Coronavirus (COVID-19): the case for extending the Brexit transition period

Executive Summary

Despite Scotland having voted to remain, the UK has left the EU. But - though Brexit has already had a damaging impact on our economy - the main impact of leaving has not yet been felt because the UK is operating under transitional arrangements which ensure our producers, consumers and citizens continue to benefit from full membership of the EU single market.

The transition period is scheduled to finish on 31 December 2020. This paper sets out why it is vital, if we are to ensure the most rapid recovery possible from the COVID-19 crisis, that the UK Government immediately seeks an extension to the transition period for up to two years.

The Scottish Government, and the overwhelming majority of people in Scotland opposed Brexit. That remains the case. However, regardless of views on EU membership it is clear that COVID-19 has vastly increased the difficulties that firms across the country face in preparing for a hard Brexit (outside the Single Market and Customs Union) in December. Extending the transition period for a further two years is an appropriate and desirable economic measure that will support economic activity, employment and a speedier return to inclusive, sustainable growth.

The arguments in favour of an extension are that:

• It would allow the economy more time to recover from COVID-19 before experiencing the additional negative impact of ending the Brexit transition;
• The COVID-19 pandemic has prevented government, business and citizens from preparing adequately for what will be the most significant change to our external trade policy for half a century; and
• Proper democratic and technical scrutiny and implementation of the UK's putative new relationship with the EU is simply not possible in the few months remaining before December this year - the end of the current transition period.

Ending the transition period at the end of 2020, even with the type of basic deal the UK government is pursuing, or worse still without a deal with the EU at all, will represent a significant additional downside risk to the trajectory of the economic recovery. Immediate and short-run effects will include:

• Introduction of non-tariff barriers to trade with the EU (and tariff barriers in a no deal outcome);
• Increased disruption to supply chains already experiencing challenges due to COVID-19; and
• Heightened uncertainty in some markets.

The combined impact of these effects on businesses that are already severely affected by COVID-19 could result in widespread business closures and job losses over and above those resulting from COVID-19 alone.

New economic modelling shows the impact of ending the transition period at end-2020 or, with the full two-year extension provided for by the Withdrawal Agreement, at end-2022. We also model the impact of two outcomes to the current EU-UK negotiations, either a basic Free Trade Agreement in line with the UK government's unambitious aspirations, or no deal. The lack of progress in the negotiations so far and the impact of COVID-19 on the negotiating process make no deal a real possibility. These Brexit scenarios are overlaid on two illustrative paths for the recovery of the economy from COVID-19.

The modelling indicates that ending transition this year would result in Scottish GDP being between £1.1 billion and £1.8 billion lower by 2022 (0.7 to 1.1% of GDP), compared with ending transition at the end of 2022. That would be equivalent to a cumulative loss of economic activity of between nearly £2 billion and £3 billion over those two years. A proportionate impact would be likely for the UK economy. This will clearly hamper recovery from the impact of the pandemic.

Simply extending the transition period would thus postpone the costs of Brexit, which is crucial at this time. But beyond this - and in addition to the costs identified by the modelling - exiting the current transitional arrangements before Scotland has emerged from the COVID-19 crisis would greatly increase the costs of Brexit to the Scottish economy, in comparison to a two year extension. This is for two main reasons:

• Because of COVID-19, Scottish companies will be in a much more fragile state and less able to absorb the impact of Brexit at the end of this year than in two years' time; and
• Because of the need, rightly, for both business and government to focus now on COVID-19, they will be less prepared now than they would be in two years, resulting in even greater disruption. This would be the case whether or not a deal is agreed.

This paper also reports on the cumulative impact of the COVID-19 and Brexit shocks on key sectors. All sectors of the economy have been affected in some way by COVID-19 - many profoundly so - and will face a further adverse effect if the UK leaves the transition period in December. Analysis of exposure by sector shows the manufacturing and agrifood sectors to be particularly vulnerable to the additional shock of ending the transition period.

There is also evidence, which this paper sets out, that both COVID-19 and Brexit have particular impacts on the most vulnerable sections of society.

The impact of COVID-19 has exacerbated what was already an unrealistically tight timetable for governments and businesses to be ready to exit the transition period by the end of this year.

A fundamental problem is that preparation for the arrangements that will need to be in place cannot be done with confidence, because those arrangements are still being negotiated. Simply knowing that the outcome will be somewhere between a basic FTA and no deal is not enough. Businesses still do not know, for example:

• what tariffs there may or may not be on trade with the EU;
• which regulations they should follow;
• what Customs paperwork and processes will apply;
• how people and data will be able to cross borders in order to make businesses work; or
• whether professional qualifications will be recognised.

The case for extending the transitional period for a further two years is informed by the very real and inevitable damage to our economy, to our communities and to our citizens that - as evidenced in this paper - will result if the UK Government continues to pursue a policy of ending the transitional arrangements with the EU regardless of the consequences for our collective recovery from the most destructive global health and economic crisis in living memory.

None of the arguments put forward by the UK government and others against an extension stand up to scrutiny:

• Businesses do not want to remove uncertainty through a disorderly and damaging end to the transition period this year, when they will not have had time to prepare properly, but by having adequate time to prepare for an orderly move to a close future trading relationship with the EU;
• Extending the transition period does not expose the UK to unquantified future budget commitments: under the Withdrawal Agreement the Financial Terms for Extension have to be agreed before an extension is agreed, so, If there is an extension, the UK will know and have agreed the financial implications in advance;
• There is no basis to expect the EU to put in place regulatory measures damaging to the UK in any extension period: they have shown no inclination to do so during the current transition period, and, in any case, except for emergency measures, EU legislation normally takes around two years to negotiate and implement.

There have been suggestions that one motivation for rejecting an extension is to hide the adverse impact of Brexit In the bigger COVID-19 impacts: no responsible government could choose such a path, but no other convincing argument has been put forward.

Opinion polls suggest that a clear majority of the UK population would favour an extension as a result of COVID-19. Time is running out. After June 30 there will be no reliable way of extending the transition period. As a responsible administration which, notwithstanding our fundamental opposition to Brexit, is working to protect Scotland's interests in the Brexit process, we call upon the UK Government to act now to secure an extension to the end of 2022.