1. The economic implications of Brexit for Scotland
October: 2016

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

3. 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

4. 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.

5. 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)

6. 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

7. 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

8. Methodology

9. 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

10. 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

11. 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

12. 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

13. Long-term shock to exports

14. Results

15. Scottish EU exports

16. Norwegian Example

17. 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

18. WTO Example

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

20. WTO Example

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

22. Conclusions

23. 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

24. 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’