Publication - Research and analysis

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

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 Brexit transition period (scheduled to finish on 31 December 2020) for two years.

Coronavirus (COVID-19): the case for extending the Brexit transition period
Section 1: Why an Extension to the Transition Period is Essential

Section 1: Why an Extension to the Transition Period is Essential

1.1 Economic Analysis

The COVID-19 pandemic has caused Governments across the world to shut down large sections of the economy to deal with the public health crisis, resulting in a collapse in global economic activity that is steeper and faster than in previous downturns and presenting an uncertain path for economic recovery. What began as a public health crisis is now also an economic crisis.

COVID-19 also has significant implications for the UK's exit from the European Union. The path that the economy will be on by the end of transition, scheduled for 31 December 2020, will be fundamentally changed. Additionally, as we consider in a later chapter, the likelihood that the EU and UK will be able to reach a timely agreement on new arrangements will be seriously affected.

COVID-19 has created unprecedented uncertainty for world trade, with current forecasts by the WTO suggesting anything between a 13% and 32% fall in world trade in 2020.[1]

Illustrative analysis of the potential short run impact on GDP during the COVID-19 outbreak[2] indicates that output in the Scottish economy could fall by 33% in the current quarter, primarily because of physical distancing and its implications for business closures and temporary reductions in operations.[3]

These results are broadly in line with estimates and models for other countries around the world, including the Bank of England, the OBR and OECD; see Figure 1, below.

Figure 1: Potential Economic Impact - During Period of Social Distancing
Two bar charts side by side showing percentage GDP loss. Chart on the left shows percentage GDP loss at constant prices during partial or complete shutdown in different sectors across the economy, chart on the right shows percentage GDP loss at constant prices during partial or complete shutdown in different sectors across Scottish sectors

Implications of Ending the Transition Period in December 2020

The severe economic impact of COVID-19 was clearly not foreseen during the first phase of negotiations between the UK and EU.

If the UK were to exit the transitional arrangements at the end of 2020 with anything less than a comprehensive trade deal (which the UK Government is not currently seeking), this would represent a significant additional downside risk to the trajectory of the economic recovery from the COVID-19 shock. Such a scenario would have serious implications both for the short to medium-run economic recovery and for the long-run economic outlook. Short-run effects would include:

  • tariff and non-tariff barriers to trade with the EU; and
  • disruption to supply chains which are already experiencing challenges as a result of COVID-19; and heightened uncertainty in some markets, potentially weighing against the prospects of a recovery from the COVID-19 downturn, which could negatively impact business sentiment, investment, and consumption.

The combined impact of these effects on the operations of businesses that are already severely affected by COVID-19 and struggling with lower demand and consequent cash-flow issues could result in:

  • business closures and job losses over and above the potential losses that would result from COVID-19 alone.

With or without an FTA, the impact would vary across sectors, as we set out later.

These short-run impacts could be mitigated to some extent by policy responses, including fiscal stimulus. However, Governments across the UK are already providing unprecedented support to the economy in response to COVID-19, reducing the room for further mitigating policies to address the additional impacts of EU exit.

Modelling

The economy will recover from the current impacts of COVID-19 but the shape and speed of adjustment are uncertain.

The scale of the COVID-19-related economic shock is now becoming more apparent as real data begins to emerge. UK GDP data for Q1 2020 indicated that output in the economy declined by 2% over the quarter driven by a 5.8% decline in March. The Bank of England has published illustrative analysis that estimates that the UK economy could decline by around 14 per cent in 2020, this would be the largest annual decline in economic output in 300 years. The Bank also estimated that unemployment may increase to nine per cent in the second quarter of this year, higher than in the wake of the 2008/9 financial crisis, up from around four per cent in February and is estimated to remain at 7% in 2021. The scale of the increase in unemployment has yet to emerge in the data. However, Scottish Government analysis referenced earlier in this paper indicates that a 33% decline in output could be associated with the rate of unemployment increasing to up to around 10% in Scotland.

Recent analysis by the National Institute of Economic and Social Research (NIESR) suggests that some of these impacts could become permanent, estimating that "scarring" caused by the COVID-19 shock could take as much as 3% off long-term GDP.

The shape of the medium-term economic recovery is subject to several key uncertainties:

i. How long physical distancing measures will need to be in place to ensure public health is protected;

ii. Whether or not the size and scale of the temporary downturn causes more long-lasting supply-side damage to the productive capacity of the economy;

iii. The impact that fiscal and monetary responses will have; and

iv. The global nature of the crisis, with economic spill-over effects from other countries both in terms of trade and policy responses.

Ending the Brexit transition period at the end of 2020 would provide an additional headwind to this already uncertain recovery.

We have already published detailed analysis of the potential impact on the economy of an exit based on the type of unambitious deal the UK government favours; previous Scottish Government modelling of an EU-UK FTA estimated that GDP could be around 6.1% lower in the long term compared to EU membership under a similar scenario.[4]

In this paper we are publishing new modelling looking specifically at the risks posed by exiting the transition period at the end of 2020 in combination with the impacts of the COVID-19 crisis.

Two[5] illustrative scenarios for COVID-19 modelled using the Scottish Government's Global Econometric Model (SGGEM) have been extended to include potential impacts of Brexit, giving further illustrative paths for the economic recovery. In terms of COVID-19 recovery, one scenario illustrates a single wave of infection followed by a single ('v-shaped') recovery, where the other is an illustration of how a second wave of infection, if one were to occur, could lead to a second economic impact and a 'w-shaped' recovery. Both scenarios assume a resumption of the pre-COVID-19 status quo, including continuation of trade with the EU on current terms.

It should be noted these additional scenarios do not represent a central prediction or medium term forecast; the aim of this analysis is to explore how the economy could be further impacted by different Brexit outcomes, through EU trade and migration channels which this modelling takes into account. For more information on the approach, please see footnote.[6]

We have then, against the background of these two illustrative COVID-19 scenarios, shown a range of possible Brexit outcomes: ending the transition period either at the end of 2020, as currently scheduled, or at the end of 2022, as would be the case with a two-year extension; and exiting the transition period into either a basic FTA, or no deal.

The impacts of COVID-19 and of Brexit outcomes are modelled separately and overlaid on top of each other rather than interacting in any more complex way. This is a necessary simplification. In reality the situation would be more complex, for reasons that include those described earlier, and the real-world, short-term outcomes might be expected to be worse than those illustrated by the modelling.

No additional assumptions have been made about shocks to uncertainty or investment as result of Brexit. For example, the impact of ending the transition period at the end of 2020 could, on top of the impact of COVID-19, result in additional operating and financing impacts that might have been avoided by postponing the Brexit impact.

