BREXIT AND ITS IMPACT ON BRITAIN

Britain’s exit, popularly known as Brexit was a vote by the people of Britain to leave the European Union (EU) in a historic referendum which took place on 23 June 2016. The Leave campaign won by 51.9% votes as against the 48.1% votes for the Stay campaign. The overall turnout recorded was around 71.8% with more than 30 million people voting for the historic referendum. Immediately after the declaration of the referendum results, the pound fell to its lowest levels since 1985 and the then Prime Minister David Cameroon resigned. Though it was predicted by many economists that UK’s economy will face a rough patch after the referendum results, however, most of it has proven to be wrong. This may be because Britain has not yet officially left the EU and maybe once it officially leaves the EU on 29 March 2019 predictions might turn out to be true. According to stock market statistics, there is no doubt that the pound remains around 10% lower against the dollar and 15% lower against the Euro. According to official ONS figures, the UK economy grew at a rate of 1.8% in 2016 and is estimated to have grown at the same rate in 2017. Inflation has risen since June 2016 to stand at 3.9%, but employment has continued to fall, to stand at a 42 year low of 4.3%. Annual house price increases have fallen from 9.4% in June 2016 but were still at an inflation-beating 5% in the year August 2017 (Alex Hunt & Brian Wheeler, 2017). Even The Bank of England took steps to boost the UK economy, particularly cutting interest rates from 0.5% to 0.25% in August 2016, taking UK rates to a new record low. The data published by ONS in February this year stated that immigration was estimated to be 596,000; of these 268,000 were EU citizens, 257,000 were non-EU citizens and 71,000 were British citizens and some 323,000 people are thought to leave the UK during the same period ( Tim Bowler, 2017). As expected, these trends are likely to undergo drastic and eventual changes once Britain officially leaves the EU after a long drawn process of negotiations which has already begun and has been in news for the various obstacles it has been facing.

The Brexit negotiations have already begun from 29 March 2017 when United Kingdom was served with a withdrawal notice under Article 50 which was created as part of the Treaty of Lisbon for any country wishing to exit the EU and had become a law in 2009 (Tim Oliver, 2016). However, this is the first time that a country has decided to exit the EU and the entire process will definitely be cumbersome and full of uncertainties. The three major hurdles for a smooth Divorce Bill are the Brexit bill, the Irish border and protecting EU citizens’ rights. The negotiations for the Brexit bill had been going on for months now and it seems like the deadlock between Britain’s negotiators and EU’s negotiators has finally come to an end. The EU wanted the amount of the bill to go as high as possible because Britain was one of the major contributors to the EU budget every year and its exit will leave a major dent in future budget prospects of the EU whereas Britain had tried its best to keep the amount as low as possible (Jennifer Rankin, Lisa O’Carroll  and Jessica Elgot, 2017). As per latest reports, the UK may end up paying £50bn to Brussels bowing to EU pressure and future prospects wherein the UK wants to cut ties in an all friendly manner and does not want the settlement to end on a rough patch. It has been reported that the gross liabilities are expected to be around €100bn which could eventually come down to around € 55bn to € 75bn once the share of assets of UK in EU is taken into account (Daniel Boffey, Jennifer Rankin and Anushka Asthana, 2017). As Britain is all set to leave the single market and customs zone due to its exit from the EU, it is most likely that there will be some kinds of control and restrictions on the movement of people and trade in the Irish border. Northern Ireland (still part of the EU) has made it quite clear that it is not going to accept any hard border (restrictions in terms of trade) with the UK as it will adversely affect the economy due to the imposition of tariffs and taxes during trade with the UK. However, after the Brexit bill, this is one of the major issues which have to be solved as part of the Divorce Bill. The next major issue which needs attention is that of EU citizens living in the UK. According to BBC news, “All EU nationals lawfully resident in the UK for at least five years will be able to apply for ‘settled statuses’ and be able to bring their spouses and children, under a 15- page proposal” as unveiled by present Prime Minister Theresa May. Though the talks are at an initial stage, it is yet to be seen what the final decision would be. For UK citizens living in the EU countries, a lot depends on how the Britain government finally decides the course of action for EU citizens within the UK. However, it is expected that Britain is going to impose stricter immigration policies as this was one of the vital reasons as to why the UK citizens voted to leave the EU. There has not been much discussion on this aspect and it would be interesting to see how things shape up in the coming time once the Brexit bill and Irish Border issues get solved.

