Brexit likely to hit Leave voting areas hardest

If people voted Leave to stick it to the metropolitan elite they might be disappointed. A piece of research published in Regional Studies journal this month found that London is a lot less dependent on EU trade than most other parts of the UK. Furthermore, the regions that voted strongly for leave tended also to be the same regions whose economies were most dependent on the EU.

The researchers used data from the World Input–Output Database to calculate the share of each NUTS-2 region’s economic activity that is dependent on trade with the rest of the EU. They then mapped this against that region’s Leave vote.

Figure 1. Relationship between the NUTS-2 regional votes for leave and the regional gross domestic product (GDP) share due to consumption and investment demand in the other European Union countries, 2010.

Note: R2 = 0.31.

 

They then did the same with the share of wages.

Figure 2. Relationship between the NUTS-2 regional votes for leave and the regional wage-income share due to consumption and investment demand in the other European Union countries, 2010.

Note: R2 = 0.23.

 

The findings suggest that the economies and wages in the high Leave voting areas are far more likely to be adversely affected by the UK’s exit from the EU. This is counterintuitive, to say the least. The dominant narrative since the referendum has it that London reaped the benefits of EU membership while the rest of the country has seen precious little.

But, as the authors of the paper point out, London is one of the few truly global cities in the world. Because of its international connections it exports goods and services all over the world. Therefore, even though it exports more to the EU than any other region, as a percentage of its total GDP, the value of those exports is much smaller than in other parts of the UK.

While London’s financial services engage with markets all over the world every day, most of the firms in the rest of the UK’s regions tend to engage with European value- chains rather than genuinely global value-chains. The share of UK domestic GDP which is accounted for by EU demand has remained remarkably stable between 1995 and 2011, although its composition has changed due to the UK’s increasingly complex integration processes with EU global value chains.

[A]lmost every part of the UK outside of London has become more, not less, integrated with the EU over recent years, with the major exception being London. On the other hand, London has benefited from inflows of human capital more than any other city in the world and the majority of these human capital injections come from Europe. Yet, these EU-dominated inflows help London compete globally rather than just across Europe. In contrast, the rest of the UK tends to compete on more of a pan-European scale.

In short, London’s economy is globalised while the economies of other regions are Europeanised.

The report’s appendix breaks down the findings by region and sector but I have summarised them and sorted them as a league table here. There are a few surprises near the top but Inner and Outer London are the least EU dependent of the lot. East Yorkshire and North Lincolnshire, one of the areas with the highest Leave voting majority, also has one of the highest dependency on EU trade.

There’s a further twist, though, because the London economy, say the report’s authors, has become detached from that of the rest of the country.

Indeed, the extent to which the London economy is largely disconnected from that of the rest of the UK is observed in the WIOD inter- regional data. Further examination of the detailed interre- gional data8 shows that for all other UK NUTS-2 regions, demand from London only accounts for between 0.7% and 4% of their local GDP.

For all non-London UK regions, the share of their local GDP which is accounted for by the EU demand is greater than the share which is accounted for by demand from London.

It is not surprising that EU markets are more important to UK regions than London markets, given that the EU markets are some 33 times larger than the London markets, and only slightly further away from most of the UK regions than London.

In other words, the economies of many regions are more dependent on trade with the EU than they are on trade with London. Therefore, London’s resilience after Brexit might not help the rest of the country much at all.

We don’t yet know how far Brexit will disrupt trade with the EU. That depends on the terms the government is able to negotiate. Whatever happens, though, there will be more friction in our trade with the EU which will increase costs and reduce the competitiveness of the UK’s exports in the EU. Those regions whose economies are most integrated with the rest of Europe and whose incomes are most dependent on it are likely to suffer disproportionately.

The trouble is, many of these areas are also more dependent on public spending than London. They are therefore likely to lose more from the deterioration in tax revenues and the resulting squeeze on public spending in the wake of Brexit. high Leave voting areas tend to receive a greater proportion of their household income from social benefits. The last thing they need is faltering business revenues.

Brexit is therefore likely to further increase the share of the country’s tax paid by London. Those advocates of devolution who say that they want their region to keep more of its money might want to think about that. Regionalisation might mean London keeping more of its money too and, unless other regions can find new sources of revenue outside the EU, they are likely to find paying for their public services gets even more difficult than it is now.

There will be hard times ahead for many parts of the UK after Brexit. How hard depends on what happens over the next two years. London is likely to fare better than most though. The London elites, by which I mean the real elites with investments and high six figure salaries, not the cycling beardy hipsters, will be just fine. Whatever else people thought they were voting for when they put their crosses in the Leave box, those who wanted to punish rich Londoners will be the first to be disappointed.

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26 Responses to Brexit likely to hit Leave voting areas hardest

  1. metatone says:

    This is the ultimate con Farage played…

  2. Dipper says:

    Think you are looking at this all wrong. Those regions most dependent on the EU like it least. The EU has brought poverty and over-crowding to their regions, whilst the region least linked to the EU has done best.

    • John says:

      Interesting comment – can you expand on how the EU has bought poverty and over-crowding to these regions? Thanks.