The results of this new modelling are summarised in Figures 2 and 3, below, and in Annex A.

Figure 2: Illustrative Scenarios of Possible Macroeconomic Paths of the Scottish Economy with an FTA Brexit Outcome at the End of 2020 or the End of 2022
Graph illustrating change in GDP (%) over years 2019-2026 under three scenarios: A) No Brexit, B) FTA Brexit end of 2020, C) FTA Brexit end of 2022
Figure 3: Illustrative Scenarios of Possible Macroeconomic Paths of the Scottish Economy with a No Deal Brexit Outcome at the End of 2020 or the End of 2022
Graph illustrating projected change in GDP (%) over years 2019-2026 under three scenarios: A) No Brexit, B) No-trade deal Brexit end of 2020, C) No-trade deal Brexit end of 2022

Coronavirus Scenarios

Scenarios A, B and C on these graphs represent an illustrative scenario in which the economy has partially recovered from the large demand shock in the second quarter of 2020 and is on its path to economic recovery. Scenarios D, E and F represent a hypothetical deeper COVID-19 shock and an illustration of how a second wave of infection, if one were to occur, could lead to a second economic shock. This second-round impact represents a second significant reduction in international trade levels, which means that, in these scenarios, trade is already at a very low level when the impact of Brexit is overlaid.

The Impact of Brexit Outcomes

The four possible Brexit outcomes overlaid on top of the two COVID-19 scenarios are ending the transition period either at the end of 2020 or at the end of 2022, and moving thereafter into either a basic FTA or no deal.

In the no deal Brexit outcomes, the economic path diverges from the illustrative baseline due to the immediate introduction of UK-EU trade barriers and lower investment prospects. Following this immediate impact on GDP, this economic impact worsens over time for two principal reasons.

Firstly, in addition to declines in existing trade, future Scottish-EU trade is foregone with less trade being created than would have occurred otherwise. Scottish exports into the EU single market lose competitiveness with the cost of Scottish goods and services being higher due to tariffs and non-tariff barriers.

Secondly, net annual EU migration is likely to fall. With each year following EU exit seeing lower levels of net-EU migration, the level of foregone migration accumulates over time. This results in smaller pools of available workers each year than would have been the case, putting upward pressure on production costs as well as reducing prospects of business expansion. All of these contribute to a prolonged period where trade levels never recover fully, and GDP is permanently lower in the long term.

In the Brexit outcomes with an agreed FTA, it is assumed that there are no tariffs on EU-UK trade - but the other economic impacts, including non-tariff barriers and the net migration effect, still apply.

In terms of timing, the graphs show clearly that, depending on the COVID-19 scenario, ending Brexit transition at the end of 2020 or at the end of 2022 has a significant impact on the extent to which the economy has been able to recover from, or is still suffering the effects of, the pandemic. As would be expected, the worst illustrative outcome would be a 'W-shaped' COVID-19 scenario with Brexit transition ending at the end of 2020 without a deal.

Every year, EU single market access brings economic benefits to the Scottish economy. An extension will provide more breathing space for businesses still dealing with the aftermath of the COVID-19 downturn. Extending the transition period will also enable further negotiations for extended market access without any trade or migration restrictions, bringing benefits to these years and delaying the impacts that Brexit will have on the Scottish economy.

Ending the EU exit transition period at the end of 2020 would increase frictions in the economy at a time when companies will be in a fragile state, still dealing with the financial implications of the recession, and less able to manage and absorb the impact than they would be in two years' time. The transition period was supposed to be used to prepare for the UK's departure from the EU Single Market, allowing both business and government to implement processes in order for them to ensure compliance with new trading arrangements. However, COVID-19 has meant that firms have had to spend this period dealing with the challenges caused by the pandemic, managing an unprecedented decline in demand and the associated implications that this has had for cash flow. The COVID-19 shock will also create a more indebted business base further depressing business investment, which was already at muted levels prior to the crisis.

With the economy unlikely to have fully recovered at the beginning of 2021, even in a best case scenario, the additional structural changes forced on business by leaving the EU could undermine current attempts to support the economy.

Figure 4, below, illustrates the economic impacts that would be avoided by extending the transition period by two years. The modelling indicates that simply extending the transition period for two years would leave Scottish GDP between £1.1 billion and £1.8 billion higher by the end of 2022 (between 0.7 and 1.1 percent of GDP). This would constitute vital support to the Scottish economy, and public finances, as Scotland recovers from the COVID-19 shock, and would be equivalent to avoiding a cumulative loss of economic activity of up to £3 billion over those two years. This Figure shows only the additional costs of ending the transition period in 2020, compared to 2022. It does not include the annual costs of leaving the transition period in 2022 compared to remaining in the Single Market and Customs Union.

Not only would shifting the date see a saving of up to £1.8 billion of economic output in Scotland in each of the next two years, it would avoid additional adverse effects, not included in this modelling, from hitting Scottish businesses with a new shock when they have only begun to recover from COVID-19, and when neither they nor Government have had the time to prepare.

The modelling confirms earlier modelling results that leaving the EU is a negative outcome for the economy whenever it is undertaken. In the event that transition is ended with an FTA or a no-deal Brexit at the end of 2022, the benefits provided by the transition period would slowly disappear over time as the full impact of Brexit is realised from that year and every year onwards.

Figure 4: The Reduction in Scottish GDP Due to Ending the Transition Period at the End of 2020 in No-Deal-Brexit and FTA Scenarios
A table showing the possible impacts on Scotland's GDP of various Brexit scenarios - no deal at end of current Transition Period, FTA deal at current Transition Period and FTA deal after extension
Figure 4 (continued): The Reduction in Scottish GDP Due to Ending the Transition Period at the End of 2020 in No-Deal-Brexit and FTA Scenarios
2021 2022 2023 2024 2025 2026 2027
Foregone GDP due to ending transition with an FTA at the end of 2020 (QNAS 2018 current prices) -£691m -£1,147m -£1,068m -£1,093m -£803m -£547m -£397m
Impact on GDP of ending transition with an FTA at the end of 2020 (% difference from ending transition at the end of 2022 with an FTA) -0.4% -0.7% -0.7% -0.7% -0.5% -0.3% -0.2%
Foregone GDP due to ending transition with a no-deal Brexit at the end of 2020 (QNAS 2018 current prices) -£1,109m -£1,844m -£1,665m -£1,658m -£1,197m -£768m -£508m
Impact on GDP of ending transition with a no-deal Brexit at the end of 2020 (% difference from ending transition at the end of 2022 with a no-deal Brexit) -0.7% -1.1% -1.0% -1.0% -0.7% -0.5% -0.3%

Long-Term Implications

In the long term, a wide range of evidence[7] has shown that Brexit will limit the economy by imposing restrictions on trade, investment, migration and productivity.

