Brexit analysis

This Forecast in-depth page has been updated with information available at the time of the March 2024 Economic and fiscal outlook.

Since the announcement of the EU referendum we have been producing analysis and writing about the potential effects of Brexit on the economy and public finances. We have compiled our assumptions, judgements and analysis on this page.

  Current assumptions and judgements

This page sets out our assumptions related to EU exit that underpin our latest March 2024 forecast. Specifically, our latest economy forecast assumes that:

  • The post-Brexit trading relationship between the UK and EU, as set out in the ‘Trade and Cooperation Agreement’ (TCA) that came into effect on 1 January 2021, will reduce long-run productivity by 4 per cent relative to remaining in the EU. This largely reflects our view that the increase in non-tariff barriers on UK-EU trade acts as an additional impediment to the exploitation of comparative advantage. In order to generate this figure, we looked at a range of external estimates of the effect of leaving the EU under the terms of a ‘typical’ free trade agreement (FTA) (see Box 2.1 of our March 2020 EFO for more information). Our assessment is that the TCA is broadly similar to the ‘typical’ FTAs assumed in those studies and reflected in our forecasts since March 2020. We estimate that around two-fifths of the 4 per cent impact had already occurred by the time the TCA came into force, as a result of uncertainty weighing on investment and capital deepening (see Box 2.2 of our March 2021 EFO for more information).
  • Both exports and imports will be around 15 per cent lower in the long run than if the UK had remained in the EU. The size of this adjustment is calibrated to match the average estimate of a number of external studies that considered the impact of leaving the EU on the volume of UK-EU trade (see our November 2016 EFO for more information). Impacts on export and import growth are similar, therefore downward revisions to gross trade flows are broadly neutral in their effect on the current account over the medium term. Box 2.5 of our October 2021 EFO and Box 2.6 of our March 2022 EFO provide initial assessments of this assumption.
  • New trade deals with non-EU countries will not have a material impact, and any effect will be gradual (see our 2018 Discussion paper for more detail). This is because the deals concluded to date either replicate (or ‘roll over’) deals that the UK already benefited from as an EU member state, or do not have a material impact on our forecast. An example of the former is the UK-Japan ‘Comprehensive Economic Partnership Agreement’ – which largely mirrors the agreement Japan signed with the EU in 2019 – where the Government’s economic impact assessment suggests that it will increase the UK’s GDP by 0.1 per cent over the next 15 years (see the Government’s October 2020 UK-Japan CEPA: final impact assessment). This estimate is relative to not having a trade deal with Japan, whereas the UK would have been part of the EU-Japan agreement had it not left the EU. An example of the latter is the free-trade agreement with Australia, the first to be concluded with a country that does not have a similar arrangement with the EU. The Government’s estimate of the economic impact is that it will raise the UK’s GDP by 0.1 per cent over 15 years (see the Government’s December 2021 UK-Australia FTA: impact assessment).
  • We had assumed that the Government’s new post-Brexit migration regime would reduce net inward migration to the UK, settling at 129,000 a year in the medium-term, based on the ONS ‘zero net EU migration variant’ of the 2018-based population projections (see Box 2.4 of our March 2020 EFO). We have since revised up our projections for net migration to reflect evidence of sustained strength in inward migration since the post-Brexit migration regime was introduced. We now assume net migration settles at 315,000 a year in the medium term, based on the ONS 2021-based interim population projections (see Box 2.3 of our March 2024 EFO). This compares to 245,000 in our November 2023 forecast, which was based on the ONS 2020-based interim migration projections.

The key assumptions regarding our fiscal forecast are that:

  • The savings associated with expenditure transfers to EU institutions (after factoring in the cost of the financial settlement) are now entirely captured within the Government’s departmental spending (DEL) plans. Box 3.5 of our March 2020 EFO explains this judgement in more detail.
  • The ongoing costs associated with the EU financial settlement are published in the expenditure supplementary tables alongside the latest forecast on our website. Annex B of our March 2018 forecast explains the financial settlement in more detail.
  • Our revenue forecasts include the tariff revenue collected on both EU and non-EU trade based on the UK Global Tariff (UKGT) introduced on 1 January 2021. Annex A of our October 2021 EFO discusses the likely reasons behind customs duty receipts in 2021-22 running ahead of expectations. The outturn data suggests that higher-than-expected receipts from EU imports (due to low preferential utilisation rates (PURs)) is the single largest factor when compared to the original costing of the UKGT (described in Annex A of our November 2020 EFO). PURs measure the proportion of imports that meet the ‘rules of origin’ requirements set out in the UK-EU TCA, which allow them to qualify for tariff-free access. Our latest forecast is for receipts from 2021-22 to be an average of £1.9 billion a year higher when compared to our March 2020 forecast.
  • Many aspects of the VAT and excise duty regimes changed during 2021. We assume that these changes lead to a temporary rise in the level of tax non-compliance. Paragraphs A.28 to A.32 of our November 2020 EFO set out the detail behind this assumption, which reflects the readiness of both Government and firms for the upcoming border changes as well as evidence from past episodes of tax non-compliance.
  • Paragraph 3.8 of our March 2021 EFO sets out a variety of other fiscal implications related to EU exit policy, such as the implementation of the new UK emissions trading scheme, a variety of changes to the VAT and duty regimes, the initial fiscal implications of the points-based immigration system and eligibility rules for EU citizens accessing student finance in England. The detailed implementation of some of these policies, for example around the migration regime, remain ongoing.

There remains significant uncertainty both around some of the outstanding elements of our future economic relationship with the EU as well as the response of firms and households to the new trading arrangements. So we will continue to update our forecast assumptions as existing arrangements are revised, new agreements are reached, and new data emerges, in our Economic and fiscal outlooks and other publications.

