5. Conclusion
 
The mechanical effect of leaving the EU would be to strengthen the UK’s public
finances by around £8 billion a year as a direct result of ending our net
contribution to the EU’s budget. Future governments might well also decide to
spend somewhat less than the current £4 billion or so of EU money that goes to
support agriculture and, to a smaller extent, poorer regions such as Cornwall and
the west of Wales. In that case, the public finances would be strengthened by
somewhat more than £8 billion a year, though obviously at the expense of the
farmers and regions whose subsidies would be cut.
 
This mechanical effect would be substantially smaller if, post Brexit, a future UK
government were to decide to join the EEA in order to gain most, though not all,
of the benefits conferred by membership of the single market. It is hard to know
quite what the cost of that would be, but going by the Norwegian experience it
might reduce the budgetary benefit of Brexit by about a half, or possibly more, as
we would be required to make a contribution to the EU budget.
It would not, however, take a substantial effect on future national income to
offset this immediate £8 billion gain to the public finances. A fall in national
income of just 0.6% relative to what it would otherwise have been would be
enough. There is a wide range of estimates of both the short- and long-run effects
of a Brexit on national income. The vast majority suggest a negative effect
substantially in excess of 0.6% of national income.
 
In the short run, this negative effect is largely driven by an increase in
uncertainty leading to a reduction in investment, lower consumer spending, falls
in asset values and a hit to the exchange rate. In the longer run, more expensive
trade with the EU – much our biggest trade partner – is generally modelled as the
largest contributor to reduced national income, though a fall in foreign direct
investment (FDI) could also be important. The scale of the long-run hit will
depend on what trade arrangements we reach and the extent to which any
reduced trade flows feed through into reduced productivity. Some reduction in
regulation could have an offsetting effect, though most estimates are for this to be
relatively small. In any case, such effects would depend on future political
decisions, which are hard to forecast.
 
Looking at the short term, and in particular out to 2019–20, which is the year in
which we are supposed to reach budget surplus, forecasts for the effect of Brexit
range from a reduction in GDP of 6% to an estimate from ‘Economists for Brexit’
of an increase in GDP of 1.6% – though the latter is an outlier in having a positive
effect. The estimates of NIESR for a GDP hit of between 2.1% and 3.5% probably
provide a good central range for the likely impact on GDP in 2019. Including the
direct benefits of reduced budget contributions, these would lead to the public
finances being between about £20 billion and £40 billion less healthy than in a
scenario in which we did not leave the EU. Of course, the effects could be different
from that and NIESR is explicit that most risk is on the downside – i.e. the hit to  
GDP is more likely to be bigger than in the pessimistic scenario than it is to be
smaller than in the optimistic scenario.
 
How a government would react to this is uncertain. It is possible – though in our
judgement unlikely – that a further £20–40 billion of spending cuts or tax rises
would be implemented in years up to 2019–20 in an effort to keep the public
finances on track for the currently predicted £10 billion surplus. This would be
both difficult to achieve and unlikely to be appropriate in a period of weak
economic performance. Even restoring just a budget surplus would, under the
most optimistic scenario, be far from easy – for example, this would require an
additional fiscal tightening equivalent to increasing the cuts to day-to-day
spending by central government on public services planned for this parliament
by 40%, and increasing the planned cuts to social security by 40%, alongside a
£5 billion net tax rise. Perhaps more likely would be to extend the period of
‘austerity’ into the next parliament and identify tax rises or public spending cuts
then. In the more optimistic scenario, roughly an additional year of cuts at the
same rate as we have experienced over this decade would get us back to budget
balance. In the more pessimistic scenario, an additional two years would be
required. Another alternative would be simply to live with higher borrowing and
higher debt for a longer period.
 
This raises the question as to whether these are big changes. If we turned out to
have a £20–40 billion hit to the public finances, that would certainly be much
smaller than the effect of the 2008 recession, which hit the public finances to the
tune of around £175 billion. Indeed, it would be below the downgrades to the
forecasts made by the OBR between the Budgets of March 2011 and March 2013
(estimated at £43 billion). We have coped with those. On the other hand, we start
from a position of having a greater level of public sector net debt and, having
already done several years of spending cuts, less scope to cut public spending
with relatively little pain.
 