A recent publication by NIESR outlined the long-term implications of leaving the Single Market and instead entering into a Free Trade Agreement with the EU: "In the long term leaving the EU single market and customs union is expected to reduce GDP by 3-4 percent relative to what it would have been had the UK remained in the EU".[8] Previous Scottish Government modelling of an FTA scenario estimated that GDP could be around 6.1% lower in the long term compared to a scenario of continued EU membership.[9]

A no-deal Brexit scenario has greater economic implications and could see the economy 8.5% smaller by 2030 compared to a scenario of continued EU membership.

For comparison, the UK Government's own analysis shows a Free Trade Agreement with the US would only increase UK GDP by up to 0.16% over a similar time period.

Sectoral Analysis

This section focuses on the sectoral implications of the Brexit outcome in the context of COVID-19. It draws on recent COVID-19 analysis published in the latest Scottish Government 'State of the Economy' report,[10] alongside economic analysis of the sectoral implications of a WTO Brexit outcome.[11]

This analysis focuses on the international dimension of COVID-19. It examines how sectors that have been exposed to changes in international trade through COVID-19 could be further affected by tariffs and regulatory barriers that could be introduced at the end of 2020 as a result of Brexit. This would be in addition to the impact of the domestic public health measures on the viability of different sectors. The agriculture, fishing and manufacturing sectors would face some of the highest increases in trade costs - through the introduction of customs controls, rules of origin and non-tariff barriers. In the event of a no-deal outcome these sectors would also face tariffs and quotas. Key service sectors, such as financial and professional services, would face disruption as a result of regulatory barriers.

The COVID-19 situation is highly uncertain, and the interaction with Brexit is heavily dependent on how long it is necessary to maintain restrictive measures for, and the speed of recovery, both domestically and abroad. The Scottish Government's State of the Economy publication in April 2020[12] highlighted that the three main channels for economic impact from COVID-19 are:

  • International supply exposure (% of intermediate use sourced internationally);
  • International and domestic demand exposure (changes in international & domestic demand); and
  • Labour market disruption (sectors exposed to labour supply disruption through social distancing guidance, absences and existing labour supply shortages).

Brexit represents an additional risk to the sectors already exposed to those COVID-19-related channels, especially through the international (specifically EU) supply and demand exposures and the impact of removal of Freedom of Movement of Workers on labour supply.

Figure 5, below, outlines the relative exposure of sectors in Scotland, using a no-deal Brexit to illustrate the most severe level of risk.

Figure 5: Sectoral Exposures to a No-Deal Brexit and COVID-19
Sector No-trade deal Brexit COVID-19: International Supply COVID-19: International Demand COVID-19: Domestic Demand COVID-19: Labour Market Disruption
Primary/Manufacturing Sectors
Agriculture, forestry and fishing R Y A Y Y
Mining and Quarrying Industries R Y A A Y
Manufacturing R R R A R
Electricity, Gas & Water Supply A Y Y Y A
Construction/Service Sectors
Construction A Y Y R R
Retail & wholesale A Y Y R R
Transport & Storage A Y Y A A
Accommodation & food services A Y A R R
Information & Communication A A Y Y Y
Financial & Insurance Activities A Y Y Y A
Real Estate Activities Y Y Y Y A
Professional, Scientific& Technical Services A Y A Y A
Administrative & Support Services A Y Y A R
Public Administration and Defence Y A Y Y R
Education Y Y A Y R
Health and Social Work Y A Y Y R
Other Services Y Y Y R R

Legend:
Red [R]: Most Exposed
Amber [A]: Medium Exposure
Yellow [Y]: Least Exposed

These exposures are necessarily presented at an aggregated level in order to align with modelled outputs from both our Brexit and COVID-19 modelling. As such there will be variation at firm level. Simply because a firm is not in the red category does not mean the impacts are limited. On the contrary, for many firms within the amber and yellow sectors the impact of COVID-19, although on average less extreme than in the most exposed sectors, will still be enough to jeopardise their future prosperity, or indeed existence.

Within the impacts of Brexit, a key factor is different sectors' exposure to the potential introduction of tariffs and non-tariff barriers. These will be introduced with a no-deal outcome and, potentially, for some products, in an FTA outcome. Exposure to tariffs has two elements: the higher price of UK goods and services in the EU market; and increased costs of production and consumption within the UK if tariffs are applied to imports from the EU.

As shown in Figure 6 below, EU tariffs vary considerably across product groups. For some sectors, or individual products within sectors (e.g. red meat), tariffs themselves are high. But for many sectors and products and, in particular, for trade in services, non-tariff barriers such as regulatory and customs procedures are more significant.

Figure 6: World Trade Organisation - European Union Tariffs on Imports [13]
EU MFN applied duties
Product groups Simple Average
(%)
Products duty-free
(%)
Maximum duty Applied
(%)
Animal products 17.9 28.4 152
Dairy products 43.7 0 235
Fruit, vegetables, plants 10.7 19.8 218
Coffee, tea 5.9 27.1 16
Cereals & preparations 14.9 7.8 51
Oilseeds, fats & oils 5.5 48.1 112
Sugars and confectionery 27.5 11.8 140
Beverages & tobacco 19.8 18.4 152
Cotton 0.0 100.0 0
Other agricultural products 3.3 65.5 75
Fish & fish products 11.6 7.4 26
Minerals & metals 2.0 50.0 12
Petroleum 2.5 33.7 5
Chemicals 4.6 22.3 13
Wood, paper, etc. 0.9 81.5 11
Textiles 6.5 2.1 12
Clothing 11.5 0 12
Leather, footwear, etc. 4.1 27.2 17
Non-electrical machinery 1.8 23.9 10
Electrical machinery 2.4 23.9 14
Transport equipment 4.7 12.9 22
Manufactures, n.e.s. 2.2 28.4 10

Sectoral Exposure

Our analysis suggests that the sector most exposed to the combined effects of Brexit and COVID-19 is manufacturing, given its level of international integration. As discussed above there will be variation; for example, sectors such as food and drink, manufacturing, chemicals and life sciences will face higher tariff and non-tariff barriers than some other sectors within the wider manufacturing classification.

Agriculture and fishing, where international supply and demand exposures associated with COVID-19 are lower but their exposure to the effects of Brexit is high, face a different challenge:-

  • Higher prices of UK produce in EU markets could lead to lower demand, resulting in permanently lower sector output and exports.
  • The imposition of UK tariffs, which would be a matter for the UK government, could boost domestic demand for these sectors, contributing to a reduced net overall impact. However, this would result in higher prices for domestic users/consumers. If the UK government responded by cutting tariffs to benefit consumers then this potential gain to the domestic industries would be reduced.

