Regions outside London hit hardest by post-Brexit price rises, says IPPR
Regions of the UK outside London are expected to experience greater impacts from price rises caused by Brexit, according to new research from the progressive policy think tank, IPPR.
Likely rises in transport costs will contribute to a disproportionate impact on household spending in areas outside the capital, the new analysis shows.
Researchers modelled the likely effect of two Brexit scenarios on prices and household spending and found the same pattern of effects under each.
They estimate how price rises due to likely new trade barriers with the EU after Brexit will affect areas of the UK in different ways, based on varying household spending patterns. The researchers found larger impacts outside London, in part because housing costs – expected to be less affected by Brexit – make up a smaller part of their spending. Meanwhile, transport costs, likely to rise more through increased prices of vehicles, make up a larger part of household spending outside the capital.
Impacts on prices are estimated to be largest under a ‘hard’ Brexit, where the UK leaves the EU on WTO terms. Under this scenario, an average ‘basket’ of goods and services bought by a household would rise in price by 2.7 per cent in London, compared with rises of between 3 and 3.2 per cent for households elsewhere in the UK.
The IPPR report, which explores the potential effects of Brexit on different income groups, nations and regions, genders and ethnicities, also found that:
· More highly paying industries, such as finance and chemicals, are expected to suffer more negative economic impacts (negative GVA) from Brexit. But a number of lower-paid sectors are also expected to be negatively hit.
· Prices are expected to rise for all household income groups, and reductions in tariffs for imports from non-EU countries would be unlikely to fully compensate for these price rises. But price rises will have a broadly neutral effect on income inequality.
· Wales and the North East are the regions with the highest EU goods exports relative to the size of their economies, putting them at greater risk of an adverse economic impact from trade barriers in goods. Localities with the highest EU goods exports relative to the size of their economies are Flintshire and Wrexham, Sunderland, Telford and Wrekin, South and West Derbyshire, and Luton.
The report recommends that the best way of minimising the predicted negative impacts of Brexit on poorer groups and regions is for the UK to pursue the option of a ‘shared market’ in its negotiations with the EU. This would include a comprehensive customs union and an agreement on regulatory alignment with the single market, together with a mechanism to allow for the possibility of divergence over time.
Commenting on the findings, IPPR senior research fellow and author of the report, Marley Morris, said:
“Our findings suggest that post-Brexit price rises will squeeze incomes more in parts of the UK outside London.
“Limiting these impacts will require a new relationship with the EU that preserves our trade links. Negotiating a ‘shared market’ – based on a customs union and a deal on alignment with the EU’s single market – is the most promising strategy for minimising post-Brexit price increases for households.”
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The report’s author, Marley Morris, is available for interview.
1. The full report ‘An equal exit? The distributional consequences of leaving the EU’ is available (under embargo) upon request. It will also be available online at 00:01 Wednesday 4th July 2018 at: https://www.ippr.org/research/publications/an-equal-exit
2. The report ‘The Shared Market’ is also available here: https://www.ippr.org/publications/the-shared-market
3. The analysis in this report is drawn from a range of academic studies. The regional price impacts analysis is based on the results of the LSE’s modelling of the impacts of Brexit (‘The costs and benefits of leaving the EU: trade effects’ (Dhingra et al. 2017).) Using a similar approach to the LSE’s distributional analysis (‘Who bears the pain? How the costs of Brexit would be distributed across income groups’ (Breinlich et al. 2016)), we combine the LSE model’s results on final price impacts with regional household expenditure data from the ONS Living Costs and Food survey. In the LSE’s study, ‘Soft Brexit’ is defined as staying in the single market, while ‘hard Brexit’ is defined as leaving on WTO terms.
4. The report assesses and evaluates assumptions of both Remain and Leave supporters. It presents the evidence on where Brexit might have a positive, neutral or negative effect on inequality. The analysis has been reviewed by a number of academics who were involved in the original research we have drawn from. The report recommends a position in the Brexit negotiations from a particular progressive perspective, while also recognising that those with different priorities might draw different conclusions.
5. IPPR is a registered charity and the UK’s pre-eminent progressive think tank. We exist to promote research and educate the public on the economic, social and political sciences and in science and technology, the voluntary sector and social enterprise, public services, and industry and commerce. With more than 40 staff in offices in London, Manchester, Newcastle and Edinburgh, IPPR is Britain’s only national think tank with a truly national presence. IPPR did not take a position in the referendum on the UK’s membership of the European Union and the findings of this report are not intended to support either a ‘leave’ or ‘remain’ position.