Since the announcement of the EU referendum we have been writing analysis on Brexit and its possible impact on the economy and public finances. We have compiled our assumptions, judgements and analysis on this page.
The OBR is required by legislation to produce its forecasts based on current government policy (but not necessarily assuming that particular policy objectives will be met). With the terms of the UK’s exit from the EU and the nature of the future relationship between the two still to be settled, this is not straightforward. We asked the Government if it wished to provide any additional information on post-Brexit policies in relation to trade and migration that would be relevant to our forecasts. As set out in the Foreword, it directed us to the July 2018 White Paper on the future relationship between the UK and EU and the immigration White Paper published in December 2018.
Parliament is scheduled to vote on various Brexit-related questions in the week of the Spring Statement – after we closed the forecast. But reflecting the draft Withdrawal Agreement published in November 2018, our forecast incorporates a transition period until December 2020 – during which time the terms on which the UK and EU trade with each other will remain unchanged. This means that we continue to assume that the UK makes an orderly transition to a new – though, as yet, undefined – long-term relationship. Our remit does not allow us to produce scenarios based on alternative government policy, such as the UK leaving the EU without the implementation of a Withdrawal Agreement. But our Brexit discussion paper sets out how different trading and migration relationships could affect our forecasts, and Chapter 5 summarises some of our previous scenarios that shed light on the responsiveness of the public finances to changes in the outlook.
Given the relatively high-level nature of the Political Declaration – which accompanied the Withdrawal Agreement – and the current uncertainty as to how the Government will respond to the choices and trade-offs it faces during the negotiations regarding the future relationship between the UK and the EU, we still have no meaningful basis for predicting the post-Brexit trading relationship beyond the near term. We have not made any changes to our net migration forecast on the basis of the Government’s immigration White Paper as the Government only plans to publish final immigration rules after a year of consultation. We have therefore retained the same broad-brush assumptions regarding Brexit that underpinned our previous post-referendum forecasts.Specifically, as regards the economy forecast, we assume that:
- The UK leaves the EU in March 2019 – two years after Article 50 was invoked. A transition period follows until December 2020.
- The extra frictions associated with new trading arrangements with the EU and other countries slows import and export growth over a 10-year period. We calibrated this based on external studies of different possible trade regimes and have assumed broadly offsetting impacts from exports and imports on net trade and GDP growth.
- The vote to leave the EU will be associated with lower net inward migration, but that net inward migration will remain above ‘tens of thousands’. We assume that the UK adopts a tighter migration regime than that currently in place and that ‘pull factors’ – such as a fall in the value of UK wages in prospective immigrants’ home currencies due to the past depreciation of the pound – will be weaker. The data do indeed suggest that inward migration from the EU has fallen since the referendum, consistent with the weakening of pull factors. But overall net inward migration has not fallen to the extent implied by the ONS principal migration projections (which we use as the base for our forecast), as the fall in net immigration from the EU has been partially offset by a rise in net immigration from non-EU countries.
Specifically, as regards the fiscal forecast, we assume that:
- Any reduction in expenditure transfers to EU institutions – after factoring in the cost of the financial settlement – would be recycled fully into substitute spending. This assumption is fiscally neutral.
- There are no changes to the structure or membership of tax systems for which there are common EU rules (such as VAT and the EU emissions trading system or the customs duties that are deemed to be collected on behalf of the EU).
Since our previous forecast, the UK Government and the European Union published the latest draft Withdrawal Agreement and the Political Declaration on the future relationship between the UK and the EU on 25 November 2018. This set out in further detail the terms of the financial settlement – the so-called ‘divorce bill’ – to complement the draft Withdrawal Agreement from 19 March 2018. We have updated our central forecast to incorporate the latest information on the cost of the financial settlement.
Economic and fiscal outlook – March 2019 | Page: 26 and 70
In this paper we explain how we expect to approach the task of making forecasts and projections in the pre- and post-Brexit environment. We also look at some of the specific challenges that will be posed for us by forthcoming policy decisions and developments.
Discussion paper No.3: Brexit and the OBR’s forecasts, 11 October 2018
In March 2018 we estimated the size of UK’s EU financial settlement, also known as the ‘divorce bill’, and described the composition of the payments.
Economic and fiscal outlook – March 2018 | Annex B | Page: 215
In November 2017 we explained the element of ‘net expenditure transfers to EU institutions’ in our forecasts. We provided further information on how these forecasts are produced and the judgements that underpin them.
Economic and fiscal outlook – November 2017 | Annex B | Page: 245
Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to the publication in which they appear. Our boxes on Brexit and the EU are below:
In the March 2018 Economic and fiscal outlook (EFO) we set out in detail how we calculated the cost of the Government’s financial settlement with the EU. This box from our October 2018 EFO updated our estimate of the financial settlement’s cost and the reasons for the changes since March.
Economic and fiscal outlook – October 2018 | Box: 4.1 | Page: 158
In the November 2016 EFO we made a number of judgements about how the vote to leave the EU would effect the economy in the near-term. This box from our March 2018 EFO compared these judgements against the outturn data that we had received since then, finding that most of these judgements were broadly on track.
Economic and fiscal outlook – March 2018 | Box: 2.1 | Page: 26
Our first post-EU referendum forecast in November 2016 assumed that leaving the EU would result in a less open economy and lower productivity, but we did not incorporate an explicit link between the two over our medium-term forecast horizon. This box from our March 2018 EFO discusses why we did not include this link and what other forecasters have assumed.
Economic and fiscal outlook – March 2018 | Box: 3.3 | Page: 73
Our post-EU referendum publications noted many direct or indirect Brexit-related uncertainties across our economy and fiscal forecasts. One area that will be directly affected after Brexit is customs duties. In our March 2017 Economic and fiscal outlook, this box outlined the how customs duty was currently treated in the public finances data and the fiscally neutral approach that we had used in our forecast pending further information on post-Brexit policy settings.
Economic and fiscal outlook – March 2017 | Box: 4.4 | Page: 124
In our November 2016 forecast, our first following the June 2016 referendum, we revised down our potential growth forecast, primarily reflecting the effect of weaker business investment on productivity growth. To give some context to our central forecast judgements, this box outlined a number of channels through which the decision to leave the EU could affect potential output and the uncertainty associated with estimating these effects.
Economic and fiscal outlook – November 2016 | Box: 3.1 | Page: 46
The UK currently makes a substantial net financial contribution to the activities of the European Union. This box outlined the historical liabilities and other commitments entered into that officials, institutions and MEPs were said to be arguing that the UK should pay a share of, in light of Brexit. The box also listed government policy commitments to fund spending in certain areas where EU funding would be withdrawn.
Economic and fiscal outlook – November 2016 | Box: 4.4 | Page: 160
Our forecasts must be prepared on the basis of current government policy. Before the EU referendum, that policy was to remain in the EU, so that was the basis for our March 2016 forecast. While we made no assessment at that stage as to what the economic and fiscal impacts of Brexit might be, in every forecast we highlight particular risks and uncertainties around our central projections. This box discussed Brexit as a particular source of uncertainty, by highlighting some pieces of external analysis which showed a wide range of views as to the possible impacts on trade, productivity and GDP growth.
Economic and fiscal outlook – March 2016 | Box: 3.4 | Page: 84