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Scotland's place in Europe: people, jobs and investment
This paper presents the latest analysis by the Scottish Government of the implications for Scotland’s economy if the UK exits the European Union.
Technical Annex
Assumptions underpinning the analysis
- Trade: Assumptions for all scenarios are drawn from Ebell & Warren, 2016, covering the literature around the impact of leaving the EU. The results are drawn from the gravity model literature reflecting the impact from factors including reduced market access, higher non-tariff barriers, being outside the Customs Union, and other trade frictions.
- Tariff: The assumption follows Ebell, Hurst & Warren, 2016 in assuming a 5% tariff on trade with EU countries for the WTO scenario. This is lower than the baseline World Trade Organisation, Most Favoured Nation ( MFN) tariff, but reflects the possibility of some potential negotiation with the EU.
- FDI: Assumptions draw from the work of (Ramasamy & Yeung, 2010) and (H.M. Treasury, 2016) covering the negative impact on FDI from a range of trade scenarios. This is then modelled as a calibrated reduction in private sector investment in line with the work of Ebell, Hurst & Warren, 2016.
- Repatriation of EU Budget: Based on Ebell, Hurst & Warren, 2016. Data from GERS 2016, which details the net contributions both UK and Scotland make to the EU budget. This is equivalent to around 0.3% of GDP.
- Productivity: Based on work from (H.M.Treasury 2016) and ( OECD, 2016) on the impact of a reduction in trade openness on levels of productivity. This assumes that any impact on Scotland would be equivalent to that seen for the UK as a whole.
- Migration: Based on OBR analysis. Assumes that the Scottish and UK populations grow in line with the ONS “High Migration” projections for any scenario involving free movement of labour (e.g. EEA) and the “Principal Migration” projection under an FTA and WTO scenario. The shock applied to an FTA and WTO scenario is then the percentage difference between both projections over time.
Summary of modeling assumptions
| Shock | EEA | FTA | WTO |
|---|---|---|---|
| Reduction in export market share in the EU | -23% | -29% | -50% |
| Increase in tariffs on trade with the EU | 0% | 0% | 5% |
| Productivity | -2.4% | -3.5% | -5% |
| Reduction in inward FDI flows and Investment | -10% FDI | -17.5% FDI | -24% FDI |
| (-1.5% private investment) | (-2.6% private investment) | (-3.5% private investment) | |
| Population | No change | -2% UK / -2.8% Scotland | -2% UK / -2.8% Scotland |
| EU budget savings, % of GDP | No change | 0.30% | 0.30% |
Comparisons to other studies
The results in this paper are for Scotland. To compare the analysis to other institutions, the table below presents the UK results from the Scottish Government model alongside the results of similar studies. While there are differences in the results, reflecting different assumptions and models used, the Scottish Government analysis is broadly in line with other studies.
Comparison of modelling results with other studies
| OECD | HM Treasury | WTO NEISR | FAI | Scot Gov | |
|---|---|---|---|---|---|
| UK GDP, % Change from base | -7.7% | -5.4% to -9.5% | -7.8% | -7.9% to -8.1% | -9.4% |
| Assumptions | |||||
| Reduced Trade with EU | √ | √ | √ | √ | √ |
| Productivity Losses from Reduction in Trade | √ | √ | √ | √ | |
| Reduction in FDI | √ | √ | √ | √ | √ |
| Productivity Losses from reduced FDI | √ | √ | √ | √ | |
| Change in Migration | √ | √ | √ | ||
| Lower or zero contributions to the EU budget | √ | √ | √ | √ | √ |
| Model | NiGEM | CGE | SGGEM | ||
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