Brexit: Five Economic Myths that Conceal Reality

Myth

Leaving the EU would solve the migrant problem.

Reality

Historically, most migrants to the UK have come from non-EU countries

This myth forms a crucial part of the Leave campaign. However, it rests on partly misleading arguments. In the 20 years to 2011, non-EU net migration was almost double EU migration.

Net migration from the EU increased when Eastern European countries joined the EU in 2004, and in the wake of the euro crisis. However, it is still slightly lower than net migration from non-EU countries.

If the UK perceived migration as a real problem, the UK could restrict the number of non-EU migrants from entering. The EU’s freedom of movement rules does not apply to non-EU migrants.

While EU membership gives EU workers the right to come to the UK, it is entirely up to the UK authorities to decide how many non-EU migrants are allowed into the UK.

Myth

EU migrants, especially those from Eastern Europe, are a burden to UK economy and public finances in the UK

Reality

EU migrants, including those from Eastern Europe, are on average better educated than natives. They are a net-positive for UK public finances

Unemployment for EU migrants is lower than for natives, as we discussed in our first report. In addition, EU migrants, including those from Eastern Europe, are on average also better educated than natives.

The economic literature is clear on the benefits of having a more educated population: less crime, better health, and higher earnings, to name but a few.

Moreover, since EU migrants (including Eastern Europeans) are at least as economically active as natives, research finds a positive impact from EU migrants (including Eastern Europeans) on UK public finances.

Under the current system, the UK is mostly attracting the right kind of immigrants from the EU already. As a result, UK does not need an Australian type points based system, as suggested by the Leave campaign as an alternative for a post-Brexit UK.

Beyond the extra administrative costs it would create, it would rely on government or some other central agency to identify supply gaps in the labor market and then allocate foreign workers accordingly in a more effective way than the current market based system.

It makes little sense to risk introducing a government failure where a market failure doesn’t exist.

Myth

If the UK does not leave the EU and does not reduce net migration from the EU, migration will put the capacity of public services such as schools and hospitals under unmanageable strain and will worsen the housing crisis

Reality

EU migrants make a positive net contribution to the UK budget. They enable the UK to offer more public services.

If services do come under strain, a lack of investment in capacity, rather than too many people, is the most likely cause. And bad policy, not too many people, is the cause of the housing crisis

After gradually accelerating since the late 1980s, population growth has in recent years stabilized at a relatively high rate compared to historical levels. But restricting EU migration would not have made a decisive difference.

The Migration Observatory at Oxford University finds that around half of the increase in the UK population since 1991 is due to net migration.

Since 1991, EU migrants have accounted for just over a quarter of total net migration into the UK and thus, for only a small portion of the growth in the UK population.

Restricting EU migration would not reduce the stress on public services or housing decisively. Current or future pressure on public services and housing is due to poor fiscal management and a failure of land and planning regulation.

These stresses could be avoided with better domestic policy. The trend rate of nominal GDP growth has fallen post-Lehman, primarily due to weak productivity growth coming from a lack of private investment.

Real government capital spending, which makes up only around 10% of total government spending, has collapsed too. The UK government can borrow at a record low rate because of a global savings glut and high demand for low risk assets.

Now would be a good time to utilize the cheap funding to expand government investment. Done properly, this would enhance productivity, raise trend growth and thus help to reduce the structural fiscal deficit.

Similarly, the argument that immigrants compete with natives for housing – pushing up prices to unaffordable levels – misses the major point. The UK housing market suffers mainly from a lack of supply rather than excess demand.

Less than 10% of Britain is urbanized. It does not lack space. Better land and planning laws to make the supply side of the market more responsive to changing demand conditions, especially when demand increases, are badly needed.

Such changes would be a better solution to the housing crisis than reducing net migration.

Myth 4

The UK joined the European project on the understanding it was exclusively an economic/free-trade community

Reality

Labour Party prime minister Harold Wilson made clear to parliament as early as 1967 that the European project was a political project as well as an economic project

Here’s a quote from Wilson in 1967:

But whatever the economic arguments, the House will realize that, as I have repeatedly made clear, the Government’s purpose derives above all from our recognition that Europe is now faced with the opportunity of a great move forward in political unity and that we can — and indeed must — play our full part in it.

Wilson then goes on to say:

It is for all these reasons that we intend to pursue our application for membership with all the vigor and determination at our command.

The UK has changed its view on the European project since then. Cameron’s renegotiated terms, which exclude Britain from “an ever-closer-union,” make it clear that the UK will primarily focus on the economic rather than the political side of the project if it stays in the EU.

UK parliament discussed the concept of a European political union as early as the 1960s. It is debatable whether or not the intentions of the project were properly appreciated by the UK public, but UK parliament did understand that membership in the European club would ultimately involve political commitments.

It cannot be said that Britain was duped by Europe into joining the community on the basis that it was exclusively an economic project. The blame for misunderstanding falls on the shoulders of UK government.

Since the UK joined, the major changes to the club that affected the UK were the completion of the common market advanced by Lord Cockfield and Prime Minister Thatcher in the late 1980s, the partial reform of the common agricultural policy and the eastern enlargement of 2004.

The UK was in favor of these initiatives. The UK gained opt-outs from other integration steps such as monetary union or the Schengen free travel area. ‎

The UK was never duped into any significant kind of integration it did not want. Remember that it was the UK’s own decision to fully open its labor market for Eastern European when these countries joined the EU‎ in 2004 instead of applying a 10-year transition period like Germany and almost all other EU members first.

Myth

If the UK leaves the EU, it could re-embrace the Commonwealth

Reality

The Commonwealth accounts for a relatively small proportion of demand for UK goods and services. The potential is limited. And being in the EU does not prevent the UK from expanding its trade with Commonwealth economies in the first place

The top 50 UK export destinations account for 95% of total UK exports. Only 10 of the UK’s top 50 export destinations are Commonwealth nations (Gibraltar included).

The top Commonwealth trading partners together account for a mere 8% of total UK exports. This pales in comparison to the 17 EU countries in the top 50, which account for 46% of total UK exports.

The export share going to the Commonwealth is also below the share of exports to countries with which the UK already has some form of trade agreement through EU membership.

This group of nine countries accounts for 9% of total exports. This figure is marginally higher if you include South Africa (Commonwealth) that also has a trade agreement with the EU.

The remaining 14 countries, that are neither in the Commonwealth nor in the EU and with whom the EU and hence the UK do not have some form of trade agreement make up 33% of total exports.

Examples of other countries within the EU, such as Germany, show there is nothing stopping the UK expanding its trade with non-EU economies or fast growing emerging markets. Germany exports almost 20% more than the UK to the major Commonwealth economies (Chart 4) – and over three times as much as the UK to China.