Ben Chu (Newsnight) moderated our March meeting on Brexit held jointly with the National Institute at their Westminster offices. The panellists were Jagjit Chadha from NIESR, Gemma Tetlow from the Institute for Government and the LSE’s Thomas Sampson. The event was live-streamed on to NIESR’s social media platforms.

Jagjit kicked off the debate by arguing that with the UK economy at full employment supply enhancing capacity was needed for productivity gains. But however you look at Brexit he said there was no near-term economic upside - whatever the outcome of the negotiations. He judged a soft form of exit the most likely scenario, though by containing a hard Brexit the economic outcome associated with the “average” Brexit scenario would be rather weaker than the central view. Jagjit noted that the betting odds were currently for a delayed Brexit, with a deal being passed and without a second referendum. He suggested that increased fiscal spending might be needed to offset any Brexit shock, and in any case to make up for past under-expenditure in eduction and health relative to social needs.

Thomas continued the debate by considering the impact of the vote to leave the EU thus far on the UK economy by focusing on investment. It was questionable whether a 2% weaker economy was due to uncertainty per se or represented an early response to anticipated trade barriers. In his analysis Thomas used announcements of new foreign direct investment transactions rather than the official FDI data which he said were volatile. Thomas then computed a synthetic counterfactual of FDI transactions between the UK and EU, both inward and outward, designed to track what might have happened to UK investment in the absence of the vote to leave based on the UK’s peer group experience. The findings were that there was a 12% rise in outward investment from the UK to the EU relative to the control group, with a similar decline in inward investment from EU countries. What is uncertain - and therefore is ripe for further research - is whether this reflects lost investment in the UK or whether it indicates extra investment in the EU. Thomas found that the investment shift was all to do with service sector firms - probably because the costs of setting up service firms abroad were lower than the manufacturing equivalent. In short, his conclusions were that the vote to leave the EU made the UK a less attractive place to do business.

Gemma concluded the panel by arguing there were three reasons that fiscal support might be needed in response to Brexit - interest rates were already super-low, monetary policy can only respond to cyclical (not supply side) shocks, and fiscal policy can be more targeted. It would prove difficult, Gemma suggested, to identify in real-time the demand and supply reaction to Brexit. There could well be an overshoot in the short term supply shock, and maybe too on the demand side, over and above the long term response. In the case of a demand overshoot (i.e. far weaker demand in response to Brexit) the usual counter-cyclical policies such as VAT cuts and increasing investment allowances could be employed. Though Gemma pointed out that the latter may not be so useful in a no-deal world. In the case of a deal and transition period being agreed, there may be a small economic boost relative to current official forecasts thanks to the reduction in business and household uncertainty. However, this could lead to higher interest rates which might in turn reduce the Brexit “deal dividend” to the public sector accounts.

George Buckley
SPE Vice Chair

You can watch the event by clicking here.

We are grateful to NIESR for kindly hosting this event.