What are the financial and economic numbers behind the issue of Brexit?

I have regularly been asked for a breakdown of the finance and economics around the concept of the UK leaving the European Union. Perhaps the easiest part is to say that it is the European Union as some have been saying Europe which of course will remain about 22 miles from Dover in Kent whatever happens! As ever I will avoid the politics and stick to the numbers we can get something of a handle on. There are also a lot of areas which are contentious and the reason for that is we simply do not know some of the factors which will be in play. Let me illustrate by this published by the Open University magazine Conversationalist.

It opens by parroting the words of Chancellor Osborne.

George Osborne has said that mortgage rates will rise if there’s an Out vote.

It then argues that the higher risks of Brexit would mean this situation will happen.

This translates into higher borrowing costs for the UK government, and higher costs of capital for UK businesses.

Furthermore an outflow of capital will put pressure on many areas of the economy. Oh and aping “the pound would collapse” rhetoric of Yes Prime Minister we are told this.

The consensus forecasts are that the exchange rate would fall from its current value of around £1 for €1.27 to something more like parity with the euro. The latest forecast from the National Institute of Economic and Social Research think tank is of a 20% fall in the value of sterling

Such forecasts are fascinating. Has anybody published the track record of the NIESR in currency forecasting so we can see if they have the skills of a Druckenmiller or Soros?! I have to confess it is hard not to have a wry smile at such forecasts but on those grounds and the fact that many part of the UK establishment seem to have forgotten they want a lower UK Pound £ to help with the current account and trade deficits. Indeed it was Bank of England policy under Baron King of Lothbury although of course the promised “rebalancing” never happened.

One bit I can agree with.

Britain will face a substantial short-term economic shock if it votes to leave the EU.

The substantial may well be overdoing it and hype but there will be ch-ch-changes and a shock. Let me just deal with the higher mortgage rates point. You see and to be fair the article does mention this the Bank of England could have “an emergency interest rate cut” . If it chose it also could then use the Funding for Lending Scheme to reduce mortgage rates just like it did in the summer of 2012 and perhaps some more QE as well. After all some policymakers are heading in that direction anyway. Indeed those that are will be noting today’s data on economic growth.

Between Quarter 1 2015 and Quarter 1 2016, GDP in volume terms increased by 2.0%, revised down 0.1 percentage points from the previously published estimate……The latest Index of Services estimates show that output decreased by 0.1% between February 2016 and March 2016.

Suddenly mortgage rates are not rising and the situation is different again.

How much do we pay into the European Union?

The situation here is typically complex as the UK ONS explains.

The UK’s contribution to the EU budget changes each year as it is dependent on various factors such as: UK Gross National Income (GNI), the GNI of other EU member states and the value of the UK rebate (which is not a fixed amount, rather it is based on payments and receipts for the previous year).

In terms of numbers we have seen that the net contribution was £11.3 billion in 2013 and £9.9 billion in 2014. The 2015 numbers are still estimates but are as follows.

A 2015 initial figure used by some commentators in the debate is the £8.5 billion estimate of the UK’s 2015 contribution (which is net of the rebate and the direct payments from the EU to the public sector)…….Another estimate can be found in table H of this ONS release which includes some information on the UK’s official transactions with the EU in 2015. The figure published here is £10.6 billion; however, the information used to calculate this figure is approximate

Sadly it will not be finalised until the 29th of July when for referendum purposes it will be over a month too late. The numbers are never complete because some EU expenditure is general and not specified by country and some income such as fines is not split by country and these are around 2% of the totals.

What about trade?

This is a perennial issue for the UK economy with its seemingly endless deficits in this area where trade with the European Union is a major sub-plot. The latest ONS numbers are shown below.

In 2015, 44% of the UK’s goods and services were exported to the EU, while 53% of our imports came to the UK from the EU.

In the same year, UK exports to the EU were valued at £223.3 billion, while UK imports from the EU stood at £291.1 billion.