      • Mr turner says:

        Did you miss the austerity measures? Short memories typical

      • Dipper says:

        FT showed recently that the UK is the only western country where GDP has gone up and wages have gone down. So many people are worse off.

        Population is increasing markedly with a city the size of Newcastle being added each year. Much of this is immigrants from Eastern or Southern Europe happy to live in multiple-occupancy accommodation.

        So for many people, wages have gone down, and the house prices have moved from what someone on a crap wage could afford to something a buy-to-let investor can get a return on when renting multiple-occupancy.

        All this enabled by Free Movement of People.

        Examples include Grimethorpe as covered by Janice Turner in the Times a few months back, where a large warehouse operation recruits directly from Eastern Europe, and Sports Direct warehouse in Consett which MPs called out as having mainly Eastern European workers.

        • John says:

          Correlation is not causation – real wages have gone down so people are indeed worse off. There is some limited impact of wage depression by migrants at lower wage levels but don’t forget that migrants spend into the economy thereby increasing GDP – in fact, some research has found that recent increases in GDP are due to immigration. Immigrants from the EU pay more in taxes that they receive from the government so are net contributors enabling higher government expenditure/less borrowing.

          Housing is a more general problem and began with the Thatcher sell-off and the failure to re-invest in the housing stock. There are vested interests in maintaining high house prices among Tory voting middle-classes that has a negative effect at the lower end of the market but is now also affecting the sons and daughters of the middle-classes.

          Abuses of the labour market by certain organisations need to be addressed by legislation, inspection, Trades Union but shouldn’t distract from the overall positive impact of immigration.

          • Dipper says:

            John – this is the standard line repeated frequently.

            The data round migration is very sparse as the government does not routinely collect data in a thorough and robust way. The last ONS figures on migration recorded a drop in net migration of 49K but that was within measurement error. If they don’t know within 49,000 how many came in last year then what do they actually know about anything to do with migration?

            The FT data blew a hole in the notions that increases in GDP are a net benefit with the revelation that wages had gone down. We are told this is not caused by Free movement of peopler, and simultaneously trade organisations are saying removing Free Movement of People will cause wages to go up. So there is significant contra-information to your GDP statement,

            Housing is indeed a more general problem, but the European Commission has projected an increase in population for the UK of 16 million between 2016 and 2050/60, so that’s an infrastructure roughly equivalent to the infrastructure of The Netherlands that requires to be built in that time, so housing is indeed a massive problem. And down here in my corner of the south-east, that means concreting over a significant chunk of our green space and even more over-crowding and pressure on education and health.

            And yes on labour market reform. The gig economy means multinational companies can get all the money, register it offshore to avoid paying tax, and leave all the social costs and obligations on the host country. But you have more chance of sorting that out outside the EU than in it, because the EU is a huge beneficiary of migration into the UK and has no interest in stopping it.

          • Dipper says:

            … and on that positive impact of immigration. We are told ad nauseum that we need all these scientists from Europe. Well my son has A* coming out of his ears, is at one of the best Universities not just in this country but in the world, and cannot get a summer internship. A major company that is having a social media campaign about future shortages of scientists wouldn’t even interview him. So excuse me if I don’t see the benefit of all these clever people coming here to the UK, but right now I wish they’d all go home so my son can get a job. And please don’t bother with all that stuff about the jobs going as well, because right now those jobs are now use to me or my son.

            Economists keep popping up to say that there is some special magic that people like me are far too stupid to understand that means all this immigration makes us all better off despite what we see around us. Its all bullshit. George Orwell had it nailed in 1984:

            “The party told you to reject the evidence of your eyes and ears. It was their final, most essential command.”

          • gunnerbear says:

            “Immigrants from the EU pay more in taxes that they receive from the government so are net contributors enabling higher government expenditure/less borrowing.”

            Really….so an EU worker on NMW using the NHS and getting In-Work Benefits like housing benefit is going to be a net taxpayer? Really?

          • John says:

            “Immigrants from the EU pay more in taxes that they receive from the government so are net contributors enabling higher government expenditure/less borrowing.”

            “Really….so an EU worker on NMW using the NHS and getting In-Work Benefits like housing benefit is going to be a net taxpayer? Really?”

            It’s in toto rather than at the individual level.

  3. The Pessimist says:

    As most leave voters would retort in light of these findings: “fake news!”

  4. sdbast says:

    Reblogged this on sdbast.

  5. Laurie says:

    Hi Rick, I am suprised to see Cornwall so far down your league table considering its significant additional European Structural Investment Funding (ESIF). Are grants like these included in your figures?

  6. Dipper says:

    Many people find themselves in a hopeless situation. House prices out of reach, an education system that requires them to borrow heavily to get what many people would consider an entry-level education for success in the modern world, a benefits system that discourages work and makes working harder and becoming better-skilled largely pointless, and an endless supply of Labour from overseas to out-compete them and push up accommodation costs. They want this to stop even if in the short term there will be problems.

