Theresa May will be forced to offer further politically difficult concessions to the EU to minimise damage to the economy caused by Brexit, said one of the UK’s leading economic thinktanks.
The National Institute for Economic and Social Research (NIESR) said Britain was gripped by an epidemic of uncertainty about the terms of its EU departure, and warned that the government would have to pay a bigger financial contribution or accept higher migration to get the deal it wanted.
May has already lost two cabinet ministers – David Davis and Boris Johnson – after announcing plans for Brexit that involved prioritising trade in goods over services, while aiming to limit free movement of people.
But in its latest quarterly health check on the economy, the NIESR said May’s version of a soft Brexit was still not soft enough. The government was aiming for market access similar to that enjoyed by Switzerland but with a much tougher migration system. “In our view, the government will have to make significant concessions to the EU,” it said.
The thinktank said, that following the pick-up in activity after the sluggish start to the year, the economy was on course to grow by 1.4% in 2018 and by 1.75% each year thereafter.
It added, however, that even these modest growth rates relied on the UK continuing to have close to full access to the EU market for its goods and services.
The more limited proposals for market access in the recently published white paper would lead to a loss of output amounting to £500 per person over time, compared to a soft Brexit.
“The loss would be around £800 under a ‘no deal’ Brexit. These estimates do not include the likely impact on productivity which could, on some estimates, double the size of the losses,” said the thinktank.
Jagjit Chadha, director of the NIESR, said: “In the UK, uncertainty about exit from the EU seems to be limiting the development of policies to promote more inclusive growth.” Brexit, he added, was a demanding agenda that was causing political stasis. “Things are not happening that should be happening.”
Chadha said pre-Brexit Britain was “gripped by an unusual amount of uncertainty, you might call it an epidemic of uncertainty – we haven’t worked out how to do it”.
The NIESR said the Bank of England would need to take account of the uncertainty when setting interest rates. While supporting a quarter-point increase in official borrowing costs this week, the Bank should make it clear that it was prepared to reverse the decision, the institute added.
“The UK is just eight months away from the March 2019 EU exit date and the range of outcomes remains as wide as ever. We are by no means sure that there will be a deal by then, and even if there is a deal it is not clear how policymakers, businesses and households will respond to the new arrangement. And, all along, the chance of a second referendum is rising.”