In our analysis a number of other sectors have been identified as having a medium exposure to the effects of Brexit and medium or low relative exposure to COVID-19 impacts. For example, we identify the Professional, Scientific and Technical Services sector as having medium exposure to both Brexit and the impacts of COVID-19 on international demand. This does not mean that these sectors are unaffected. On the contrary, for many firms within those sectors the impact of COVID-19, although less extreme than in the most exposed sectors, could still be enough to jeopardise their survival. Adding in the negative impact of Brexit could further compound these effects, leading to significantly reduced demand and, ultimately, the potential for business closures.

All sectors have been affected in some way by COVID-19 and will be adversely affected by the UK leaving the transition period. The cumulative impacts in some specific sectors are described briefly here and more fully in Annex B:-

  • COVID-19 has caused major disruption for the transport sector and at EU-UK borders, with cold storage capacity nearly full. The preparations businesses will have to make to plan for new border arrangements at the end of the transition period, deal or no deal, will be complex. For example, new compliance measures could necessitate at least 200 hours of training for each employee or outsourcing to customs intermediaries, of which there is a shortage.
  • Manufacturing has been particularly hard hit by COVID-19 and, even with a deal, it will face major additional challenges at the end of the transition period. The complex international supply chains on which companies rely have been significantly impacted. UK companies will be at a severe disadvantage when working to maintain their places in those supply chains after COVID-19 if they are also facing the cost and disruption of new border controls and customs restrictions at the end of 2020. Recovery will be further inhibited by loss of freedom of movement of workers.
  • Tourism is one of the sectors most severely impacted by COVID-19 and ending freedom of movement of EU workers, in the absence of a similar route for migrants, will make it more difficult to recruit the workforce needed to drive recovery.
  • In the food and drink sector, businesses' capital, cash flow and capacity have all been reduced by COVID-19, leaving them short of the resources needed for no deal preparations. Some key Scottish exports, such as beef and lamb, face the risk of prohibitively high EU tariffs as well as new non-tariff requirements, including for Export Health Certificates. Retailers had intended that greater local sourcing would help mitigate supply problems but COVID-19 has made it difficult to engage with potential alternative suppliers. Moreover, the COVID-19 crisis has highlighted UK producers' heavy reliance on migrant workers and they are struggling to source the labour needed to harvest crops.
  • The fishing industry's supply chains to the major markets in Europe have been severely disrupted by COVID-19. Even with a deal, the end of the transition period will mean substantially more border controls and regulatory duplication; without a deal, tariffs will add further pressure. The industry's capacity to absorb these shocks is much reduced, since they have already had to take steps such as reducing their catch and filling up cold stores in order to cope with COVID-19. Fragile rural communities would be hit hardest.
  • In addition to COVID-19, the oil and gas industry has had to face the impact of the collapse in oil prices. An extra period within the EU's trading arrangements would remove a further source of instability: even with a deal, current UK Government plans would put UK refiners at a competitive disadvantage; and a no deal outcome would mean tariffs for exports to the EU.
  • Maintaining the supply of medicines and pharmaceuticals was an important issue in previous EU exit planning. The system for managing shortages of medicines and pharmaceuticals in the UK is under enormous strain as a result of COVID-19, which places increased risk on its capacity to manage disruption resulting from the end of the transition period. Handling a pandemic, when the search for a vaccine is intense, is also a dangerous time to disrupt the regulatory arrangements for approving medicines and vaccines.
  • The construction industry has faced supply chain disruptions from COVID-19, and will face workforce supply challenges as it recovers. Both of these issues will be exacerbated by an early end to the transition period, with or without a deal. Given the likely importance of infrastructure investment in the recovery from COVID-19, this could result in a major bottleneck.
  • Trade in services has been hit by COVID-19, due to restrictions on transport and travel and the temporary closure of businesses. Patterns of services trade may shift as a result of COVID-19 (with, for example, greater emphasis on digitally-enabled cross-border trade in services rather than temporary movement of persons). Even with a deal, the end of the transition period will substantially increase barriers to trade in services, putting UK firms at a substantial disadvantage. The loss of freedom of movement of workers will also create workforce pressures. Both these effects will be particularly important in growth areas like digital services.
  • A rapid acceleration of progress is needed in the negotiations on cross-border trade in services, mobility, domestic regulation and Mutual Recognition of Professional Qualifications so that businesses can understand and manage to some extent the new barriers. With, at best, a very basic FTA in prospect and with no concrete information on progress towards an equivalence decision, financial services providers have been obliged to consider "no deal preparedness": to continue trading they may need to move staff and activities to new EU hubs. COVID-19 has minimised the capital available for businesses to do this. It is also not yet clear what residence requirements EU states may apply to UK-based staff moving for work. The Irish Taoiseach Leo Varadkar has argued that the UK is highly vulnerable in this sector, telling the BBC[14] in January that "You may have to make concessions in areas like fishing in order to get concessions from us in areas like financial services."
  • In Higher Education, universities, whose business models were predicated on receiving significant numbers of overseas students, will face immediate financial pressures. Leading academics had already flagged up the difficulties which will result from ending freedom of movement from the EU and this will now be compounded with the challenges which reduced international travel will pose for research collaboration.

Inclusive Growth

In terms of the relative exposure of different parts of society, the Scottish Government published on 26 January this year a report entitled "Brexit: social and equality impacts",[15] which analysed the potential impact of Brexit on the most vulnerable people in Scotland:

"For instance, disabled people, minority ethnic communities, refugees and asylum seekers, and women, tend to be at a higher risk of poverty and insecure employment or unemployment than average … Given that 37% of households in Scotland (or 890,000 households) are considered to be 'financially vulnerable', any negative impact on their household finances resulting from smaller UK economic growth - which the Treasury has forecast in relation to Brexit - could put further pressures on struggling households."

There is a body of emerging evidence that suggests that COVID-19 is also having a disproportionately negative economic impact on particular groups in society.[16]

In terms of COVID-19 harm, some groups such as older, disabled people and possibly ethnic minorities will be more affected by severity of disease. Women make up the majority of people providing care, both paid and unpaid, and the majority of health workers which may increase their risk of infection; women may also be more at risk of domestic abuse during relationship tensions in lockdown. Initial analysis of infection has shown that people in the most deprived areas were 2.3 times more likely to die with COVID-19 than those living in the least deprived areas. In addition to COVID-19 harm, we also recognise that there are much broader harms related to population health, social and economic impacts. These harms are also likely to disproportionately impact on those least able to cope. For example, initial analysis of labour market impacts has shown that those most likely to be hit hardest financially include low earners, younger people, women, ethnic minorities, disabled people, lone parents and those living in the most deprived areas of Scotland. Intersectional impacts compound this with many belonging to more than one group. Leaving the European Union without a trade agreement could further exacerbate the negative impacts on many people's lives at a time when the economy is still recovering from the impact of COVID-19.

