Britain’s $55 Billion Brexit Bill Looks Like a ‘Bargain’ Deal

  • Bloomberg Economics: even a basic trade deal is worth it
  • Brexit bill would pay for itself in less than three years

Benefits From Canada-Style Deal Might Outweigh Brexit Bill

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U.K. Prime Minister Theresa May has provisionally agreed to pay about 40 billion pounds ($55 billion) as part of the country’s exit from the European Union

Some are up in arms about the tab, but analysis by Bloomberg Economics shows it’s a price worth accepting if it helps the U.K. win favor with EU negotiators and secure a trade deal that’s beneficial to the economy. 

In fact, it would pay for itself in less than three years by limiting damage to output, even if Britain only secures what BE describes as a “relatively unambitious” agreement.

Fiscal Sense

BE research shows a good trade deal is worth paying for

Source: Bloomberg Economics

Note: BE estimates for lost GDP flows are calculated using a discount rate. Comparison is Canada-style deal vs WTO.

“The conclusion, from an investment perspective, is simple; taking even a relatively unambitious trade deal is worth it. Clearly, the motives for leaving the EU don’t solely reflect economics, but those trusted with writing the next chapter in the U.K.’s economic history should consider what’s at stake.”

-- Dan Hanson and Jamie Murray, Bloomberg Economics

The new research comes as the U.K. government debates what kind of trade deal it will seek, before talks on the future relationship start in March. Given the U.K.’s red lines on getting control of EU immigration and breaking free from the rulings of European judges, the EU side has said it can only offer a trade deal similar to the one it gave Canada. That accord was the best in its class, but would be a downgrade from the access Britain now enjoys, particularly for the financial services industry. 

As the terms of the future trading relationship become clear, there’s a risk of rebellion in the pro-Brexit camp, which is already uneasy about the size of the divorce bill.

Read more: Bloomberg Economics says the Brexit bill is worth paying

Hanson and Murray earlier this month said the cost to the economy if May fails to secure an EU agreement would be a 6.5 percent hit to GDP by 2030. That’s compared with projections for growth if the U.K. stayed in the EU. They noted at the time that anything that helps trade would soften the blow.

The benefits of some form of trade pact are echoed in the latest research. With no clear sense yet of what will actually be agreed, BE compared the no-deal scenario (where the U.K. ends up on World Trade Organization rules) with a Canada-style settlement

Calculations based on a discounted loss of output show the cumulative total at 40 billion pounds by the end of 2021 in a no-deal scenario. That’s less than three years after the exit. Roll forward to the end of the decade, the sum amounts to 290 billion pounds.

According to BE, the “benefit of a trade agreement makes the divorce bill a bargain.”

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