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 complied 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 objectives will be met). With negotiations over the UK’s exit from the EU still taking place, this is not straightforward.
Given the current uncertainty as to how the Government will respond to the choices and trade-offs facing it during the negotiations, we still have no meaningful basis for predicting a precise outcome upon which we could then condition our forecast. Moreover, even if the outcome of the negotiations were predictable, its impact on the economy, monetary policy and the public finances would still be uncertain. 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.
- The negotiation of new trading arrangements with the EU and others slows the pace of import and export growth over a 10-year period. We calibrated this slowdown on the basis of a range of external studies of different possible trade regimes and have assumed offsetting impacts from exports and imports on GDP growth.
- The UK adopts a tighter migration regime following departure from the EU than that currently in place, but not sufficiently restrictive to reduce net inward migration to the desired ‘tens of thousands’.
- These assumptions will, of course, be updated once firmer information about the outcome of the negotiations becomes available. As well as these broad-brush assumptions about the Brexit process, our recent forecasts have incorporated specific judgements regarding the impact of the referendum result on the UK economy in the short term (see Box 2.1).
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 extra 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 scheme or the customs duties that are deemed to be collected on behalf of the EU).
Economic and fiscal outlook – March 2018 | Page: 26 and 87
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.
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 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