We rarely give ourselves credit for being a major trading nation although as I have already pointed out in accountancy terms we are regular debtors. The EU is a major trading partner and we provide some £291.1 billion of gross demand for their goods and services which is £67.8 billion in net terms. That is a lot especially to the countries in the EU which have seen particular economic difficulty such as Italy, Portugal and Greece. Indeed even countries currently in better shape such as Ireland and Spain see quite a bit of trade with the UK. And there is this.

15% of imports of goods came from Germany

From their point of view we are this.

The UK is also a relatively small export destination for EU goods, accounting for 6%-7% of total exports of other EU countries over the past eight years

I think “relatively small” is somewhat misleading as they are 27 nations so of course yes but who would want to give up 6-7% of their exports?

We have been shifting away from the EU in recent times although we have become more important to them.

Last year, goods exports to non-EU countries pulled ahead, with a 53% share of the total….The share of EU exports going to the UK has been gradually declining over the past 15 years, but it has risen marginally in the last four years.

There is also the “Rotterdam Effect” which inflates trade with the European Union via double-counting as total trade rather than value added is often used. Efforts have been made to reduce this but it still exists.

Comment

As you can see the tangible numbers tell us that the UK makes a substantial contribution to the EU budget and supplies a large amount of net demand for EU economies each year. I have often pointed out we are much better Europeans than we are given credit for. However this is a long way from the end of the story as there are a lot of factors we cannot specify. Would companies leave the UK post Brexit? What are the invisible benefits and costs of being part of the European Union? How will GDP growth change? After all even supporters of the IMF have to have had a wry smile at predicting a fall of 1.5% to 9.5%. You could drive a fleet of London buses through that! And of course that would have been appropriate for Greece but the IMF turned its “blind eye” to that.

There are costs to and risks in leaving as well as remaining in the EU. But in economic terms there are more dangers on the morning of the 24th of June if we leave. For example yes there could be problems for the Pound and the UK Gilt market and there could be a subsequent loss of trade with Europe. We do not know how much though beyond that there will be some of each. The uncertainty has been raised today by the migration figures which have been published as I cannot see how we can have any confidence in them, after all people have freedom of movement within the EU. But here they are.

In 2015, a total of 44% (277,000) of long-term immigrants to the UK were non-EU citizens, 43% (270,000) were EU citizens and 13% (83,000) were British citizens……

This is good for the age balance of the UK population and demographics but also looks to have contributed to the troubles with real wages.

So we know some of the picture but we also know that a fair bit is missing.

Meanwhile remember how we are regularly told how well things are going especially in Japan? Well someone seems to have changed the record. From Reuters.

Japanese Prime Minister Shinzo Abe warned his Group of Seven counterparts of a crisis on the scale of Lehman Brothers, Nikkei reported

Pensions and Tata Steel

Whilst on the subject of number crunching this suggestion for Tata Steel pensioners is wrong on so many levels. From the BBC.

The government is expected to propose basing the scheme’s annual increase on the Consumer Prices Index (CPI) inflation measure, which is usually below the current Retail Prices Index (RPI) measure.

This is a stealth cut to benefits by around 1% per annum which soon mounts up. It is therefore a breach of contract which presumably they hope to get away with because pensioners will not understand it. Even worse it sets a precedent.

So as Dawn Penn reminds us.

No no no

 

 

 

 

 

 

 

 

Advertisements

23 thoughts on “What are the financial and economic numbers behind the issue of Brexit?

  1. Well done, Shaun. What a delight to get away from all the fear and “glitterature” we have been bombarded with over the past how many weeks! Cutting through the froth ensures an unbalanced picture and I am sure this will help in our decision-making. any possibility of similar-themed pieces (say one a week) during the next few weeks? Thanks very much,
    Ray Fletcher

  2. Shaun, thanks for trying to make sense of the cascade of nonsense coming from the leave and particularly the remain camps. I agree that the markets would have a temporary panic attack the morning after a vote to leave however it doesn’t take much to spook them these days. I have decided to look beyond the economics and base my decision on the desire to be governed by our own government, who, despite all their faults can be elected or booted out and are held accountable to the citizens of the UK. The EU on the other hand has a massive democratic deficit and follows an agenda that is very unpopular with the European public and are for all practical purposes is unaccountable to the public. Jean Claude Junker has also given a very clear indication that Cameron’s so called reforms will be dumped in the waste basket the day after we vote to remain. I am also very concerned that the creation of an EU army will seriously deplete the commitment to NATO and produce an expensive but useless armed force that requires the agreement of all members before being deployed. And how likely is that? Recent events have shown the EU to be an ineffective talking shop when confronting Russia, or committing to Libya and Syria. I would not trust an EU army to defend our interests should another Falklands occur. They have already suggesting we negotiate with Spain over sovereignty of Gibraltar.

