There will be no post-Brexit dividend

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.

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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.

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39 Responses to There will be no post-Brexit dividend

  1. Dipper says:

    Yes Rick. We get your point.

    But its not enough to say this option is worse than our current position. The EU estimates that 16M people will come here between 2013 and 2050. (its here, http://ec.europa.eu/economy_finance/structural_reforms/ageing/demography/index_en.htm,). Remain failed to say how they would accommodate all these folks, or which skill gap it is we have that requires an additional 16M to fill. Its not enough just to say the outlook isn’t good, you need to demonstrate that the problems you have described above are worse than the problems we would encounter trying to accommodate the population the size of the Netherlands.

    • Metatone says:

      Nothing in the link says where the population growth comes from? Seems odd to attribute it to all immigration.

      • Dipper says:

        Correct. I assume its a mixture of immigration and increased birth rate. Overall the countries getting an increase are Sweden, Belgium, France, Ireland. the countries getting a reduction are Germany and basically most of eastern and southern Europe. so there’s a massive tilt towards the north-west.

        Nevertheless the point remains. An increase of 16M, equivalent to 2 Londons. The onus is on Remainers to address this, not to find a way of avoiding discussing it.

        • Metatone says:

          Given the timescale, it’s not really any different to the population growth the country has managed in the past?

          • Dipper says:

            its 450K a year which is above current levels which many regard as too high.

            This is why so many voted to Leave. A requirement to house twice the population of London in the next 35 years. Just think of the roads and railways that need to be built, the schools, the hospitals, the offices, the reservoirs, the sewage systems, the additional power generation. Its absolutely massive and Remainers just refuse to acknowledge this is even an issue.

            This is not a Europe wide problem. If you add up the overall figures, the rest of Europe has a flat population over this timescale, so all that is being done is putting all the increase in population in one country.

          • AF says:

            @Dipper building the infrastructure would have likely costed less than Brexit.

        • Al Baker says:

          The main cause of the population increase, unsurprising in a report about demographics and aging, is people are living longer.

          Reducing immigration would worsen the ratio of working-age households to unproductive (and costly) retirees. So the question for Leavers would be how do you intend to pay for their pensions, care and medical costs without them?

          • Dipper says:

            so why are they not living longer in the rest of Europe?

          • Dipper says:

            ok Al Baker I’ve found some stats and done some calculations. I’ve used the CIA fact book, taken the birth rate/1000/year and death rate, calculated for 35 years forward without any projected change, and then taken the difference to the EU projections.

            UK: + 6.3M from domestic births/deaths, +9.7 from migration
            France: + 7.4M domestic, + 2.6 immigration
            Sweden: +0.9 domestic, +2.6 migration
            Belgium: +0.1 domestic, +4.1 migration
            Germany: -8.4 domestic, -2.1 migration
            Spain: +1.0 domestic, -1.5 migration
            Poland: -0.6 domestic, -4.7 migration

            so 60% of the population increase for the UK is net migration.

          • Al Baker says:

            “calculated for 35 years forward without any projected change”

            I don’t think you can apply that to a projection that includes assumptions on increases in mortality.

            The ONS, which gives similar figures, attributes 51% to net migration.

            http://www.bbc.co.uk/news/uk-34666382

            So, if we had zero net migration, we could avoid building one London. Now, can you answer how we pay for our pensioners?

          • Dipper says:

            of all the countries in the EU with a pensions problem I would have thought Germany is the one to worry. Low birth rate, people leaving … and they are looking to increase the retirement age.

            https://www.ft.com/content/1d34b1d6-62ea-11e6-a08a-c7ac04ef00aa

            I would continue to push the age of retirement up and get rid of the pensions triple lock.

            We will probably have to do more. Tax breaks for people living with old parents in their house ( I believe Singapore do this). Rethink provision of medical car to avoid bed-blocking. But every immigrant we take to pay for our pensions or look after our pensioners is someone who isn’t paying for their country of origin’s pensions; it simply pushes the problem somewhere else.

            And have a good look at tax payments going overseas instead of into the UK treasury.

          • Dipper says:

            and just to labour the point, the EU don’t insist on The Free Movement of People so we can solve our problems – we are perfectly capable of allowing immigration of necessary people without instruction from the EU – they insist on it so we can solve theirs.

        • Ian Glenister says:

          …as the Leavers never talk about how we pay the pensions of the ageing baby-boomers without in-migration of working age people. Its our demographics/economic system thats bust, not Europe per se.

          I guess these numbers are based on projections of existing trends?

          • Dipper says:

            as commented above, the projected numbers are higher than recent immigration.

            see below for a longer answer.

    • Dima says:

      The report you cite gives 16M increase in *2060*, not 2050. And about 70% of these extra 16M will be pensioners (and of these half will be 80+ years old). 80+ old people do not need much general infrastructure, and it probably won’t change much in the coming 40-45 years either. Most interesting part of the figure is the percentage of people under the retirement age, and it looks really great compared to most of the rest of the EU.
      (Surprisingly, France looks almost on par with UK in this respect – also with a projected population increase, of some 10M, but other big countries like Germany, Italy, Spain really look screwed in this respect).
      As to what skill gap will be there – it is trivial: caring for the elderly, medical and health-related professions…

      In a comment below you write, that you assume that the population growth is “a mixture of immigration and increased birth rate”. This is not correct, as you could see if you read the source you cite. Birth rates are not increasing, it’s rather the fact that people live longer.
      There could well be medical breakthroughs coming that would result in dramatic life expectancy growth, dwarfing that 16M increase.

