Brexit and the NIESR

I have been conducting a Facebook debate with some chums about Brexit. Two (who shall remain nameless), in particular, are fiercely pro-Brexit where I am firmly on the side of #Remain. One of these Brexistas made reference to the National Institute of Economic and Social Research (NIESR) referring to material by Angus Armstrong to support some point he was trying to make.

For those unfamiliar with the NIESR, this is from their website:

The National Institute of Economic and Social Research is Britain’s longest established independent research institute, founded in 1938. The vision of our founders was to carry out research to improve understanding of the economic and social forces that affect people’s lives, and the ways in which policy can bring about change.

I have spent the day trawling through some of the material on the NIESR website. There’s a load of stuff, but I tried to focus on recent, Brexit-related material. What follows is selected quotes (bold text is my emphasis) from the material. I admit to bias, but I have tried to use quotes that accurately reflect the meaning of the source.

I am posting this on ODDROPS because WordPress is easier to use than Facebook for this kind of article.

The Impact of Possible Migration Scenarios after ‘Brexit’ on the State Pension System
Angus Armstrong; Van de Ven, J, 02 June 2016

From the summary:

Our main conclusions are that reductions in immigration would have a negative impact on the public finances. To offset these impacts policy change in the form of increases in national insurance contributions, reductions in pensioner benefits, or increases in the state pension age could be used. More restrictive immigration policies would, not surprisingly, have more negative impacts.

On mitigation:

However, these impacts could be mitigated, and indeed reversed, were the government to be able to successfully implement a very significant change in the incomes (and implicitly the skills or qualifications) of new migrants by introducing a skills or points based migration policy (perhaps similar to the policy in Australia). The reduction in EU migrants, an increase in total non EU migrants and an up-scaling of skills are all possible policies which have been aired in the referendum debate. However, an important policy question, which we do not address here, is whether these policies would and could actually be delivered in practice.

Commentary – The economic consequences of leaving the EU
Angus Armstrong; Portes, J, 10 May 2016

On the influence of the UK within the EU:

Our first research article by Menon and Salter examines the degree to which the UK is able to set and influence the EU’s agenda. They find that, despite headlines about the UK being ‘outvoted’, that at least up until the most recent period, the UK has been relatively successful in influencing policy, in both a negative (preventative) and positive (proposing) sense. In many ways the UK has steered the EU in its own preferred direction of market liberalisation combined with national control of social policies… If we vote to Remain, re-establishing the UK’s centrality to EU debates will be an urgent task.

On the Treaties et al vs FTA’s:

Services account for the overwhelming majority of the UK economy, and a large and growing proportion of our trade. Focusing on the sectors of tourism and higher education, Barnard and Ludlow examine how the process of liberalisation, driven by EU law and policy, has largely worked to the benefit of the UK… Currently, the Treaties, the Commission and the European Court of Justice mean that there are strong central authorities which broadly share the UK agenda. We would lose our influence within these bodies, and our ability to call on them for recourse. By comparison Free Trade Agreements (FTA) do not cover all services, and there is no region in the world which has such a high level of integration of services across sovereign borders.

On the financial sector:

For good or (sometimes) ill, the financial sector plays a key role in the UK economy, and is a major contributor to our trade performance and public finances. Despite remaining outside the Eurozone, London continues to be Europe’s dominant centre of financial services. It is difficult to see how leaving not just the EU but also the wider EEA would not have important implications for this status. Armstrong argues that some substantial UK institutions would necessarily be excluded from key parts of the European financial infrastructure, including central counterparty clearing houses. This in turn could have major consequences for the decisions of private sector firms on where to locate both their headquarters operations and large parts of their operational business.

On the cost of membership:

Begg… concludes that, although it is a net contributor to an extent comparable with several other Member States of a similar level of prosperity, the UK does not face an unfair share of the burden of the gross costs of the EU.

On FTA’s:

Shifting to a free trade agreement is not, as some would argue, a relatively minor matter. It would be uncharted territory, likely to result in significant changes to the structure of the UK economy, particularly in respect of the tradeable services sectors.

On the economic impact:

However, in all cases the key mechanism leading to the decline in GDP is a decline in trade openness, which is assumed to feed through into a decline in investment and labour productivity.

In the short term, we expect that a vote to leave would result in a significant economic downturn, with unemployment rising by up to 1.7 per cent. However, as uncertainty was resolved, employment and growth would recover. Over the long term, our results are somewhat less pessimistic than those of the Treasury or OECD, with the long-term hit to GDP ranging from about 1.5 to 3.7 per cent.

