OECD Economic Policy Papers
The OECD Economic Policy Papers series is designed to make available selected studies on structural and macro-economic policy issues of current interest. The Papers are produced in the context of the work carried out on the two regular OECD titles, OECD Economic Outlook and Going for Growth.
- ISSN: 2226583X (online)
- https://doi.org/10.1787/2226583X
The Economic Consequences of Brexit
A Taxing Decision
Membership of the European Union has contributed to the economic prosperity of the United Kingdom.
Uncertainty about the outcome of the referendum has already started to weaken growth in the United
Kingdom. A UK exit (Brexit) would be a major negative shock to the UK economy, with economic fallout in
the rest of the OECD, particularly other European countries. In some respects, Brexit would be akin to a
tax on GDP, imposing a persistent and rising cost on the economy that would not be incurred if the UK
remained in the EU. The shock would be transmitted through several channels that would change
depending on the time horizon. In the near term, the UK economy would be hit by tighter financial
conditions and weaker confidence and, after formal exit from the European Union, higher trade barriers
and an early impact of restrictions on labour mobility. By 2020, GDP would be over 3% smaller than
otherwise (with continued EU membership), equivalent to a cost per household of GBP 2200 (in today’s
prices). In the longer term, structural impacts would take hold through the channels of capital, immigration
and lower technical progress. In particular, labour productivity would be held back by a drop in foreign
direct investment and a smaller pool of skills. The extent of foregone GDP would increase over time. By
2030, in a central scenario GDP would be over 5% lower than otherwise – with the cost of Brexit
equivalent to GBP 3200 per household (in today’s prices). The effects would be larger in a more
pessimistic scenario and remain negative even in the optimistic scenario. Brexit would also hold back GDP
in other European economies, particularly in the near term resulting from heightened uncertainty would
create about the future of Europe. In contrast, continued UK membership in the European Union and
further reforms of the Single Market would enhance living standards on both sides of the Channel.
Keywords: immigration, confidence, trade, FDI, skills, European Union, uncertainty, Brexit, deregulation, risk premia
JEL:
E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy;
H12: Public Economics / Structure and Scope of Government / Crisis Management;
C54: Mathematical and Quantitative Methods / Econometric Modeling / Quantitative Policy Modeling;
E24: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
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