“Modelling potential economic impacts of Brexit
We need to understand how the potential long-term effects of Brexit could affect people living on low incomes. JRF has been working with Cambridge Econometrics to model the impact of a new UK-EU relationship based on a range of potential scenarios. These range from the ‘Norway’ model (staying in the single market) through to a no deal relationship.
The evidence suggests that an increasingly distant trading relationship with the EU will mean higher non-tariff barriers, lower net migration, lower inward investment, and – in a no deal scenario – tariffs for EU-UK trade.
Introducing new costs for trade with our primary trading partner inevitably leads to lower trade and economic output – which would affect prices, employment, and real wages. The modelling suggests that by 2030 the average low-income household would need to find an additional £480 per year to maintain the same standard of living (in 2016/17 prices) due to price inflation caused by Brexit under a no deal scenario.
Effect on poverty
So, what would this mean for poverty in the UK? Our analysis finds that wages aren’t likely to rise by enough to offset the effects of inflation, so real wages will fall which will be felt by people across the income spectrum.
In addition to wages, for many low-income households benefits and tax credits are vital for maintaining a decent standard of living, as they are already stuck on low pay that doesn’t allow them to cover their costs. How badly they are hit by rising prices will depend on whether the Government chooses to raise benefits and tax credits to match inflation.
If the Government uprated all benefits and tax credits in line with inflation – in contrast to its current policy where they are frozen – we find that poverty would, if anything, be lower because low-income households would be more protected against rising inflation than higher-income households. If the Government does not do this, it will leave low-income households falling further behind, with incomes shrinking as costs rise, leading to higher numbers of families trapped in poverty”.