Big change means big uncertainty. Especially when that big change is happening to a major developed country in the 21st century. To complicate the task further, in the case of Brexit Britain while we know big change is coming, we don’t know what form that big change will actually take.
Every parent worries about moving their kid between schools because they don’t know quite how they’ll react. They worry much more if they’ve got the added twist of not knowing which new school they’ve managed to secure a place at. In the face of all that uncertainty it’s not surprising that there’s huge temptation to reach for swift answers – call it home schooling. That is the attraction of the “no deal” Brexit that seems to have returned to the public debate over the last week. The Prime Minister has talked up steps to “prepare for every eventuality” and J.P. Morgan is following the general mood in saying the probability of a no deal on Brexit has increased.
But in periods of huge uncertainty, it is worth remembering that lots of people say lots of things – but they can be judged more accurately on what they do. Here what is clear, for all the “no deal” talk, is that what the government wants is a deal. That was the reason for Theresa May’s recent Florence speech and her motivation for travelling to Brussels last night for dinner with a man – European Commission President Jean-Claude Juncker – who has behaved horrendously towards her.
May knows that while no deal is possible, it is a long way from the first best outcome. The main reason for that is the sheer uncertainty it unleashes. In many areas of life we simply don’t know what a genuine “no deal” outcome would mean. Far from ending uncertainty, it would multiply it.
And what we do know about a “no deal” Brexit isn’t pretty. For all that the economy held up in the short term after the Brexit vote, one prediction that has come true is that the major sterling depreciation which followed would feed through into higher prices and a renewed squeeze on living standards. Inflation in September is at its highest since 2012.
Similarly, making firm predictions about the overall impact of “no deal” is fraught with difficulty. However, some things are much more knowable, or at least quantifiable. And top of that list is tariffs.
That is the focus of a new joint piece of work between the Resolution Foundation and the University of Sussex’s Trade Policy Observatory. The sudden return of debates about trade has to date focused on the macroeconomic effects on growth surrounding what UK firms and workers can sell to the rest of the world. But the debate also needs to focus on the much more certain effect of tariffs on consumers right here at home.
The heart of a “no deal” Brexit outcome is that the UK and EU fails to sign a new trade agreement. In that scenario, government policy (and World Trade Organisation rules) is that we would levy the same tariffs on imports from the EU as from other partners where no separate agreement exists. That means either from March 2019 (or after any transition period agreed), tariffs on clothing and drink from the EU would rise from zero to 10 per cent, those on dairy products like milk and cheese by 45 per cent and those on meat by 37 per cent. The level of these new tariffs is as close to facts as we get in current Brexit debates.
Crucially, these tariffs would feed through into consumer prices. While estimates of the impact vary, our preference for EU built cars means those buying vehicles would see a 5.5 per cent price increase, while the price of clothing would rise by 2.4 per cent, partly because we buy clothes from a wider range of countries outside the EU.
Food, however, would be the area most affected. This is not only because of the substantial tariffs, but because we both import a lot of it and do so overwhelmingly from the EU. The prices of dairy goods would rise by an average of 8.1 per cent and meat would go up by 5.8 per cent.
While our modelling can only cover around 40 per cent of our consumption spending, it is enough to see that such a Brexit would mean a significant squeeze on family finances. Indeed, it would push up the costs of current consumption of these goods by an average of 2.7 per cent, or £260 in a year. Over three million families would see the cost of their shopping go up by more than £500 over a year.
Crucially, as with the impact of the fast-rising inflation, it is lower income households that would likely bear the most significant burden. The impact on those near the bottom of the income distribution would be a third greater than for those near the top, as a share of overall consumption.
Some have suggested that rather than imposing tariffs on the EU, Britain should eliminate all tariffs whatsoever with the rest of the world – thus maintaining tariff free trade with the EU but extending it to all other countries. Such an approach would mean lower costs for households. However, while lower tariffs with non-EU countries are a desirable objective, achieving them in this way would mean removing the UK’s best leverage in future trade negotiations. Consumers might benefit, but British industry could be disproportionately negatively affected.
There are many other impacts that a no deal Brexit would have. Even within the narrow economic sphere of trade, there could be effects on long run productivity, while more certainly there would be an impact on exports, and the manufacturers of goods that include imported components. There is a huge amount at stake – particularly for low and middle income families. It reminds us that for all the bluster of the past week the Prime Minister is right to note that a “no deal” Brexit may be possible but, when it comes to the living standards of working people, it is deeply undesirable.