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  Previous in-depth analysis

Since the referendum in June 2016, the OBR has conducted a range of analysis on the economic and fiscal implications of EU exit. This section sets out a summary of analysis that was undertaken to inform our previous forecasts:

  • Our November 2016 forecast incorporated initial estimates of the effect that the vote to leave the EU would have on the economy and public finances. We incorporated a series of broad-brush assumptions about the economic and fiscal impact of Brexit that would be consistent with a variety of future trading relationships with the EU, given the absence of a meaningful basis upon which to predict the precise outcome of the negotiations. The most important assumptions were initial downward revisions to our trend productivity growth and net migration forecasts. We evaluated these initial judgements in Box 2.1 of our March 2018 EFO.
  • Annex B of our November 2017 forecast set out our initial ‘top-down’ approach to forecasting post-Brexit financial flows between the UK and EU budgets. In the absence of firm policy detail, we assumed that the net fiscal savings associated with these flows would be recycled into domestic spending in the UK. Box 3.5 of our March 2020 EFO set out how the savings associated with these flows were eventually rolled into the higher departmental spending (DEL) forecasts.
  • Annex B of our March 2018 forecast included an initial ‘bottom up’ estimate of the UK’s financial settlement (the so-called ‘divorce bill’) with the EU. We produce updated estimates of this settlement alongside each EFO, please see our supplementary fiscal tables: expenditure for more information.
  • Our October 2018 Discussion paper on Brexit and the OBR’s forecasts explained how we expected to approach the task of making forecasts and projections in the pre- and post-Brexit environment. We also discussed how we would approach incorporating some associated policy decisions, including those related to migration, third-country trade agreements, regulatory changes, and tax and spending policies.
  • Chapter 10 of our July 2019 Fiscal risks report included a stress test which explored the economic and fiscal implications of a ‘no deal, no transition’ outcome to the EU exit negotiations. We also produced an alternative ‘no deal’ scenario that explored the economic and fiscal implications of the UK’s trading relationship with the EU defaulting to World Trade Organization (WTO) terms in Annex B of our November 2020 forecast.
  • Our March 2020 forecast incorporated estimates of the effect that trading under the terms of a ‘typical’ free trade agreement would have on productivity in the long run. We assumed that this channel would reduce long-run productivity by 4 per cent relative to remaining in the EU, with around one-third of this effectively already seen in the data due to post-referendum uncertainty weighing on business investment. Box 2.1 sets this analysis out in more detail. We also assumed that the new migration regime would reduce output at the forecast horizon. Box 2.4 sets this analysis out in more detail.
  • Our March 2021 forecast included an assessment of the Trade and Cooperation Agreement (TCA), as well as estimates of the economic and fiscal impact of its first two months of operation. We forecast that the associated short-term disruption would temporarily reduce GDP by 0.5 per cent at the start of 2021. Our estimate of the impact of the TCA on long-run productivity was unchanged from the 4 per cent reduction incorporated into our March 2020 forecast, as we judged that the content of the TCA was broadly in line with the assumption of a ‘typical’ FTA that underpinned that earlier estimate. Box 2.2 sets this analysis out in more detail.
  • Our October 2021 EFO included an initial assessment of the effect of the TCA on UK trade with the EU. We judged that the evidence so far suggests that both import and export intensity have been reduced by Brexit, with developments still consistent with our assumption of an eventual 15 per cent reduction in each. However, it was too early to reach a definitive conclusion, not least since the full terms of the TCA were yet to be implemented. Box 2.5 sets out this analysis in more detail.
  • Our March 2022 EFO included an updated assessment of the impact of the TCA on UK trade. We concluded that there was still little in the data to suggest our assumption that Brexit would reduce trade intensity by 15 per cent is no longer a central estimate. We also looked at the UK’s recent trade performance relative to other advanced economies and found that the UK appeared to have missed out on much of the recovery in global trade since the start of the pandemic. Box 2.6 sets out this analysis in more detail.
  • Our March 2023 EFO included updated evidence for the impact of the TCA on UK trade, productivity, investment, and migration. We concluded that while migration has been higher than we anticipated, investment growth has been significantly weaker than we expected before the referendum, and our assumption about the impact of Brexit on the UK’s trade intensity is broadly on track. As a result, we have not revised our trade and productivity assumptions but we have incorporated the latest ONS migration population projection in our central forecast.
  • Our March 2024 EFO included an updated assessment of the impact of the TCA on UK trade. We concluded that our assumption that Brexit would reduce trade intensity by 15 per cent appeared to be broadly on track. We also looked at the UK’s recent trade performance relative to the rest of the G7 and found a significant divergence between the performance of goods and services since the pandemic. Box 2.4 sets out this analysis in more detail.

The box sets area of our website also sets out other previous pieces of analysis related to Brexit and the EU.

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  Future work

It is not within the OBR’s mandate or resources to discern and separately estimate the impact of the UK’s exit from the EU and related policies on all the elements of our forecasts on an ongoing basis.

Instead, our forecasts are produced in an iterative manner, incorporating policy and other developments as they materialise. When we update these forecasts, we aim to be as transparent as possible in explaining how and why we think the outlook has changed since our previous forecast, including where this relates to the changing nature of our economic relationship with the EU. Often our estimates draw heavily upon academic research and analysis by other institutions, including the EU exit: Long-term analysis produced by HM Government in November 2018.

The economic and fiscal shock associated with the end of the Brexit transition period occurred as the country was still dealing with the pandemic. This comes on top of the stagnation in productivity seen since the global financial crisis. And more recently, the impact of the Russian invasion of Ukraine. These factors mean that it will, in practice, be very difficult to isolate the effect of the new trading relationship with the EU on the medium-term economic and fiscal outlook.

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