One of the most dramatic claims made by those seeking to reverse Brexit is that leaving the EU is costing the UK economy ‘£100 billion every year’ in lost output, or about 4pc of GDP.

Moreover, that would translate into about £40 billion in lost tax revenues, which happens to be roughly the same as the tax increases in Rachel Reeves’ first Budget. So, say the Rejoiners, without Brexit there would not have been any need to raise taxes.

It is therefore essential to understand where the £100 billion comes from – and whether it is reliable. (Spoiler alert – it is not!)  

One source is the assumptions about the long-term impact of Brexit made by the Office for Budget Responsibility (OBR). The analysis from the government’s own fiscal watchdog is potentially most important, but it also the most widely misunderstood.

In a nutshell, the OBR has assumed that UK imports and exports will both be 15pc lower than if we had remained in the EU. This fall in the ‘trade intensity’ of the UK economy is then assumed to cause a 4pc reduction in productivity, measured by GDP per head. Finally, though, the OBR has assumed that this drag will build over time, with the full impact only felt after 15 years.

This a lot to unpick. Note first that the 4pc figure is not an estimate of the impact that Brexit might already have had. The OBR has said that the resulting uncertainty has held back investment in the UK, and that this has reduced productivity by about 1.5pc. But the watchdog also expects this shortfall to fade as uncertainty clears and investment recovers.

The correct takeaway here is therefore that Brexit is only a small factor over the five-year forecast horizon which matters most for fiscal policy.

What’s more, the longer-term analysis is looking increasingly shaky. For a start, the OBR’s assumptions are only weakly supported by the actual data – if at all. Most economists agree that UK trade has held up much better than expected after Brexit, with no sign of falls anywhere near as large as 15pc in either exports or imports.

At most, the UK’s trade intensity might be a few percentage points lower than it would otherwise have been. This is unlikely to make much difference to productivity in a large, advanced economy which remains relatively open.

Nore too that the 4pc figure itself is simply an average of the results of 13 external studies, rather than original work by the OBR. These studies, all done before the final shape of the exit agreement was known, used a variety of different models and assumptions, most of which now look far too pessimistic. Even then, nine of these studies put the impact at less than 4pc.

Last but not least, the OBR’s 4pc does not take account of any potential benefits of Brexit, including new trade deals with the rest of the world, smarter policies on immigration, and better regulations at home. This omission is partly because the OBR judges that these benefits will be small. But it is mainly because it does not usually incorporate the impacts of policy changes that have not yet been made.

In summary, the OBR’s assumption of a 4pc long-term Brexit hit is just that – an ‘assumption’. It is also nowhere near as important for the Budget as many would have us believe.

Other studies have attempted to quantify the impact that Brexit has had to date by comparing the actual performance of the UK economy with those of similar countries. In particular, economists at Bloomberg arrived at the figure of £100 billion in 2023, mostly by looking at how the UK had done relative to the rest of the G7.

The most sophisticated of these studies rely on a computer algorithm to select a weighted combination of economies whose performance best matched that of the UK before Brexit. The actual performance of the UK economy since Brexit is then compared to this control group, or ‘doppelganger’, and the difference taken as a proxy for the impact of leaving the EU.

The best work here has been done by John Springford at the Centre for European Reform (CER). At face value, his ‘doppelganger’ models suggest that Brexit has already shrunk the UK economy by at least 5pc, which would be well over £100 billion a year.

But all these results are unreliable, too.

It is reasonable to assess the impact of Brexit by comparing the performance of the UK economy to that of its peers. Indeed, almost every claim made by both sides makes some sort of assumption about what would have happened if we had not left.

Instead, the fundamental flaw in these studies is that they assume that any divergence in economic performance between the UK and the ‘control group’ can only be due to Brexit. This is clearly nonsense.

It glosses over the impact of other shocks, notably the pandemic and the global energy crisis, which are bound to have affected different economies in different ways. It also ignores any other national factors, notably in fiscal and monetary policy, and downplays differences in the economic and political cycles.

It surely makes more sense to narrow the control group to those economies which would have been equally vulnerable to Covid and the energy crisis. My own preference is to look at the euro area, excluding Ireland’s notoriously suspect GDP data. On this basis, the UK economy has grown by about 1pc less in total than its peers in the rest of Europe since 2016. In terms of output per head, ‘Brexit Britain’ is continuing to track midway between France and Germany.

Unfortunately, Rejoiners prefer to toss big numbers around for the ‘cost of Brexit’ with no attempt to understand where they came from, let alone their limitations. The dodgy ‘£100 billion’ is just one of many examples.

This piece was first published in the Daily Telegraph on 2 January 2025

• Applied economics
• Brexit
• global economy
• Politics
• Taxation
• Trade policy
• UK economy