      In yet another comment you write: ” the rest of Europe has a flat population over this timescale”. This is also not correct; e.g. France is projected to grow by 10M.

      In all of your comments you also talk about 35 years, not 45 years. Perhaps you ought to fix your numbers…

      Having said this, I am sure the calculations you cite are based on a very simple linear regression model, just taking the numbers from the last N years and extrapolating them linearly. So they have to be taken with a very large grain of salt. (E.g. think of a possibility that retiring abroad would get more attractive and affordable, and then 30% of these projected 16M increase ends up in Spain or Croatia…).
      Needless to say, your own computations in a comment below don’t look any more convincing either.

  2. Chris says:

    Is there any group one can join to support the UK staying in the EU?

  3. Old Red Dog says:

    “This is why so many voted to Leave. A requirement to house twice the population of London in the next 35 years. Just think of the roads and railways that need to be built, the schools, the hospitals, the offices, the reservoirs, the sewage systems, the additional power generation. Its absolutely massive and Remainers just refuse to acknowledge this is even an issue.”

    And yet, Dipper, I would counter by saying that “the roads and railways that need to be built, the schools, the hospitals, the offices, the reservoirs, the sewage systems, the additional power generation” are all issues that need to be addressed irrespective of whether we are in the EU or not. Serious under-funding by government in our country is “absolutely massive” AND caused by those who would have the most to benefit from Brexit by bringing about an American-style free market economy, and yet “Leavers just refuse to acknowledge this is even an issue.” Indeed, it is somewhat myopic and dangerous to think that the Brexit vote has “solved” any issues relating to the social fabric of this country, of which inward migration is only one of a whole host that need addressing…

  4. “This is why so many voted to Leave. A requirement to house twice the population of London in the next 35 years. Just think of the roads and railways that need to be built, the schools, the hospitals, the offices, the reservoirs, the sewage systems, the additional power generation. Its absolutely massive and Remainers just refuse to acknowledge this is even an issue.”

    And yet, Dipper, I would counter by saying that “the roads and railways that need to be built, the schools, the hospitals, the offices, the reservoirs, the sewage systems, the additional power generation” are all issues that need to be addressed irrespective of whether we are in the EU or not. Serious under-funding by government in our country is “absolutely massive” AND caused by those who would have the most to benefit from Brexit by bringing about an American-style free market economy, and yet “Leavers just refuse to acknowledge this is even an issue.” Indeed, it is somewhat myopic and dangerous to think that the Brexit vote has “solved” any issues relating to the social fabric of this country, of which inward migration is only one of a whole host that need addressing…

    • Dipper says:

      This is fair enough Red Dog (and Ian Glenister above), but it you want to fix these things then the first thing you need to do is put a control on migration. Otherwise any steps you take to solve the issues immediately get swamped by excess demand hitting your system.

      The EU as constructed encourages every nation to take advantage of every other nations expenditure, so produces a race to the bottom. For instance, why spend money training your young people in important skills when you can let other countries pay for it and then poach their people to fill a “skills gap”?

      I would contend that Teresa May’s speech in Downing Street addressed these issues head on. Of course, that was the easy bit, effective policies are the hard part, so we will see.

      • bmarcj says:

        On the contrary; I don’t know how we solve any of those issues without significant immigration to help.

        • Dipper says:

          if you control your borders then you can choose to allow immigration for supply, but with completely open borders you can’t stop immigration of demand. 16M people is quite a skills gap.

          • Ian Glenister says:

            50% of year’s net immigration was non-EU, i.e. numbers we had full control over and yet chose not to. If we had curtailed non-EU migration wouldn’t we have got immigration down to around 30% of that projected in your EU Commission figures (if I’ve read them correctly)? Incidentally those figures look very strange for the UK. I’d like to see the the detail behind how are they calculated. In a free movement situation those numbers would only be so high if Britain’s economy is booming way beyond that of the rest of the EU until 2060. The assumptions seem to be pure conjecture and probably vastly wrong!

      • Does the concept of free movement not state that it isn’t unqualified or unrestricted movement?

        For those extra heads to migrate here they would need to have a job or a good chance of getting one, be studying or be self sufficient (and obviously be otherwise suitable for admission).

        In that respect the immigration controls for the UK at least appear to already be in place. Better policing of the rules would help – but if there’s no jobs/opportunity here why would the migrants come? If there are jobs – chances are we’ll need them.

        • Dipper says:

          “For those extra heads to migrate here they would need to have a job or a good chance of getting one” – I believe the Tories discussed deliberately making the economy worse in order to cut immigration …

          I think the definition of Free Movement is sufficiently flexible for a compromise to emerge and for all sides to declare victory.