    I think we will vote to remain as the fear campaign resonates with the most basic concerns of Joe public, even if the arguments do not stand scrutiny. I also believe that, like the Scottish referendum, there will be a massive swing towards anti EU sentiment in the months following a vote to remain. The issue will remain a festering boil on the bum of our relations with the EU.

  3. For some reason my posting omitted the last line which was:

    I would like the UK to be a member of an EU; but not this one.

    • Hi Oldal and welcome to my website.

      The comments from Prime Minister Abe were to say the least odd. From Bloomberg in more detail.

      “Japanese Prime Minister Shinzo Abe presented documents to his fellow Group of Seven leaders Thursday that he said indicated a risk of the world economy falling into a crisis on the scale of the 2008 Lehman shock if appropriate policy measures weren’t taken.

      Abe presented documents showing that commodity prices had fallen by 55 percent between 2014 and January 2016, similar to the margin by which they fell in 2008-2009, among other data. The presentation at the summit in Mie Prefecture in central Japan could play into domestic economic policy, as Abe has frequently said that he would proceed with a planned increase in the sales tax in April 2017 unless there is an event on the scale of the Lehman shock or a major earthquake.”

      Abe seems to have forgotten that Japan is a manufacturing nation which should be a large net gainer from the lower commodity prices. Although there is an Ooops! As of course driving the Yen lower offset that.

  4. Hello Shaun,

    Thanks for the article. Its a bit difficult to comment on the financials of the EU membership mainly because its really a political union and a botched financial one.

    A proper union would have done both

    So which EU party do I vote for ? well actually there is none ! plenty of national parties support the EU but theres no real EU wide party of any colour

    In or out ?

    A comparison between Iceland, Norway and Sweden with Greece Spain and Portugal would seem in order .

    But its as Pavlaki said , who do you want to govern you ? a faceless technocrat or a polefaced MP ? 🙂

    Either way the public will be bamboozled by the MSM , if you want to know the way to vote – figure out why all the parties here WANT you vote to stay in , then think of Blair and Kinnock !

    Forbin

    Will be fooled again – the who ( misprint )

    or do describe the pollies

    Winkers song – Ivor Biggun and the Red Nosed Burgulars

    • Hi Forbin

      Well as you watch events I am sorry to tell you that the price of corn has been edging higher ( US $4.09) so your popcorn might rise in price. It might be a passing phase but a few agricultural commodities are doing that so it is time to monitor the CRB again I think.

  5. Great blog, Shaun, as always. Thank you for telling us about the plans to change the index used for uprating Tata Steel pensions from the RPI to the CPI. I arbitrarily looked at just the average inflation rate over the last five years (i.e. April 2011 to April 2016). It was 0.9% for CPI, 1.6% for RPIJ and 2.2% for RPI. Note that even the average RPIJ inflation rate is 0.7 percentage points lower than its CPI counterpart. The government believed that RPI inflation was overstated by about 0.7 percentage points, i.e. the difference between RPI and RPIJ inflation and could have reformed the RPI to remove the difference. They used their duty to protect gilt holders as a lame excuse for leaving RPI as it was, but they easily could have phased the change in over several years. RPIJ was introduced in March 2013. If they had started phasing in the changes to RPI then they would be largely done. Instead they introduced RPIJ, kept RPI as it was and now they plan to get rid of RPIJ and leave RPI on life support. One wonders if this wasn’t the plan all along. If a government likes to blow up housing bubbles, it doesn’t want an upratings index, reformed or not, that includes housing prices. So they are gambling that they will be able to make British people accept the CPI as an appropriate upratings index, when it should be obvious that it isn’t fit for purpose.

