The economic implications of Brexit for Scotland October: 2016

Outline Potential economic impacts of Brexit on the Scottish economy Our methodology Results Conclusions Next Steps

Long-term economic considerations of Brexit Trading relationships – with EU and non-EU countries International investment – access to EU capital markets & international investment Population & labour market – future migration trends & regulation Fiscal contributions – gross & net contributions Dynamic effects – productivity, competition, innovation

Introduction There have been a number of macroeconomic analyses of the likely impact of Brexit for the UK (Treasury; OECD; NIESR) However, to date there have been no analyses of: the impact on Scotland or other UK regions; the sectoral distribution of effects.

Introduction This study begins to address this gap by providing an interregional and multi- sectoral analysis of Brexit on Scotland. We model the potential impact on Scotland (and rUK – crucial to capturing spill- over effects given Scotland’s high levels of integration with UK supply chain)

Brexit means……. We interpret Brexit as implying the UK as a whole leaving the EU We focus on the likely economic effects: Adverse impact on Scottish and RUK exports to the EU – non-tariff barriers; Fiscal boost from smaller net contributions to EU budget; Potentially higher tariffs with EU under certain scenarios; Potential “dynamic” effects - productivity impact

Key qualitative results Significant impact on Scotland - scale depends upon final ‘deal’ We find that the impact is slightly less on Scotland than rUK The size of the relative long-term impact by sector depends on complex interplay between EU-export intensity and sensitivity to changes in competitiveness Focus now needs to be on what needs to be done to protect individual firms/industries and crucially, scope out new opportunities

Methodology

Our methodology We make use of an 18-sector Computable General Equilibrium (CGE) model of the Scottish and rUK economies CGE models provide detailed representation of the economy and capture the interlinkages between the private sector, government and households Our model combines economic data with a complex system of equations to give a picture of the structure and operation of the Scottish economy

Our methodology We examine the long-term impacts of Brexit by comparing world with less economic integration with EU to status quo We assume ‘all-else remains equal’ – particularly trading relationships with 3rd countries and possible policy responses We assess impact on sector by sector basis. In practice, each product – not just sector – will face own unique circumstances

Our methodology In base case, we apply an ‘export-shock’ from trade theory & empirical research We then trace impact on Scottish (and rUK) economy – taking into account: EU-export intensity of sectors; Proportion of value added in total output & relative size of sector; ‘Local’ multipliers and local inputs; and, Sensitivity of each sector to competitiveness boost – real depreciation & lower real wages

Our methodology 3 ‘stylised’ examples as an illustration - other scenarios are possible – qualitative results are robust to size of shock (though clearly scale is subject to change) Norway Switzerland WTO

Long-term shock to exports

Results

Scottish EU exports

Norwegian Example

Norwegian Example – sector results Export shock is largest in sectors with highest exposure to EU trade: Other Primary; Wholesale & Retail, Transportation & Storage; Food & Drink. In long-run, the greatest contraction in GVA is in Wholesale & Retail, Transportation & Storage and Professional Services & R&D In relative terms, Other Primary (output 5-8% lower); Chemicals & Pharmaceutical (3-5% lower); Electrical Manufacturing (3-5% lower) and Rubber, Cement, Glass & Metals manufacturing (3-5% lower) are hardest hit

WTO Example

Other effects to consider Repatriation of net contributions to EU budget Export tariffs on EU trade

WTO Example

Other effects to consider Repatriation of net contributions to EU budget Export tariffs on EU trade Possible productivity effects

Conclusions

Conclusions Brexit is likely to have a negative impact on the Scottish economy - even under more optimistic scenarios Scale of impact depends on precise form of Brexit – fiscal savings not sufficient to offset wider shock Additional reductions in activity could result from: Any dynamic effects – such as a fall in labour productivity; Any induced net outward migration to the rest of World

Conclusions Impacts vary by sector Modelling is macroeconomic – therefore applies aggregate shock at the sectoral level ….allows us to obtain interesting insights. Scale of impact by sector ultimately depends upon complex mix of exposure to EU markets, wider competitiveness and links with rUK Next step on sector dimension likely to require detailed product-by-product analysis Crucial now that focus turns to opportunities and supporting sectors adjust to new ‘normal’