Brexit And My Finances
23 May 2019
Schrodinger's cat was simultaneously dead and alive until the facts were available. It's a bit like Brexit: until the nature of our EU exit is known, the UK’s in a hellish purgatory.
And the subject is so politically charged that you need pinches of salt - and maybe an economics degree - when separating fact from partisan opinion.
Nonetheless, handpicked data and a sea of caveats have led us to this rundown, showing the likely impact of Brexit – whatever form it takes – on our everyday spending.
Deal or no deal ...Brexit will impact people’s personal finances. Whether it's long term or short, there's no doubt that prices will fluctuate.
It’s tricky to speculate on what exactly Brexit’s impact will entail. With no deal we revert to World Trade Organization rules - let’s just call it a blank slate of sorts.
With a deal, well, we’ll have a deal. But without a crystal ball, what exactly that looks like is TBC.
For the sake of simplicity, a no deal will probably mean drastic changes - and quickly.
In a deal scenario we'll likely have another period of transition. It’ll be as you were while changes in trade, rules, regulations and prices are phased in before a formal break.
Food bills up 10%?Deal or no deal, one certainty is that post-Brexit Brits will still need to eat. And with 30% of Britain’s food imported from the EU, we can expect changes in food prices.
In a no deal outcome, the Bank of England has warned that shopping bills could surge by as much as 10%. Increased tariffs, import costs and a decrease in the value of the pound are waiting in the wings to hurt us at the till.
Warning of empty shelves, some supermarkets have already began to stockpile food. And the fresh fruit and veg we get from sunnier climes across Europe could be an issue moving into a no deal era.
Much of the UK’s produce is out of season during our winter: 90% of lettuce, 80% of tomatoes and 70% of soft fruit, according to the British Retail Consortium. But optimists would argue that we can strike bespoke deals with other food producing nations on more favourable terms - so the impact needn’t be too shocking.
Important interventions?When UK membership of the EU ends, so will free movement of goods. Without all those extra duties, taxes and custom checks, import prices just now are low.
But under a no deal Brexit new rules could apply. The UK currently pays its tariff revenue to the EU but without that obligation, we would be able to set our own levels to our own advantage. The key thing here is being able to keep prices low for consumers, while not pricing British producers out of the market.
The government has set out plans to reduce tariffs to zero on 87% of the goods it imports to keep prices down - for the good of customers.
In reality, Britain’s longstanding relationships with European partners means regulations are already fairly in-sync. These could easily be rolled into a deal, but this dynamic would be akin to Norway’s trading relationship with the EU - and many Brexiteers feel this doesn’t represent enough of a break.
Brexit rates for holiday makersMost British holidaymakers tend to stick to Europe. Right now, while we're in limbo, nothing has changed and Brits can still fly uninhibited within the EU.
In fact, in most deal scenarios, nothing much will change. So holiday and business travelers can, for the moment anyway, relax on that.
Travel is a hot potato in the deep-fat-fryer of Brexit. The EU recognises the value of British tourists so measures are already being taken to avoid the Visa system that, for example, US travelers are subjected to. However, from 2021, Brits will, deal or no deal, have to pay £6.30 under the European Travel Information and Authorisation System (ETIAS) to avoid said Visa.
All signs point to traveling as one area where Brits won’t necessarily take a big financial hit.
Money, money, moneyTaking a hit directly in the pocket, however, is a very real Brexit prospect. In 2016, the Bank of England dropped interest rates to a record low of 0.25%. Controversially, it was nudged up (to 0.75%) in August 2018.
Dropping interest rates makes borrowing cheaper, so people feel inspired to spend on debt items: mortgages, loans, credit cards etc. The counterweight to low rates is that prices and pensions can suffer (not necessarily saving as banks can set rates independently). Raising interest rates does the opposite.
Bank of England governor Mark Carney – who has agreed to stay on until 2020 to help navigate Brexit – has stated several times that until the exact nature of withdrawal from the EU is known, monetary policy can not be determined. Going forward, he says, rates could rise or fall.
Interest rates and mortgagesSome 3.5 million residential mortgages are on a variable or tracker rate
The average standard variable rate mortgage is 4.72%
On a £150,000 variable mortgage, an interest-rate-rise to 0.75% will likely increase the annual cost by £224
House PricesWith uncertainty the order of the day, both home buyers and sellers are opting to hold tight. House price growth is at its lowest rate for almost six years, according to a 2019 Nationwide report.
Uncertainty is the key factor here. Either way – deal or no deal – prices will start to move once there's clarity on Brexit.
In all likelihood, a deal scenario will prompt prices to remain still or increase. After all, incomers and migrants still see Britain as an attractive place to live - and natives still see home ownership as one of life's key goals. Owning is much more entrenched here than in rental cultures across Europe.
However, as the Bank of England has stated, a no deal outcome will hurt the UK housing market. Prices may plummet, so says the BoE, by as much as 35% over three years.
As the population ages and lives longer, the issue of pensions has many concerned. The government has said it'll underwrite pension growth itself - but experts question how possible this is.Should interest rates or company profits fall, it remains to be seen what would happen to final salary pension schemes. And such pressure on the sustainability of pensions could see some schemes close entirely.
Regardless of deal or no deal, the state of the economy, good or bad, will ultimately decide the fate of pensions. Forecasts are good, bad and indifferent - depending on who you read - so frustratingly, it’s another case of sit tight. Unless working into your seventies sounds fun.
SterlingThe pound has dropped in value since the Brexit referendum. Sure, most of that's down to uncertainty as we scrape through a period of unprecedented change.
But this is another key area where the difference between deal and no deal outcomes is stark. Leaving with a deal, so say US bank Morgan Stanley, will likely cause a resurgence in the pound's power because relative certainty can be brought back to forecasting.
If it's a no deal, however, Sterling's up-and-down performance is expected to continue.
In general?A study for thinktank Global Future – led by Professor Jonathan Portes of King’s College London – states that both deal and no deal scenarios would hurt UK citizens.
According to Professor Portes, a no deal scenario will hurt the UK treasury by £81bn per year by 2034. A deal, will cost less at £40bn per year. If Global Future is correct, a big hole in the public purse means we can expect cutbacks, perhaps in health, education, transport and the arts.
So as much as everyday spending will fluctuate, changes to funding at a higher level funding could pack a more substantial punch in our finances should the cost of services creep up.
Continuing the Schrodinger's Cat metaphor, Brexit and its effect can be discussed, considered and debated by experts in every field. But until the box is opened and we see what's inside, it's all guesswork.
Britain, far from being a lion or a dragon is, at this point, a cat in a box whose fate is unknown.
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