I was invited onto Tom Swarbrick’s show on Saturday to comment on Brexit and, particularly, the chancellor’s pledge to maintain the EU spending on agriculture and some scientific projects. As I said on the programme, and as several other people have pointed out, this isn’t really a big deal. The funding is only guaranteed until 2020 and as it is unlikely that the UK will be out of the EU until 2019, this only amounts to one year’s funding.
There is a wider issue here though. As one commenter later in the programme put it, leaving the EU is like trying to take the stripes out of toothpaste. The EU economy is integrated and rests on a set of assumptions built up over 23 years of the single market. Supply chains stretch across Europe. Businesses have been built on the basis that goods, services and workers can move freely.
Last week, the Institute for Fiscal Studies published a report on the likely impact of the various Brexit scenarios on UK trade. It focused on the important distinction between membership of and access to the single market, making the point that once the UK leaves the single market, trade becomes a lot more expensive and bureaucratic, mainly due to non-tariff barriers. (For more on this see Ben Kelly’s piece.) The impact on trade will, says the IFS, have a knock on effect on the public finances through reduced tax revenues and increased welfare payments “as higher-than-expected unemployment – and prevalence of low incomes – pushes up spending on working- age benefits and tax credits.”
This will blow a huge hole in the budget. The IFS estimates that the public finances will be between £24 billion and £39 billion a year worse off by 2020. It was already going to be extremely difficult for the government to eliminate the public deficit by the end of the decade. Brexit will make it impossible, which is why Theresa May has abandoned the idea.
Set against this, the amount the UK will save by not contributing to the EU is puny. An IFS report in May calculated the likely net contribution over the next few years at around £8 billion a year. Once you allow for the rebate and EU spending on the UK, the much-trumpeted £350 million a week is reduced by more than half.
This will be completely obliterated by the hit to the public finances, which will dwarf it by three to four times. On top of that, there will be extra pressure on the public purse, not least from the increase in the size of the civil service that will be necessary just to deal with what the Economist called “bureaucratic marathon” of Brexit.
The upshot of this is that there will be no extra money from leaving the EU. It will be eaten up by the cost of Brexit. The cost of guaranteeing funds for farmers and research projects will therefore either have to be met by taking funds from somewhere else or by increased taxation and borrowing.
The chancellor’s pledge to maintain funding would need to be renewed after 2020 and could therefore become an issue at the next election. Do you want to maintain the support for farmers and for other former EU funding recipients like Wales and Cornwall? If so, should we take that money from the NHS or schools or defence? Or would you rather pay extra tax or have the government borrow more? Those are the options. There is no Brexit dividend. Our EU refund has disappeared into the vortex of the post-Brexit slump.
It will be interesting to see what the voters decide.