Initial results suggest that substantial reductions in EU migration will reduce GDP per capita and worsen the overall fiscal position; in other words, changes to migration policy would likely further exacerbate the negative economic impacts.

On Economists for Brexit:

Finally, we note that a group called ‘Economists for Brexit’ has produced a model based forecast showing a positive impact on GDP of withdrawing from the EU, assuming that the UK moved to implement a policy of unilateral free trade (Economists for Brexit, 2016)… The resulting impact estimates therefore do not appear credible.

On making new deals:

Leave campaigners… argue that the UK would in fact be able to negotiate arrangements with the remaining EU that would ensure that any reduction in trade was mitigated and that at the same time the UK would succeed in negotiating new free trade arrangements with non-EU countries.

These assertions are impossible to disprove ex ante. However, future trading arrangements with the EU would require complex and difficult negotiations, while leaders from the US, China and India have stated that they would prefer to deal with the UK within the EU. A fair summary is that the overwhelming weight of economic opinion is that leaving the EU would not have a significant negative trade impact if – and only if – the UK was able to undertake a remarkably successful series of complex and difficult trade policy negotiations after leaving the EU.

On the risks:

Those in the Leave campaign emphasise that there are also risks to staying in the EU: the status quo is not an option. There is indeed widespread recognition that the economic governance of the EU, and in particular the Eurozone, has proved hopelessly inadequate, and that fundamental change is required… While the Prime Minister’s agreement with EU Heads of State in February secured a number of clear safeguards, the possibility that Eurozone nations caucus and introduce rules unsuitable for non-Eurozone members cannot be eliminated. If we remain, we do at least have the opportunity to shape and influence those changes.

Risks are also attached to remaining in the EU, but appear easier to manage.

The consensus on modelling Brexit
Jack Meaning, Oriol Carreras, Kirby, S, Rebecca Piggott, 23 May 2016

On all those models:

In the case of the EU referendum, it seems that the central result of lower output, a falling pound and higher inflation, is robust to the range of assumptions made by a large number of economists, with a variety of methodologies and ideologies, even if the precise quantitative estimates vary at times.

Immigration, free movement and the EU referendum
Portes, J, 10 May 2016

On the impact of EU migration on employment:

To the considerable surprise of many economists, including this author, there is now a clear consensus that even in the short term EU migration does not appear to have had a negative impact on the employment outcomes of UK natives.

On the impact of EU migration on wages:

While the evidence on wage impacts is less conclusive, the emerging consensus is that recent migration has had little or no impact overall, but possibly some, small, negative impact on low skilled workers.

On benefit tourism:

In fact, the UK government has been notably unable to substantiate its position that ‘benefit tourism’ is a significant policy concern. There is no evidence that access to the UK benefit system is a major driver of migration flows. Overall, migrants are under-represented among benefit claimants, and especially claimants of unemployment and other out-of-work benefits. And while it is EU migrants who claim significant amounts of ‘in-work’ benefits, which are available to low paid workers, especially those with children, most do so only after they have already been resident for several years, suggesting it has little to do with their original migration decision (Portes, 2015). The wider economic literature also supports the view that differences in benefit entitlements are not a significant driver of migration (Giuletti, 2014).

On EU and non-EU migration:

Migration Watch (2016), for example, argues that applying the same migration rules to EU nationals as currently apply to non-EU ones would reduce net migration by about 100,000. It follows that further significant reductions in non-EU migration – which is currently slightly higher than EU migration – would be required to meet the government’s pledge.The economic consequences would be significant. As Nardelli (2015) points out, in the short term a reduction in migration on this scale would jeopardise the government’s ability to achieve its fiscal targets.

On wages:

The evidence on the impact on wages suggests that there a restrictive policy might have some (relatively small) positive direct impact on wages for low skilled workers, although little or none for medium and highly skilled workers. However, the impact on incomes would be more than offset by the wider negative economic and fiscal impacts.

On nothing much changing in the levels of immigration:

However, whether for political or economic reasons, some proponents of Brexit have argued that it would allow a more liberal approach to non-EU migration… This would mean that immigration continued to run at historically fairly high levels; it could, however, support a rebalancing from unskilled jobs to skilled migration.

After Brexit: how important would UK trade be to the EU?
Portes, J, 02 Nov 2015

On negotiating a deal:

So how important would exporting to the UK be to the EU economy after Brexit? EU exports to the UK would represent about 3 percent of EU GDP; not negligible by any means, but equally perhaps not as dramatic as one might think. The EU, and even more so the UK, would certainly have a strong incentive to negotiate a sensible trading arrangement post-Brexit. But no-one should imagine the UK holds all the cards.

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