Local level Brexit vulnerabilities in Scotland: Brexit Vulnerabilities Index (BVI)

2. Implications of Brexit

Scotland has been a member of the EU since 1973. During this time EU membership has been a central element of Scotland's economic and political model. It has been the main destination for Scotland's international exports, has provided significant funding for communities throughout Scotland, has allowed EU citizens to live and work in Scotland and for people in Scotland to easily travel across the continent.

Leaving the EU (Brexit) will therefore have a significant impact on communities across Scotland. There is broad consensus that Brexit will have a negative impact on Scotland's economy.^[8] A No Deal Brexit would impose an immediate economic shock on Scotland. Other forms of Brexit, which provide a transition period followed by a new relationship with the EU, would reduce the risk of a short-term economic shock, but are still expected to reduce Scotland's long run economic performance.

The Scottish Government has published a range of analysis highlighting both the short-term risks that a No Deal Brexit would represent and the long-term economic implications that different trading relationships could have. This section summarises this evidence and presents a methodology for identifying the areas of Scotland which may be most vulnerable to the consequences of such outcomes.

Economic Implications of a No Deal Brexit

Analysis by the Scottish Government's Chief Economist has considered the short-term economic impact that a No Deal Brexit could have on the Scottish economy.^[9] This analysis considered two different scenarios. In the first scenario - a short, sharp, supply disruption - it was assumed that a No Deal Brexit with no transition agreement leads to an immediate economic shock caused by disruption to supply chains, restrictions on trade, delays to investment and recruitment and a depreciation in Sterling leading to higher inflation and reducing household spending power. In the second scenario it is assumed that the supply shock lasts for longer, which in turn leads to a collapse in demand, through a sustained fall in consumer and business confidence.

There are a range of channels through which each scenario could impact on the wider economy. These are summarised in Figure 3. The headings in bold represent the additional transmission channels under the second scenario.

Figure 3 - Transmission Channels for a No Deal Brexit

Source: Scottish Government

The analysis concluded that collectively these pressures have the potential to result in GDP contracting by between 2.5% - 7% over a 12-18 month period depending on the way in which a No Deal Brexit outcome evolves, and for the unemployment rate to increase to up to 8%, equivalent to the number of people unemployed increasing by 100,000.

Similar conclusions have been drawn by other organisations. For example, the Bank of England has estimated that a 'disorderly' no deal, no transition scenario could reduce UK GDP by up to 7.5% by the end of 2023 relative to the May 2016 trend.^[10]

Long Term Economic Implications of Brexit

The Scottish Government paper 'Scotland's place in Europe: people, jobs and investment' highlighted the long-term implications that different trading relationships with the EU post-Brexit would have on Scotland's economy. This analysis assumed that the UK Government was able to achieve a deal with the EU, and that Brexit was followed by a transition period which reduced the short-term economic shock.

The report concluded that the most likely alternative scenarios to EU membership: a World Trade Organization style relationship, a Free Trade Agreement: outside the Single Market and Customs Union and Membership of the European Economic Area (EEA) would all result in GDP, disposable income and business investment being lower than if we remained in the EU as summarised in Table 1. These results were driven by the fact that leaving the EU is expected to reduce opportunities for trade and increase tariff and non-tariff barriers. This would reduce trade in goods and services, make Scotland a less attractive location for foreign direct investment, reduce net migration, and ultimately lower levels of productivity growth.

Table 1 Headline Macroeconomic Indicators by 2030 relative to a baseline of Full EU Membership

Source: Scottish Government Global Econometric Model (SGGEM)

Impact of Brexit on different Communities

Many of the trends identified above will operate at a UK or international level, and certainly at a level much higher than that which is easily measurable for local communities. However, they will all have local impacts and consequences.

These local impacts will not be uniform. Some communities will see a greater impact because they have a greater reliance on workers from the EU, or because a high proportion of their companies trade with the EU. For example, there is a relatively high concentration of horticulture farms in parts of Angus, which is both a sector economically exposed to Brexit, and a sector which relies on seasonal migrant workers. Other communities will have less direct exposure to Brexit, but will already suffer from relatively high levels of deprivation which will make them less able to absorb the impact of an economic shock or higher prices.

Likewise, in some communities the economic implications of Brexit will exacerbate underlying challenges. For example, many rural communities already face the challenge of depopulation. Migration, including from the EU, has helped to ameliorate or alleviate this trend over the past decade, but this may not remain the case post Brexit.

Finally, many communities have benefited from EC funding for a number of decades. In rural Scotland, Agri-food businesses have been supported by CAP.^[11] In urban areas European Social Funds help vulnerable communities, and wider European Structural Funds (of which the social fund is a part) support a range of social and economic programmes across Scotland. There is no guarantee that the UK Government will continue to fund replacement programmes in the same manner or at the same level in the long term. Indeed, if Brexit permanently reduces the UK's economic performance, as most studies expect, this in itself could result in public spending being lower in future years than if we had remained in the EU.