May 9, 2017 / 11:38 AM / 3 months ago

Britain’s Brexit bill is worth the money

Britain's Prime Minister Theresa May welcomes Head of the European Commission, President Jean-Claude Juncker to Downing Street in London, Britain April 26, 2017.Hannah McKay/File Photo - RTS15A6D

LONDON (Reuters Breakingviews) - Britain’s Brexit bill is worth paying. EU negotiators may ask the UK to hand over as much as 100 billion euros (84 billion pounds) as part of its orderly departure from the trading bloc. While eurosceptic politicians will complain about paying anything at all, a chaotic exit would risk imposing much greater costs on the UK’s 1.9 trillion pound economy.

Less than two years remain for Britain to negotiate a deal with the remaining 27 EU countries on the terms of its access to the single market. There seems little doubt that suddenly ending free trade with the world’s second-largest economic bloc, as could happen if they fail to agree, would dent the UK’s future growth rate.

To get a sense of the potential damage, assume that under a reasonably orderly Brexit, the UK economy grows at an average rate of 1.8 percent a year – in real terms – for the foreseeable future. Now assume that a messier departure lowers that annual growth rate by 0.2 percentage points.

By 2030, the UK economy would be 2.7 percent smaller than it would have been in the benign scenario, according to Breakingviews calculations. Total output forfeited over that period would be about 450 billion pounds in today’s money. The government would have lost 150 billion pounds of tax revenue – assuming the exchequer continues to collect a third of GDP.

Even if the hit to the UK growth rate was just 0.1 percent a year, lost output by 2030 would amount to 228 billion pounds, and forgone tax revenue would be 75 billion pounds. Those estimates may be on the low side. Morgan Stanley economists reckon that an exit which results in tight restrictions on immigration and a sharp drop in foreign investment could lower Britain’s potential annual growth by 0.5 percentage points.

Besides, the amount the EU demands will probably be less than feared. Eye-catching estimates of the Brexit bill ignore Britain’s share of existing EU assets, as well as rebates the country has negotiated. The net figure will probably be smaller and spread over multiple years. If the alternative is a prolonged period of economic damage, the UK has every reason to settle its tab.

 

Run the numbers: tmsnrt.rs/2pUmLd6

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