While many of these impacts arise because groups are disproportionately represented in those sectors of the economy that have been, by and large, shut down, negative effects can persist in the longer term when individuals are not easily able to find new employment. For example, evidence suggests that lower skilled workers are less able to find jobs quickly in periods of weak economic conditions.[17] Women are less mobile than men on average (in terms of commuting distances) meaning they have a smaller pool of job opportunities, particularly in weaker labour markets.[18] Experience of the 2008 recession also suggests that economic shocks can disproportionately affect minority ethnic groups and disabled people.[19]

These detrimental impacts would be compounded by Brexit. Trade shocks can have significant distributional effects within an economy.[20] Evidence suggests that it is those workers who are less able to move from declining to growing sectors that can suffer long-term negative impacts.[21] A further economic shock caused by leaving the EU without a deal could make it more difficult for those displaced by COVID-19 to get back into employment.

Those out of employment for extended periods of time are also more likely to become discouraged in the labour market or become long-term unemployed, with the vulnerable groups mentioned above most likely to suffer these 'scarring' effects.[22]

Summary of the Economic Analysis

COVID-19 has led to the economy facing one of the steepest and fastest falls in economic output in history. EU exit represents a different type of shock: as outlined in Scotland's Place In Europe, People Jobs and Investment, it reduces trade and investment, lowers migration and harms the productive capacity of the economy.

Our analysis shows that the severity of the impact of Brexit is now dependent on both the form of the future relationship with the EU and, crucially, the timing of the end of transition. The worst of the Brexit outcomes we have modelled would be a no-deal outcome at the end of 2020, with no extension to the transition period. Relative to a path where the UK remains in the Single Market, we would expect to see declines in existing trade, Scottish exports into the EU single market losing their competitiveness, and lower investment and reduced levels of net-EU migration. Our modelling illustrates, as a result, trade levels never recovering fully from a no-deal exit, and the economy permanently smaller in the medium to long term.

Aside from the greater likelihood (as we will argue later) of avoiding a no-deal outcome, extending transition to the end of 2022 could avoid a loss of Scottish economic activity of over £1 billion during each of the next two, important years. This could provide vital support to an economy still recovering from the COVID-19 recession. Extension would also avoid the further serious and, potentially, lasting sectoral and business-specific risks and impacts we have mentioned above, which could result from ending the transition when the economy is still recovering from the unprecedented COVID-19 shock.

Our sectoral analysis shows manufacturing, agriculture and fishing to be particularly exposed to the combined impact of COVID-19 and Brexit. Analysis of the specific potential impacts of Brexit on equalities groups - including impacts on legal rights, public services and funding, and employment, housing and spending - showed that some equalities groups may be more affected by a loss of EU funding while others are more affected by loss of specific EU rights relating to their personal characteristics.[23]

Previous Scottish Government analysis examined the medium- to long-term impact of Brexit-related economic shocks to trade flows, migration, investment and productivity.[24] Our earlier modelling suggested an FTA Brexit would reduce growth by around 6% over time. This latest analysis suggests that the range of outcomes of the negotiations could result in GDP being lower by up to 1.1% by 2022, compared to extending the transition and remaining inside the Single Market and Customs Union.

But this type of modelling is not designed to pick up some of the firm-level impacts of the type of issues that the close proximity of the COVID-19 and Brexit transition shocks will be likely to create, and which would significantly increase the adverse impact on growth. These are of two types in particular:

  • Businesses are more likely to fail, or be substantially weakened in the long term, as a result of the end of the transition period if they have just been substantially weakened by the impact of COVID-19; and
  • the fact that businesses and governments are, and will remain, largely devoted to tackling COVID-19 during the already limited time remaining in the transition period means that the extent of disruption at the end of the transition period will be substantially greater than would be the case if efforts could have been concentrated exclusively on Brexit preparation.

It is hard to quantify these impacts, but the sector analysis set out above demonstrates that both factors will be significant in most sectors of the economy. Postponing the additional economic frictions and impacts that arise from leaving the EU would clearly be desirable.

It may be tempting for some to think of the end of the Brexit transition period as a one-off shock, like removing a sticking plaster. "If the pain will be short-lived then why not get it over with?" Our analysis in this chapter has shown that this is far from being the case. The damage caused by Brexit will not be short-lived but serious and permanent; knowingly incurring this damage at the same time as the economy is reeling from the effects of COVID-19 is extremely reckless. By extending the transition period, we can avoid the double risk at the end of 2020 and potentially reduce - though not come even close to eliminating - the economic damage that Brexit will cause over the next decade compared with remaining within the European Single Market and Customs Union.

1.2 Practical Challenges to the Exit Process Resulting from COVID-19

Impact on Government Readiness

The impact of the pandemic not only exacerbates the economic risk associated with the end of the Brexit transition period; it is also delaying the technical, administrative and infrastructural preparations that will be required in the UK to implement the as-yet-unknown new arrangements.

For example, at border crossings there will need to be new arrangements for the movement of goods and citizens between the UK and EU. Appropriate checks will be needed, and staff will have to be recruited and trained. Administrative systems to support our exports will need to be in place, for instance if products of animal origin exported from the UK to the EU have to be accompanied by Export Health Certificates. With the ending of free movement of people from the EU, an entire new UK immigration system - a matter currently not devolved but reserved to the UK government - will need to be designed, legislated for, and in place by 1 January 2021.

The box below and Annex C show some specific and serious examples of areas where it is already clear that governments - both the UK government and, insofar as implementation is devolved, the devolved governments - will be unable to ensure a smooth handover on 1 January if the transition period is not extended.

Example: Delivery of Customs Checks and Border Controls

After the transition period, the checks and controls that need to be applied to UK imports and exports from and to the EU will be different. This means changes at Scottish ports and airports. Under the Northern Ireland Protocol, new measures are expected even for goods moving between Scotland and Northern Ireland. The extent of new measures that may be required is not yet understood or agreed, eating into the time that will be needed to design new systems and plan and implement their delivery. Additional capability and capacity will be required to administer new measures, including to process and respond to an increased volume of more complex Customs declarations and to manage additional Export Health Certification requirements. This means recruiting and training new customs officers, for which there is now insufficient time before the end of the year. New physical Border Control Posts may be needed in new locations to administer checks on products of animal origin moving between the island of Great Britain and Northern Ireland; provision of new infrastructure takes time and planning to get right. If the checks and controls required to prevent smuggling and to ensure the safety and quality of products cannot be delivered effectively by the end of transition then trade would likely be affected; movement of some types of goods could be prevented.

