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'No deal' Brexit could add £930 a year to UK shopping bills, say experts

The Guardian logo The Guardian 04/11/2017 Dan Roberts Brexit policy editor
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Households face increases of up to £930 in their annual shopping bills if Britain walks away from Brexit talks without a trade deal, according to new research which reveals a disproportionate impact on poorer families and the unemployed.

Meat, vegetables, dairy products, clothing and footwear would be subject to the largest consumer price rises under a “no-deal” scenario, according to a study published in the authoritative National Institute Economic Review, adding to inflationary pressures that have already forced the first interest rate rise in a decade this week.

Stalled negotiations resume next week in Brussels, but the government is also about to publish a trade bill which would result in Britain being required to apply swingeing new tariffs on European imports if it falls back on World Trade Organisation rules.

Since WTO tariffs are highest for fresh food – reaching 45% for dairy products and 37% for meat – and much of this is currently imported from Europe, the team of economists predict an inflationary surge that could match that already inflicted by the falling pound.

This would impact most on those least able to afford it, as poorer households typically spend a much higher proportion of their income on food and other essentials. For the 2m worst-affected households, the study predicts their weekly expenditure will rise by 2-4.7%, equivalent to £400-930 extra a year.

Supermarket © Getty Supermarket “The overall increase in price in the affected goods is estimated to be 2.7% and this translates into an increase in the overall cost of living of 0.8-1.1% for a typical family, with the unemployed and families, those with children and pensioners hit hardest,” conclude the economists from the University of Sussex and Resolution Foundation.

“This may seem a small number but, in a country in which the real incomes of ordinary families have been stagnant for several years, a loss of this order would have a significant effect on welfare.”

Nonetheless, the Brexit secretary, David Davis, warned MPs this week that the government still needed to seriously consider pursuing the no-deal option in the face of alleged EU intransigence over exit negotiations.

A government spokesman said: “While it is the duty of a responsible government to plan for all scenarios, we are clear that a deep and special partnership with the EU is the most likely outcome.

“We are confident of securing a deal which is in the interests of both the UK as a whole and our European partners.”

In the long run, Brexit enthusiasts argue that Britain could offset the rising cost of European imports by growing more food at home and striking new trade deals with countries such as the US, Australia and New Zealand.

Chris Grayling, the transport secretary, predicted last month: “It would mean that … supermarkets bought more at home, that British farmers produced more, that they bought more from around the world and it would damage French producers and continental producers.”

But the researchers, who modelled the impact of import substitution, argue there is a limit to how much can be grown in Britain due to land and labour shortages. International trade deals may take many years to complete and offer limited replacement sources for fresh produce in particular.

“[This] is a very conservative estimate,” said the report. “We deal only with goods, not the over 60% of expenditure on services; we ignore increases in UK costs of production; we ignore the probable increase in other suppliers’ prices as EU suppliers suffer a decline in competitiveness; and we ignore the inevitable increase in non-tariff frictions in UK–EU trade.”

Under WTO rules, there is limited room for manoeuvre for any government seeking to mitigate the impact.

The UK has decided to adopt the existing EU tariff schedule agreed at the WTO in order to simplify and speed up its ability to continue trade with the rest of the world after Brexit.

But any attempt just to ignore tariffs applied on EU imports would have to matched by the same offer to all other WTO members under rules known as Most Favoured Nation. This could risk a sudden surge of super cheap imports that could devastate British farmers and remove a vital bargaining chip in future trade talks.

The economists who wrote the report “Will Brexit raise the cost of living?” said one of the few silver linings would be that the bulk of the extra customs duties from WTO tariffs would be collected by the UK government.

“This means the overall economic welfare effects will be less than the number we have calculated but, in the absence of the government redistributing that money, it will just be extra money into the government coffers,” said Prof Alan Winters, one of the report’s authors. “Brexit clearly also has public finance consequences, meaning the tax take would almost certainly come down and there would be claims for increased expenditure elsewhere.”

The Bank of England warned this week that “the decision to leave the European Union is having a noticeable impact on the economic outlook … uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly”.

Next week, the government is expected to preview its planned new trade legislation envisaged as part of Brexit preparations. Officials say they will set out the legislation needed to transition existing EU trade deals into the UK and introduce other measures such as setting up a trade remedies body to handle trade disputes.

But in its white paper announcing the legislation, the government confirmed its plan to copy existing WTO tariff schedules.

“In order to minimise disruption to trade, the government has announced it will, as far as possible, replicate its existing commitments as set out in the EU’s schedules of commitments and submit these for certification in the WTO ahead of leaving the EU,” it wrote.

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