    Most civilised societies would value their young people, nurture them, invest in them, and regard it as their duty to support their young people into a successful adulthood. Somehow the UK went off in completely different direction, regarding the education of our young people as a profit opportunity, think trying to get good outcomes for your young people is racist, and think providing employment to people from thousands of miles away is an equivalent duty to providing employment for the people who sit next to your children in school.

    • John says:

      Be interested in your evidence that the benefit system discourages work as I’m not sure this is the case.

      • Dipper says:

        if you go here https://www.gov.uk/benefits-calculators and look at outcomes for people with children then at low rates of pay the effective tax rate is well over 90%. And that’s without factoring in the problems of trying to get back into the benefits system if you leave it.

        My interest in this came from a direct case of someone doing some work for a friend. He wasn’t sure why he bothered working as it seemed to make no difference to how much money he ended up with.

    • gunnerbear says:

      “Somehow the UK went off in completely different direction, regarding the education of our young people as a profit opportunity, think trying to get good outcomes for your young people is racist, and think providing employment to people from thousands of miles away is an equivalent duty to providing employment for the people who sit next to your children in school.”

      Well said.

  7. Dipper says:

    just to bang on and on and on about this … if large scale immigration is such a fantastic thing how come us and Sweden are the only ones in the EU doing it? If the English are being hostile to foreigners and everyone else is so gloriously welcoming then how come they are all coming to England?

    There’s a clear win-win here; England can get the “benefits” of not having foreigners here and other EU countries can get the many fantastic benefits that come with mass immigration they are currently foolishly foregoing. The fact that that isn’t going to happen tells us something quite significant about what we are all being told.

    • John says:

      Am at a loss to see what the benefits of “not having foreigners here” is. In one sense, it’s a reflection of the uptick in the economy. Unfortunately, the Tories we unable to advance this argument as they’d rather foolishly committed to reducing the flow as a sop to their right-wing/UKIP so it was best to keep quiet.

      • Dipper says:

        Well, the primary benefit is that it allows home grown talent to get jobs. The significant drop in training because we can just import skills is a clear example of home-grown talent not being developed.

        As I noted in a comment above, the European Commissions ageing study projects a population for the UK of 80 million by 2050/60. That is an increase of 16 million from 2013, or 25%. the population of the Netherlands is 17million, so that increase is equivalent to nearly all of the Netherlands moving here. Just over half of that increase is due to migration.

        what is the right number of people to let into this country? “If we put up a sign saying anyone in the world, if you want to come here just turn up” How many would we get? Lets say a conservative figure of 50 million. And most of those would, I’m sure, do the traditional migrant thing of becoming successful professionals who make a contribution to our life.

        But 50 million? I’m sure most people would think that’s too many and we couldn’t cope. So what is the right number? How do we decide what that number is and who are the priorities in that number? Its the refusal of political parties to have that conversation that leads to people thinking lets have zero and work from there.

        Yes its good to be a country where people want to come and which accepts people from outside. But we need to do the basics of checking the population already here aren’t being disadvantaged, and we aren’t doing that.

        • John says:

          The lump of labour fallacy – there isn’t a fixed amount of jobs in an economy.

          • Dipper says:

            I really don’t see what the lump of labour fallacy has to do with the argument. And no. there isn’t a fixed amount of jobs in the UK, but there is a fixed amount of land.

            It is clear many people are not getting the training or career opportunities they deserve, and one reason for that is the influx of workers from overseas who are already trained up and employers taking them in preference.

            Take nurses and doctors. We import lots of these, and train very few. Quite simply, we should train more of our own people. I am amazed that the notion we should train more of our own people (of all races) to be doctors and nurses is controversial, but apparently it is.

  8. Redunking says:

    Sounds like Dipper is just a little bit irate that is clever son isn’t clever enough to get a job. Chin up old boy. He doesn’t need to work because of benefits system right?!

    • Dipper says:

      Well I am irate. Of course I’m concerned for him because I’m his dad, but he’s not the only one in that position.

      What kind of country has educational institutions in which there is an acknowledged ranking, has qualifications with acknowledged levels of excellence, and then takes pride in not giving the people who qualify at the top of this process a decent career? France very noticeably does not do that.

      As I keep saying to the young man, when they reject you they are not just rejecting you as an individual, they are rejecting the institutions you have been to and the qualifications system that you have been through.

      and just out of interest Redunking – what is the measure of cleverness you are using that is better than the one the state uses to assess the youth of the nation?

      • Redunking says:

        Having a degree doesn’t mean you’re clever. It hasn’t for quite some time since university education became the norm. So yes in part they’re rejecting the institutions as you so aptly put it.

        But the cream rises to the top and sadly for both you and your son, it seems he may not quite be the cream you assume him to be. For every sob story of not getting what you want after the uni, there’s one of flourishing well.

        Limiting competition against your son’s career prospects, through this bizarre assumption that Brexit will mean reduce immigration (note how most of the talk from the government has been about having the control to reduce immigration, rather than actually reducing it!), is pretty pathetic indictment of the belief you have in his abilities to be honest. The gentleman doth protest to much.

        Oh well, all power to you by helping to potentially sacrifice the living standards of many based of irrational and baseless reasons.

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