelling evidence on how badly Brexit will affect the UK economy, short and longer term.

Perhaps, as one questioner at the LSE suggested, the “remain” campaign had not done enough to punt the positives for Britons of staying in the EU, as opposed to the negatives of getting out. Perhaps, it is because the arguments for staying in are often technical ones, whereas those for Brexit are more emotional ones about the UK’s sovereignty and democracy — and migrants.

The Brexit campaign has drawn attention to the limits on its power the UK has long had to endure as part of the EU. “Sixty percent of our laws now come from Brussels, with the EU in control of our trade, our borders and our democracy,” said a campaign trail list of pro-Brexit arguments.

The migrant issue is a big one in a country that has been absorbing on average 500,000 immigrants a year since 2006.

But those are issues the UK will have to deal with whichever way the Brexit vote goes. The clear evidence is that immigration has been a significant net positive for the economy.

The OECD study finds that immigrants, particularly those from EU countries, have boosted growth significantly in the UK, contributing 0.7 of a percentage point to GDP a year since 2006 and supplying 2.2-million of the 2.5-million jobs that were created in the UK in the past decade.

That migration narrative is an interesting one for SA, and the Brexit debate and OECD report raise others that resonate domestically: how much damage uncertainty can do to investment, for instance, particularly foreign investment.

Since it became a member of the EU in 1973, the UK has doubled its per capita GDP. SA can only envy that record, at the same time as it watches anxiously from afar which way UK voters will go.