The Economic Costs of Brexit on the UK

The Issue:

Brexit, the United Kingdom’s decision to withdraw from the European Union, is a rare contemporary example of a major developed economy raising trade barriers and more generally pulling back from international economic integration. When the Brexit referendum took place in 2016, academic and professional economists generally forecast that the policy about-face would result in a negative hit to the United Kingdom’s economy of about 4% of GDP over the long-term. Rather than a sudden, visible economic shock following the vote, the costs of Brexit have been gradual and cumulative. Now, almost a decade later, new research aims to assess Brexit’s actual impact on the United Kingdom’s economy, which involves the challenging task of comparing the country’s economic indicators to what they would have been if the United Kingdom had remained in the European Union. This research finds that, ten years on, the economic cost of Brexit has been larger than analysts predicted and that prolonged policy uncertainty contributed importantly to the magnitude of the impact. Understanding the ways in which Brexit resulted in a drag on economic growth for the United Kingdom provides potential lessons about the costs of abruptly pulling back from the global economy for other countries.

We estimate that by 2025, Brexit had reduced UK GDP by 6% to 8%, with the impact accumulating gradually over time.

The Facts:

• Brexit has been a long and legislatively complex process. The 2016 referendum ushered in a period of prolonged policy uncertainty in the United Kingdom. The UK’s decision to leave the European Union in 2016 represented a radical policy shift after decades of pursuing greater European economic integration. The Brexit process started when the “Leave” campaign unexpectedly won the June 2016 UK EU Membership Referendum by 51.9% to 48.1%. (The betting markets put the odds on the UK voting to leave the EU at around 30% in the months before the vote). But the complexity of the Brexit process meant that it was not until 31 January 2020 that the UK formally left the EU, with a transition period running until 31 December 2020, and negotiations on Northern Ireland stretching into 2023. As such, it was not until 2024 that the Brexit process was close to completion. (In fact, issues related to fishing rights, farming exports, defense and energy policy were still subject of negotiation in 2025).
• The changes brought about by Brexit went beyond making it more difficult for the trade of goods and services and for the movement of workers between the UK and the EU. European Union membership had provided the United Kingdom with access to the European single market — a zone with no barriers to the movement of goods, services, capital and people. Brexit meant that the terms and bureaucratic procedures involved in those transactions had to be renegotiated, determined and reestablished. The end of the United Kingdom’s membership in the EU single market increased paperwork and administrative costs of exporting and importing that made trade between the UK and the EU more cumbersome and more expensive. After Brexit, UK workers no longer had the automatic right to work in European Union countries and vice versa, as work permits were now required, affecting also EU companies that had a presence in the United Kingdom. Brexit also ended fiscal transfers between the EU and the UK which supported British agriculture, regional development, and research. There have been many other impacts beyond that, as the UK had to create its own legislation, standards, and rules in areas that had formerly been set by the EU. 
• One way to gauge the costs of Brexit is to compare the performance of the UK relative to comparable countries in the decades before and after the Brexit vote. It is challenging to estimate how the United Kingdom’s economy would have performed in the absence of Brexit, particularly given the large economic disruptions that took place due to the COVID pandemic. However, evaluating the UK’s economic performance relative to other similar countries before and after Brexit can provide an estimate of the policy’s impact. Prior to the Brexit referendum, UK GDP was growing at a similar rate to that of 33 other comparable countries: the 27 members of the EU, the United States, Canada, Japan, Iceland, Norway, and Switzerland. In the wake of the referendum, however, the GDP of the UK grew more slowly than the average of the other countries in the analysis, (see chart). Similarly, business investment, employment and labor productivity are all estimated to have grown by less in the United Kingdom than in other comparable countries since 2016. Our estimates suggest that by 2025, Brexit had reduced UK GDP by 6% to 8%, with the impact accumulating gradually over time. UK business investment is estimated to have been, on average, 18% lower than that of comparable countries. UK employment and labor productivity are estimated to have been, on average, 4% lower than other similar countries. 
• An alternative way to estimate the costs of Brexit is by analyzing the performance of UK companies in the periods before and after the referendum. Some firms were more exposed to Brexit, for instance firms with higher shares of exports to the EU; firms that relied more on EU imports; that had a higher share of EU migrants in their workforce; that had a higher share of production covered by EU regulation; that had directors that were EU nationals; or firms that were EU owned. Comparing the performance of UK firms that were more exposed to Brexit to those that were not can also provide a measure of Brexit’s impact. Using the Decision Maker Panel (DMP) Survey, a large and representative monthly online panel survey of UK businesses that we set up in 2016, we find that firms with higher levels of exposure to the EU exhibited greater adverse effects of Brexit. These firms had faster investment growth before the referendum but lower investment growth than other firms after the referendum. Aggregating from firm data, we estimate that business investment was 12 percent lower by 2023/2024 than would have been the case in the absence of Brexit. Notably, this effect built up gradually over time rather than exhibiting a sharp fall in the immediate wake of the referendum, consistent with what we found when looking at the macroeconomic comparisons. More exposed firms also had lower employment growth after the referendum than those that had less EU exposure. The cumulative effect after seven years of Brexit was an estimated reduction of employment of 3.5 percent for private sector companies and 3 percent for the entire economy. These effects, like those of investment, also accumulated over time. Similarly, the estimated reduction in labor productivity based on survey evidence is a 3.5 percent reduction for private-sector companies by 2023, the last year for which we had data on this measure.
• The survey results illustrate some of the ways in which Brexit had these adverse economic effects. The DMP Survey revealed that the vote for Brexit generated large, broad, and long-lasting increases in uncertainty. This increased uncertainty was strongly associated with decreased investment and could have lowered productivity by reducing spending on intangibles like research and development, information technology, and management that can boost productivity. The dampening effects of Brexit on employment appear most strongly associated with expectations of lower future demand. There were also high costs associated with preparing for and dealing with Brexit, including the time spent by senior management: the surveys indicate nearly one-in-ten Chief Financial Officers were spending six or more hours per week on this, and nearly three-quarters were spending some time on it, between 2017 and 2020. Productivity may have been dampened over the longer term because of lower trade and less specialization rather than with the costs of transition and heightened uncertainty. These estimates based on company-level information have similar profiles to the estimates from the macroeconomic analysis described in the previous bullet point – although the larger macroeconomic results could imply that there were spillover effects to firms not directly linked to the EU but which were impacted through the effects on other firms that had interactions with the EU.