  5. Dipper says:

    The podcast is payment of cash. Much as I’d like to hear you …

  6. Ben says:

    Dipper makes a good point about one of the (many) reasons why a rising population generates economic growth and wealth. More people begets more construction, services, retail etc

    “This is why so many voted to Leave. A requirement to house twice the population of London in the next 35 years. Just think of the roads and railways that need to be built, the schools, the hospitals, the offices, the reservoirs, the sewage systems, the additional power generation. Its absolutely massive and Remainers just refuse to acknowledge this is even an issue.”

  7. P Hearn says:

    The one thing I find fascinating with Remainers is that they continue to bang on about the economics of Brexit as if that’s the point.

    As a Leaver, I believe there is at least as good a future outside the EU as inside, though I would fully concede that there will be an adjustment period which could be painful, depending how vindictive the EU wants to be. I don’t think I’m a typical Leaver though – my motivations come despite being one who has won big out of the current system in economic terms, and therefore I ‘should’ have voted for the status quo since my life would have been immeasurably easier, at least in the short term.

    In my opinion Remain lost the argument because they just went on (and on, and on) about the economy, wheeling on more grey suits from the establishment to make ever more dire predictions which eventually turned people off. Like the worst type of presenter subjecting his audience to Death-by-Powerpoint, they hadn’t realised the audience had long since tuned them out.

    I recall a chap being interviewed in the street before the referendum, and the radio interviewer’s questions about wage rates, jobs and the like were met with “look mate, I’m a single, middle-aged man with a dog. What do I care about the ******* economy?”

    For once, it’s NOT been about the economy, stupid. If you’re 60 or 70 years old, worrying about the economic forecasts of the IFS or some other worthy think-tank for 2050 isn’t high on your worry list. Neither is who will pay the pensions of the current 40-somethings. You hate the fact that the country you knew is changing so fast, shows no sign of stopping, and worst of all, nobody ever asked you about it. I know lots of these people. Some are even my parents.

    If you’ve been left behind economically, perhaps as an indigenous white, working-class, unskilled male, you hardly want to defend the current system that you feel has dumped on you from a great height by shipping in an unlimited supply of cheap labour to ‘take your job’. If someone gives you a free swing at the EU, you’re going to take it with every bit of energy, hate and frustration you can muster.

    On such alliances of economic optimists, the old and the disenfranchised are such huge decisions made.

    It’s too late now, but what a shame that Remainers never climbed down from their metropolitan ivory towers to find out a little about what’s left so much of Britain so disaffected with life. Then again, had they done that 20 years ago, they wouldn’t have been in this situation in the first place.

    • Hidden user says:

      Perhaps the referendum was a stupid idea and we should have just ignored the hateful aged Mr Angrys who wanted to screw everything up for the next generation based on their diet of Daily Express retarded nonsense

    • Dipper says:

      yes. A clear lesson here for England the next time Scotland has a referendum I think. Be clear about the benefits. Listen carefully and answer questions honestly. Don’t talk down to voters. Remember its Scotland’s choice to make not England’s to insist upon.

    • So far, so blah blah blah P Hearn – all of what you say is true (including your critique of the woeful Remain campaign), but continues to miss the fact that in taking “a free swing at the EU”, the people responsible for “the current system that you feel has dumped on you from a great height” (and this is a wider dumping on than simply immigration) are still in charge, and indeed have been strengthened in their position by a Leave vote…

    • Person_XYZ says:

      “look mate, I’m a single, middle-aged man with a dog. What do I care about the ******* economy?”

      And his dog turned to look at him and said, “Because the ******* economy is what gives you employment and money so you can buy me Pedigree Chum, you thick wanker.”

    • gunnerbear says:

      Well said….and still the Remainiacs call us Leavers, rascist, stupid and the like…..well f**k the Remainacs…we Leavers won…we’re leaving….if the Remainac’s don’t like it tough….we weren’t asked about mass uncontrolled immigration when the scum in the Labour Party opened the gates of the UK to bring in the ‘right voters’ and the s**t in the Conservative Party kept the doors open to please their mates in business who love cheap labour…..

  8. AF says:

    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. [….] 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.

    Even without rebate 24-39 >> 16. Just saying.

  9. Mike Ellwood says:

    I agree there will be no post-Brexit bonus, and as another commenter has said, there would be a period of (probably difficult) adjustment, but with the right policies in place, there need not be a slump either.

    A government that was open to the ideas of MMT – i.e. don’t be afraid of deficits and use them productively (using taxation to damp down inflation) could and should easily compensate for (e.g. research) funding we might have got from the EU. Plus I have never quite understood the logic or justice of one member state expecting handouts from other member states. And while we aren’t as successful as Germany, we are by no means the poorest member.

    No of course, I don’t expect this government (or a Blairite Labour government) to be open to MMT, but they won’t last forever. Even now, May’s honeymoon period is over, and she is looking less and less unassailable. (And despite his denials, I’m sure Cameron’s resignation is a snub). Hopefully, the Tories will implode, and a Corbyn-led government will come in, perhaps aided by a few Greens and left-wing LibDems (if there are any). …I can dream.🙂

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