    • Hi Andrew

      It is quite a mess isn’t it? As you say it would have been more logical to switch to RPIJ from RPI. But I suspect that the numbers you quote show why the UK establishment prefered CPI. A difference of 0.7% per annum soon mounts up.

      I know you had faith and belief in RPIJ but it appears that the UK establishment simply wanted to use it as a weapon against RPI and then lost interest.

  6. Shameful cynicism at work here, nothing new, but maybe new hieghts.
    From the BBC news pages today, on Tata pensions:
    1) “Proposals to change Tata’s pension scheme would be unique to the company and would not be applied more broadly, Business Secretary Sajid Javid has said…Speaking in Parliament, Mr Javid said he was “wary of setting a precedent”…
    2) “Earlier, former Lib Dem pensions minister Steve Webb said: “The government is going down a very dangerous path….Everyone has huge sympathy for steel workers and for efforts to protect jobs, but rushed changes to pension rules risk driving a coach and horses through the pension security of hundreds of thousands of workers well beyond the steel industry.”

    Wary about setting precedents, these two politicans? Hang about…. in 2010 my fully subscribed for and contracted occupational pension (teachers’), along with as I recal BT’s, maybe others, was moved roughshod from RPI to CPI, without a by-your-leave, occasioning great loss to the victims(successfully riding roughshod over contractual obligation). By then Minister for Pension….wait for it…. tada….your friend and my friend….none other than…Steve Webb!!

    • Hi James, if it helps I too was a Public Servant until 2007 when I saw the light and escaped.

      My pension was calculated at that time and “index linked”.

      Upon seeing the RPI replaced with the CPI in 2010 I considered taking the Government to court via a class action with all other ex Public Sector workers whose pensions had been frozen and index linked. Upon further research I found the Pension agreement stated something along the lines that the value of your pension would be linked to “an appropriate index” allowing the Government to rip us off in this particularly cynical way. Until I did the research I had always believed our pensions were linked the RPI – hey ho……

      • Forgot to hammer the point home, the Government got away with it with us because of the loose wording of the Pension agreement.

        Anyone with a more tightly worded pension agreement naming the RPI as the reference index will, imo have a good case to take the offending authority to court over, whether it be Tata , the company/organisation assuming Tata’s pension liabilities or any other employer.

        • Interesting and thanks, but like you, self-interest has equipped me with the same close working knowledge as you of that nasty bit of 2010 dirty work by the coalition. What I was more hoping to draw attention to was Webb’s Olympics-standard hypocrisy (and Javid’s ignorance of wherewith he speaks and may legislate). I know they all despise history (so inconvenient), but this was only 6 years ago! Nor have I noticed any of pour sharp-eyed journos notice this things either, (though I hardly read them these days).

  7. Accurate forecasts are beyond our politicians – just look at their track record. Hence it is nonsense and a dishonest distraction to make economic predictions on relative performance of 2 inaccurate forecasts.

    The real issues are political, not economic. Accountability for Brussels spending. Accountability for politicians spending British taxpayers money. Real democracy from Swiss style referendums. Real referendums on whether to prosecute those involved in cross border bailouts, whether to remain in the euro. Accountability for politicians whose assets exceed their taxable incomes etc.

    To grow richer and more equitable, Europe needs more accountability.
    http://www.novinite.com/articles/174128/German+Investors+Disappointed+by+Bulgaria's+Corruption%2C+Judiciary

    • Hi ExpatInBG

      Do you think that being in the European Union has made any difference to corruption in Bulgaria? One of the reasons the UK was supposedly wanted in the EEC as it was then was to help reduce corruption in southern Europe.

      • Yes the EU has helped a bit. In the 1990s many politicians and mafiaosi were murdered – and the rate is now much lower. But I think more accountability is needed. Greece and Italy suffer many of the same problems – intentionally disfunctional bureaucracy and lack of any oversight on spending EU funds. Even France has major issues as shown by Edith Cresson ….

    • “Accurate forecasts are beyond our politicians ”
      _________________________________________
      Disagree.
      Unpleasant ones are.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s