In the longer term, the way to think about the public finance effects of a lower
growth trajectory is a bit different. Assuming we want to keep public spending at
around the same proportion of national income into the future as it is currently
planned to be in 2019–20, then one would expect public spending, on neutral
assumptions, simply to follow the path of the economy. This, to borrow the
language that Mr Osborne used as shadow Chancellor prior to the financial crisis,
would be one way of sharing the proceeds of growth between additional public
spending and additional private consumption. If the economy, and private
earnings and consumption, are bigger then in general we see that public spending
is also bigger, and hence the quality of public services is greater. The reverse is
true when the economy is smaller. Over the longer term, the scenarios modelled
by NIESR suggest reductions in national income ranging from 1.8% to 7.8%. After
accounting for reduced spending on financial contributions to the EU, these falls
in national income would reduce the amount available to be spent publicly by
between £7 billion and £48 billion a year.

After  
accounting for reduced spending on financial contributions to the EU, these falls  
in national income would reduce the amount available to be spent publicly by  
between £7 billion and £48 billion a year.

The Bank of England’s chief economist, Andy Haldane, admitted last week that economists had suffered a ‘Michael Fish moment’ before the 2008 crash – a reference to the veteran weather forecaster’s dismissal of the prospect of a hurricane just hours before the Great Storm of October 1987.  
Haldane said of Brexit predictions: ‘We had foreseen a sharper slowdown in the economy than has happened, in common with almost every other mainstream macro forecaster.’

Three senior executives in the UK financial industry -- Elizabeth Corley, vice chair of Allianz Global Investors, London Stock Exchange Group CEO Xavier Rolet and HSBC Chairman Douglas Flint -- will face a Parliamentary inquiry Tuesday over claims they made in the run-up to the Brexit vote.

IBM pledges major investment in UK despite Brexit vote, joining Facebook and Google

Snapchat becomes latest tech firm to pick London despite Brexit

Rolls-Royce predicts £400m Brexit boost to revenues
 
http://www.scotsman.com/business/c [...] -1-4477668

Amazon said Monday that it will hire 5,000 new employees in the U.K. this year, making it the latest elite tech firm to brush aside fears over the country's exit from the European Union.

Google (GOOG) is building a new 650,000 sq. ft office in London. And Facebook (FB, Tech30) has announced plans to open a new office and hire 500 additional workers in London.

Brexit: Expedia to double size of its UK headquarters despite fears over EU departure
Announcement comes amid concerns about recruitment of skilled workers if controls on immigration are significantly tightened

Günther Oettinger, the European budget commissioner, said in an interview that net contributors to the E.U. budget, such as Germany, will have to pay more after Britain leaves the European Union.
https://global.handelsblatt.com/pol [...] xit-714735

Once Britain leaves the European Union, Germany could have to contribute an additional 4.5 billion euros per year in both 2019 and 2020 to the EU budget, according to an internal Finance Ministry report published on Saturday.
http://www.reuters.com/article/us- [...] SKCN11G0I9

South Korea’s Woori bank to open Frankfurt subsidiary ahead of Brexit

Morgan Stanley Likely to Move EU Headquarters to Frankfurt Amidst Brexit
 
After months of speculation, global lenders operating in the UK have finally started formalizing their plans for life after Brexit, with the industry poised for an exodus out of London. Morgan Stanley may soon become the first US bank to decide on its formal relocation plans, with all signs pointing to a move to Frankfurt.

Nomura and Daiwa choose Frankfurt as post-Brexit EU base
 
Japanese banks’ decisions boost German city’s goal to be Europe’s main financial city

Euro clearing businesses moving accounts to Frankfurt, lobby group chief says

M&G to move £6bn of funds from UK in Brexit risk hedge

Brexit effect? RBS to cut over 400 UK jobs, plans to move them to India

L&G plans to move jobs to Dublin post Brexit will not impact on Cardiff operation
The financial services giant is one of the biggest private sector employers in Cardiff

Brexit will make Britain worse off, Bank of England Governor Mark Carney says