Passporting is a fundamental way in which the EU does business. It defines an important set of benefits open to members of the EU, and passporting rights are not generally made available to 3rd party states. The UK will become a 3rd party state after a Hard Brexit, and hence lose almost all of these advantages it currently enjoys with the EU.
Passporting issues were virtually ignored in the Brexit referendum debates, and have only surfaced relatively recently as the truth has dawned that new institutional arrangements will be required post Brexit, and business will not be “as normal” in a post Brexit future..
In a Services Slump scenario, constructed after detailed analysis of the air, and land transport sector, as well as the financial services sector, the loss of passporting rights will be painful. It is estimated using an Input-Output approach, that solely as a result of weakening output in these three industries, overall national gross output could fall by over 6%. Regionally the brunt of the adjustment will fall on London and the South East, which will become the worst affected parts of the UK. When this is combined with the results of earlier studies looking at the impact of tariffs and restrictions on the flow of goods, double digit falls in output nationally would appear to be possible.
Losses of passporting rights will negatively affect the financial sector, itself a large contributor to tax revenues. This could lead to a reduction of around £20 billion a year in tax revenue, seriously complicating the government’s policies regarding financial and fiscal stability. No Brexit Bonanza has been identified, and the government appears to have no fiscal room to provide additional counter cyclical support for the UK service and other sectors. To achieve this, the government would either have to raise taxes, or increase borrowing. Both of which cross its own electoral “red lines”.
The results of this analysis strongly suggest that a Hard Brexit is effectively a passport (road) to nowhere. Either continued membership of the EU, or becoming a member of the EEA, or in negotiating similar arrangements as with Switzerland, would all appear to be more economically beneficial than the current Hard Brexit course.
This paper was produced for the Federal Trust.