Example: Access to the European databases

Governments across Europe face serious challenges in preparing for the security aspects of the future EU-UK relationship and it looks increasingly unlikely that the UK will successfully negotiate similar access to the key law enforcement tools that Police Scotland and the Crown Office and Procurator Fiscal Service (COPFS) currently use in the fight against crime. However, even if those negotiations are successful, in many areas it may be simply impossible to have new arrangements in place for 1 January 2021. The technical and IT solutions required to operate new, as yet undetermined, arrangements for security cooperation must adhere to strict, important and complex requirements and standards, including for data security and data protection. Sufficient time must be allowed for proper design and implementation of the new systems and processes. The inevitable consequence of ending the transition period without new systems in place is, at best, a hiatus until new arrangements can be implemented and, at worst, a permanent loss of the security cooperation from which we have benefited for so long. The technical changes that would be required to the way that Scotland can access information in the European Criminal Records Information System (ECRIS), if something akin to ECRIS access is indeed negotiated, is just one example that may take months to design and implement. Any gap in coverage would have a serious effect on Scottish Ministers' vetting and barring functions under the Protection of Vulnerable Groups Act 2007, which is a crucial element in the protection of children and vulnerable adults. Similarly, any changes to the way Police Scotland access the Schengen Information System if access to that system is negotiated, may result in coverage gaps while that necessary new infrastructure is designed and put in place.

At the same time, the UK Government and the devolved governments need urgently to put in place the systems and processes needed to implement the arrangements that the UK and the EU have already agreed in the Withdrawal Agreement, including the Protocol on Northern Ireland and Ireland. On 30 April the European Commission published a note[25] listing the measures which the UK needs to put in place to give effect to the Protocol, the implementation of which is inextricably linked with the negotiations on the future EU-UK relationship. For example, whether or not tariffs will exist in future between the UK and the EU has implications for the border elements of the Protocol, and this cannot be prepared for whilst it is unclear whether the future relationship negotiations will result in an agreement.

These very serious issues with the Protocol are, of course, especially difficult for the Northern Ireland Executive. They also create real practical problems in Scotland, for example in planning for new arrangements at our west coast ports from 1 January when the necessary shape of those arrangements is not known. In its 1 June report, the House of Lords European Union Committee concluded that "Even before the COVID-19 outbreak, Northern Ireland stakeholders described preparing for the Protocol to become operational on 1 January 2021 as a Herculean task; that task has become even more difficult, given the impact of COVID-19 on the economy and the capacity of individual businesses to cope with the problems confronting them."[26] On 24 May, the Institute for Government wrote that "the chances of completing the work [to prepare for the Irish Sea border] in the current circumstances in less than eight months are remote."[27]

With around seven months to go before the transition period is due to end, the UK government has only now indicated it will share some of its implementation plans and assumptions with the devolved administrations, despite their crucial role in preparations, and in contrast to the much more open engagement in the run up to previous Brexit deadlines.

Impact on Business Readiness

The prospects for businesses are just as daunting as they are for governments, if not more so because for some their very survival is at stake.

Even if a deal is achieved, the type of basic Free Trade Arrangement that the UK Government is now intent on pursuing will inevitably add to the costs businesses face when trading with the EU. It will require UK exporters to implement a wide range of administrative changes to comply with the rules for exporting from non-member states to the EU single market. This is clear from the revised advice the European Commission is issuing to EU stakeholders likely to be impacted by the end of the transitional arrangements:-

"In particular, a free trade agreement does not provide for internal market concepts (in the area of goods and services) such as mutual recognition, the 'country of origin principle', and harmonisation. Nor does a free trade agreement remove customs formalities and controls, including those concerning the origin of goods and their input, as well as prohibitions and restrictions for imports and exports."

The challenge for businesses adapting their administrative procedures and implementing new arrangements (changes to labelling; verification of compliance with relevant EU legislation; proof of origin etc.) would be considerable under any circumstances. Imposing an entirely new raft of administrative and regulatory obligations on businesses already struggling to recover from the impact of the COVID-19 pandemic, at a time when they are least able to adapt, is bound to compromise their viability.

Annex B lists some real practical examples of the difficulties businesses in different sectors will face if the transition period ends with no extension on 31 December while they are still reeling from the effects of COVID-19.

Comments from a range of stakeholders confirm the Scottish Government's view that an extension is essential.

Carolyn Fairbairn, Director General of the Confederation of British Industry, wrote, on 1 June 2020:-

"For many firms fighting to keep their heads above water through the crisis, the idea of preparing for a chaotic change in EU trading relations in seven months is beyond them. They are not remotely prepared. Faced with the desperate challenges of the pandemic, their resilience and ability to cope is almost zero."

The director general of the British International Freight Association (BIFA) has said that given the disruption to supply chains caused by COVID-19, it would be irresponsible of the UK government to try to abide by the timetable for ending its Brexit transition period, referring to a whole new set of uncertainties and a second shock if there is change in the terms of trade with the EU at the end of the year.

The Freight Transport Association has said that the challenges posed by COVID-19 will make the effective implementation of any new legislation impossible in the short term. This industry is petitioning the UK government urgently to seek an extension to the transition period, as well as suspending other planned domestic legislation which will impact the logistics sector. They say that the pandemic will have a significant impact on supplies of new equipment, technology and vehicles, as well as the industry's ability to recruit and train new staff, and the challenge of adapting to new trading arrangements with the EU is placing logistics under huge and unnecessary pressures. "Our industry needs the support of government, not to be broken by it."

The food industry, and its agricultural suppliers, have faced enormous supply and logistical problems. In April, Andrew Opie, Director of Food and Sustainability, British Retail Consortium, told the House of Commons International Trade Committee that:

"Our resilience really relies on our trading relationship with our largest trading partner... There is no getting away from that: 80% of our food imports for supermarkets come from the EU. We rely on them heavily to supplement us when we are out of season, which is through the hungry years. That is the bit that we have to get right going forward: we must have a good trading relationship with the EU. That is vital to our consumers here… Northern Ireland consumers have the added issue of how we transport from our Great Britain depots into Northern Ireland without the checks being so excessive that they make the food almost unaffordable when it reaches the supermarket in Northern Ireland. I am sorry to bore everyone, but the EU-UK trade deal is fundamental to our resilience going forward… In terms of migrant workers, that is obviously a concern. We are going into the main seasonal harvest period. We are flipping over from Spain, Portugal and Italy into British produce. Tomatoes will go basically from 95% imports to the majority being produced here. Soft fruit, again, will flip almost 50% over to the UK, so we need the 80,000 migrant workers who would normally come to the country. I think that is going to be our real challenge."

The Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, has warned against not extending the transition period, saying that because of the "unprecedented uncertainty" arising from the pandemic, it would be "wise not to add more on top of it".[28]

Two-thirds of over 1,000 businesses surveyed in the Highlands and Islands region in January/February 2020, before the full impact of COVID-19 had begun to be felt in the UK, felt that UK's departure from the EU presented at least some risk to their business, rising to 74% amongst food and drink businesses.[29] That region has also been hit heavily by the effect of COVID-19 on tourism. Scottish Enterprise and Highlands and Islands Enterprise have carried out extensive qualitative and quantitative research on the UK's exit from the EU which, among other things, found that the impact of a no-deal exit would fall most heavily on the food and drink, life and chemical sciences, manufacturing, logistics and financial and business services sectors.

The British Exporters Association (BExA) has reported that the disruption to, and loss of, labour is resulting in lower output in manufacturing and agrifood. The European Automobile Manufacturers Association (EAMA) has also stated that there is insufficient time available under the transitional arrangements given the COVID-19 crisis.

Strategy Director at the CBI, Nicole Sykes, tweeted on 1 May:

"if company leadership is dealing with coronavirus, or … if their usual project teams are furloughed to stem the flow of cash out of the company, they are not dealing with Brexit. If you're in new levels of debt as a result of coronavirus, you cannot afford to deal with Brexit. And you've just lost two months in which to get ready for Brexit."

One of the main reasons that businesses are in such an invidious position is that they will not know exactly what is required of them until the EU-UK negotiations are over and governments have worked out how the outcome - deal or no deal - will be implemented. As exemplified in the box below, the level uncertainty for businesses is very high, across a range of areas, with less than seven months left for them to complete preparations for the new business environment. That leaves businesses facing the awful dilemma of whether to: try and act now, without knowing what to prepare for and whilst still battling the worst of the COVID-19 impact; or to wait for more certainty about the new arrangements but in the knowledge that without an extension they will then have even less time to make themselves ready.

Five Things Which Business Still Don't Know So Can't Prepare for Yet
  • Will there be Tariffs and what will they apply to?

Businesses still don't know what tariffs will be applied to which goods entering the EU (or entering the UK from the EU), or whether there will be no tariffs at all.

  • Which regulations to follow?

Businesses still don't know if you make something in the UK, to UK regulations and standards, whether those will be recognised in the EU (and vice-versa).

  • What customs paperwork and processes will be?

Businesses still don't know what they will have to provide at the border and whether UK certificates will be recognised (and vice-versa for the EU). Businesses don't know how much of their products have to originate in the UK and EU to benefit from preferential trade terms. They also don't know how this interacts with other trade agreements the UK and EU have which undermines businesses' ability to plan their supply chains.

  • How will people and data cross borders to make businesses work?

Businesses still don't know the rules which would allow them to conduct business in the EU or what will need to be put in place to protect data to allow businesses to move information digitally.

  • Will professional qualifications be recognised?

Business people don't know which (if any) professional qualifications will be recognised in the EU.

Impact on the Negotiations Process Itself

In normal times, concluding an international agreement with the UK's most important trading partner would be expected to take years rather than months. That would be especially true for an agreement which ought to go beyond trade and include domestic and international security, law enforcement and judicial cooperation, energy, transport, and so on.

The fact that there are fundamental differences between what the EU and the UK see as acceptable in an agreement, as evidenced by their published starting positions, could only add to the time needed if the result were to be a fully comprehensive agreement. And yet the UK government, only weeks after signing the Withdrawal Agreement that sensibly included an extension option, ruled out using it under any circumstances. In other words, even before the effects of COVID-19, it seemed that the potential outcomes had narrowed down to a very basic, economically damaging deal or no deal at all.

The practical impact of COVID-19 on the negotiating process makes that already recklessly ambitious timetable even more unrealistic. The original timetable agreed between the EU and the UK envisaged 5 rounds of negotiation between 2 March and 16 May, followed by a stocktake in mid-June, but already the timetable has had to be revised and the number of rounds reduced. Leading figures in the negotiating teams themselves, on both UK and EU sides, have sadly fallen victim to the virus. Face-to-face meetings between the negotiating parties are impossible.

Undoubtedly the teams on both sides will have been making efforts to proceed as best they can in the circumstances by using video- and tele-conferencing. But experienced trade negotiators stress the importance, in normal negotiations, of the less formal, more personal channels of communication. Personal relationships between key individuals, informal conversations that can normally take place in the margins and coffee breaks of the formal negotiating sessions play a key role in the normal negotiating process. None of that is possible in the current circumstances, which means that apart from facing an immense negotiating task in policy terms, the two teams are at the same time having to invent a whole new modus operandi for the negotiations themselves.

Moreover, rightly and properly, the Scottish and UK governments, and our counterparts across the EU, have pivoted huge amounts of staff and financial resource to tackling the human, social and economic impacts of the COVID-19 pandemic. That means inevitably that staff previously working on or in support of the negotiations have had to be redeployed to COVID-19 on all sides - UK Government, EU Commission, and in the devolved administrations.

In addition to negotiations with the EU, the UK Government is simultaneously having to negotiate continuity arrangements to rollover the existing EU-Third Country trade agreements which the UK benefited from as an EU member state. The difficulties mentioned above have also affected the UK Government's programme for negotiating these continuity agreements: 19 out of approximately 40 agreements were signed by the end of January 2020, but no further agreements have been concluded since then.

The difficulties set out here must increase the likelihood that, unless there is an extension which would allow more time for the negotiations, the UK and the EU fail to reach an agreement. The Withdrawal Agreement deliberately set a deadline of 1 July for a decision on whether to extend the transition period. Though a number of ideas have been put forward for, in effect, achieving an extension of the transition period after the 1 July deadline, all suffer from fundamental legal, political and technical shortcomings and, in the highly unlikely event these proved surmountable, would require a substantial amount of time to negotiate and put into effect. We must work on the basis that a decision on an extension is needed urgently, and extension is effectively ruled out after 1 July.