The major fear regarding UK’s exit from the EU is that of the benefits it received from being a member of the free trade and customs union within the EU. The EU accounted for 44% of all UK exports and 53% of its imports, total EU-UK trade was 3.2 times larger than the UK’s trade with the US, its second largest trade partner (Thomas Sampson, 2017).  However, as Britain leaves EU it would no longer be a part of the free trade and customs union and will have certain restrictions and tariffs imposed on it, each and every time it exports or imports goods to/ from the EU. According to one study (Richard Chen, 2017), for every 1% reduction in UK exports to EU, there would be a 0.5% loss in the British GDP. This means that as Britain loses its membership of the single market, its trade will be affected adversely and will also hamper its GDP and real per capita income of its citizens. With the imposition of various tariff and non-tariff barriers, Britain will have to bear the brunt of exiting the EU and its single market window leading to difficulties and new hurdles in its otherwise free trade within the EU. Its future trading prospects with the EU depends on how the negotiations work out (hard or soft Brexit) and the eventual decisions to join the European Economic Area or various other such arrangements for a smooth trade with EU with some barriers or completely letting the World Trade Organisation intervene in its trade prospects with EU. It is also extremely difficult to predict the level of Foreign Direct Investment once Britain leaves the EU. According to United Nations Conference on Trade and Development (UNCTAD), inward FDI to the UK surged the US $179 billion in 2016, the second highest in the world, behind the US, representing a six-fold increase over the 2015 level, when the UK was ranked 12^th. It is expected that most investors will be adopting the wait and see approach. However, much could depend on the ongoing crucial UK-EU exit negotiations especially for FDI by UK based companies whose major focus was on the EU open market and free trade. There are other reasons too to suppose that there will be inflows of FDI in the UK economy for those companies which serve mostly in the UK and other non-EU economies. Moreover, the UK offers other advantages which should be unaffected by Brexit such as the English language, light regulation, highly developed capital markets, strong rule of law and flexible labour markets. It is also speculated that a weakened pound will boost FDI inflows (Laza Kekic, 2017) and may also by Britain’s political stability and by new opening up opportunities to delegate.  The pound fell to a 31 year low of £1.315 soon after the historic referendum had taken place. Ever since then it has remained at levels lower than the US dollar and the Euro. This should have come as good news for businesses involved in the trading of UK-EU exports as a stronger euro meant that goods and services from Britain were to be cheaper for the Euro countries and it should have attracted a lot more investment. However, trends indicated that this did not happen mostly due to the uncertainty regarding Brexit and its future implications (Lianna Brinded, 2017). Moreover, a weak pound has increased living costs for British citizens as imports have become costlier along with the rising prices of oil pushing up inflation rate in the economy (Katie Allen, 2017). The Office for National Statistics (ONS) has reported that the net migration to the UK has plummeted by more than 100,000 in the year since the vote for Brexit as EU citizens leave. However, Theresa May in her latest speech has reassured EU citizens that they will not be asked to leave on any grounds and are welcome to continue with their work as they have been a major factor in boosting Britain’s economy and GDP growth. It is an undeniable fact that incomers from EU have boosted Britain’s economy over the last fifteen years or so. Analysts feel that immigrants have filled up the gaps within the workforce which otherwise would not have been filled by the natives as they lack in skills and other competencies as compared to other migrant EU workers. Though it can be argued that fewer migrants mean less demand for public services and hence lower expenditure by the government, however, most EU migrants are of working age having higher employment rates compared to the natives and eventually pay more taxes (Ben Chu, 2017). A reduction in the number of migrants would mean that there will jobs which will be left vacant and companies will not be operating at full capacity. Even there will be a reduction in the amount of total taxes collected as the EU migrants form a major share of tax payments. Moreover, sectors such as construction, social care work, the National Health Service (NHS) and agriculture which are heavily dependent on EU migrants will also be adversely affected. These are only a few of the major aspects which may be affected due to Brexit and a lot more remains to be observed and evaluated. However, until and unless Britain officially leaves the EU in 2019 there can only be speculations regarding the actual situation or aftermath resulting due to the outcome.

References:

1. Bowler, T. (2017, March 28). How has the economy fared since the Brexit vote? BBC News. Retrieved from: http://www.bbc.com/news/business-36956418
2. Hunt, A. & Wheeler, B. (2017, November 13). Brexit: All you need to know about the UK leaving the EU. BBC News. Retrieved from: http://www.bbc.com/news/uk-politics-32810887
3. Rankin, J., O’Carroll, L. & Elgot J. (2017, August 31). UK’s approach to Brexit is ‘nostalgic and unrealistic’ says EU negotiator. The Guardian. Retrieved from: https://www.theguardian.com/politics/2017/aug/31/no-decisive-progress-on-key-issues-says-eus-chief-brexit-negotiator
4. Boffey, D., Rankin, J. & Asthana, A. (2017, November 29). UK could pay £50bn Brexit divorce bill after bowing to EU pressure. The Guardian. Retrieved from: https://www.theguardian.com/politics/2017/nov/28/uk-and-eu-agree-brexit-divorce-bill-that-could-reach-57bn
5. Taylor, C. (2017, November 17). Q&A: Where are we on Brexit and the Irish Border issue? The Irish Times. Retrieved from: https://www.irishtimes.com/news/politics/q-a-where-are-we-on-brexit-and-the-irish-border-issue-1.3295556
6. Kekic, L. (2017, March 20). Foreign direct investment will remain robust post-Brexit. The London School of Economics and Political Science blog. Retrieved from: http://blogs.lse.ac.uk/brexit/2017/03/20/foreign-direct-investment-will-remain-robust-post-brexit/
7. Chen, R. (2017, June 14). The economic impact of Brexit on UK and EU trade. Retrieved from: https://medium.com/@rchen8/the-economic-impact-of-brexit-on-uk-and-eu-trade-464dd090f92e
8. Brinded, L. (2017, July 28). Brexit is making UK economy act illogically. Retrieved from: https://qz.com/1040764/brexits-effect-on-the-pound-isnt-boosting-the-economy-as-much-as-expected/
9. Allen, K. (2017, February 22). Brexit economy: Can consumers keep shoring up the UK? The Guardian. Retrieved from: https://www.theguardian.com/business/2017/feb/22/brexit-economy-consumers-uk-eu
10. Chu, B. (2017, November 30). How much damage will lower EU immigration inflict on the UK economy? Retrieved from: http://www.independent.co.uk/news/business/analysis-and-features/low-uk-immigration-economy-how-effect-brexit-eu-nationals-a8084796.html
11. Sampson, T. (2017). Brexit: The Economics of International Disintegration. Journal of Economic Perspectives. 31(4), 163-184.
12. Office for National Statistics (ONS). Data retrieved from: https://www.ons.gov.uk/economy/grossdomesticproductgdp
13. United Nations Conference on Trade and Development. Data retrieved from: http://unctad.org/sections/dite_dir/docs/wir2017/wir17_fs_gb_en.pdf