Impact on Legislation, Democratic Scrutiny and International Relations

The impact of the pandemic is not only undermining the UK-EU negotiations. It is impacting as well on necessary legislative preparations for the exceptional circumstances which arise from withdrawal from the EU. With reduced time available in the UK parliament and devolved legislatures, an extension would mean that vital parliamentary time is not diverted from focussing on the COVID-19 emergency. It would also help to ensure that all legislation required at the end of the transition period can be fully and properly scrutinised, including by the devolved governments and legislatures, ensuring it is fit for purpose.

To take one example, the end of the transition period will mark the end of the influence of the EU environmental principles, and the governance function of the EU institutions, as they apply directly with respect to environmental law in Scotland. We are designing strong, domestic measures to underpin our environmental standards. And we are seeking to ensure that robust legislation is in place to underpin Scotland's strong regulatory framework. However, both the legislative process and institutional development are significantly affected by the COVID-19 crisis. This creates risks to environmental standards, and to Scotland's reputation for a clean natural environment, which could have consequences for our communities and for business and exports. An extension to the transition period would allow us time to put statutory measures in place, and so mitigate this risk.

Even before COVID-19, the UK Government was already failing to provide the Scottish Government appropriate, meaningful engagement on or influence in the decisions which the UK Government sought to take as part of the UK-EU negotiations - despite the fact that many of those decisions fall within or impact on devolved responsibilities. The practical challenges of engagement during lockdown make such engagement more difficult, but the fact that negotiations have now begun makes it all the more vital.

Meaningful engagement must be judged not by how many meetings the UK government has invited devolved governments to, but by whether the UK's approach to the negotiations, with all its deep and widespread consequences for devolved areas of policy, is discussed and agreed among the four nations or prepared and decided upon unilaterally by the UK government. Sadly at the time of writing the latter is still the case, as it has been throughout the Brexit process. The Scottish Government continues to press UK ministers at every opportunity to open up its processes and allow proper involvement of the Scottish Government and Scottish Parliament.

Nor should we forget that COVID-19 has affected our neighbours in the EU just as it has affected people in the UK - and, like us, their attention and resource is rightly oriented to responding to the pandemic and saving lives. Even before COVID-19, for the EU the future relationship with the UK was just one issue, already reducing in importance, amongst a crowded number of priorities. Now, the Brexit negotiations must be of markedly less interest to the EU and its member states; and they will likely want to invest their limited resources and capacity accordingly. Indeed, one impact of COVID-19 might be for the EU to protect itself more forcefully against competitors that it feels are benefitting from an unlevel playing field.

The insistence by the UK Government to continue Brexit negotiations, despite our neighbours' pressing need to direct their full attention and resource to fighting the COVID-19 pandemic, will inevitably undermine what sort of future relationship can practically be agreed, given the limited negotiating capacity available this year. It could, moreover, have negative implications for the UK's international relations, reputation and standing more broadly. Care should be taken not to impose unreasonably, at this time, on the good will of the UK's international partners.

Conclusion on the Practical Challenges

The UK government has cited various arguments for not seeking an extension.

It argues that extending the transition period would create additional uncertainty for business. But in fact the main source of Brexit-related uncertainty is the fact that on our current trajectory, the UK will be leaving the Single Market and Customs Union arrangements at the end of December, but the successor arrangements have not yet been negotiated and a no-deal outcome is all too possible. The suggestion that the UK government can offset this enormous disruption by striking alternative trade deals in this time frame with other countries across the world is simply fantasy.

Conversely, extending the transition period will avoid the compounded shock of Brexit and COVID-19, and offer breathing space for businesses during which they will, contrary to the UK government's claims, have more certainty than at present.

The UK government has also argued that the COVID-19 crisis makes it all the more important for UK to be free to make its own rules. But this is a global crisis that will require international co-ordination in policy responses. The EU and its Member States are our biggest international market and our most important partners. Now is the time to work with those partners, to aid our recovery process. The UK cannot face up to this global crisis effectively by cutting itself off from cooperation with Europe, or through the 'global Britain' approach.

It is, unfortunately, true that, although the EU's response to the crisis and its long term strategy will be important factors in the UK's future prospects, the UK will not be well placed to influence them. However, this is an inevitable consequence of Brexit, and is not an argument against the benefits of an extension.

Finally, the UK government argues that the fact that the UK would have to continue paying into EU budget is a reason for not extending the transition period. The date of 31 December 2020 was chosen deliberately to coincide with the end of the EU's seven-year budget cycle, and the Withdrawal Agreement already envisaged that agreeing a reasonable UK contribution for 2021 and 2022 in the event of an extension would require calculation and negotiation. Crucially, the size of the contribution (other than for specific programmes in which the UK wishes to participate) would, under the terms of the Withdrawal Agreement, need to be agreed before any decision to extend the transition period, so the UK Government would be able to take a decision on extension in full knowledge of the financial implications.

As our analysis clearly shows, the damage caused will be significant, it will last into the long term if not permanently, and it will be all the more serious if it is allowed to come at the end of 2020 when the economy will be reeling from the impact of COVID-19. Yet the some of the worst effects can be mitigated, by using the option to extend the transition period, pushing the impact of Brexit forward to a time when the economy will be less fragile, and prolonging the current certainty and visibility for businesses. An extension will also avoid the chaos that is otherwise inevitable at the end of this year given that, as we have clearly demonstrated, there is no way that governments or businesses can be ready for that date.

This is not about, as the UK government seems to be suggesting, getting some short-term inconvenience over and done with, rather than delaying it. It is about the risk that the end of the transition period, if allowed to fall at the end of this year, will be the straw that breaks the camel's back for many Scottish businesses and, as a result, families. That outcome is not inevitable and it is not necessary.

In a press conference on 24 April, EU chief negotiator Michel Barnier called on all parties to be realistic about what could be achieved in the negotiations against the backdrop of the global pandemic, urging:

"…realism…to think about whether, in the midst of the terrible economic crisis that is forecast due to the coronavirus crisis, we will be able to reach an intelligent agreement that limits the shock that the UK's departure from the Single Market and Customs Union will entail in any case. It is only realistic to raise these questions and to remind ourselves of these deadlines."

The Scottish Government strongly endorses these remarks. Continuing to insist on a timetable that was set prior to the pandemic - and was in any event extremely tight given the complexities involved - would be utter folly. It would expose our businesses and citizens to the very real likelihood of the UK exiting the transitional arrangements with a poor deal or no deal at all.

The practical difficulties highlighted in this chapter, and the absence of proper democratic scrutiny, along with the combined economic consequences of Brexit and COVID-19, make a compelling case for the transition period to be extended. In the next part of this document we set out how the breathing space created by an extension can be used constructively to factor in the long term changes that the COVID-19 crisis will bring about.


Contact

Email: EUStrategy&Negotiations@gov.scot