SECTION 2: Potential Impacts of ‘No Deal’
32. This section summarises the potential impacts of ‘No Deal’. It is based on analysis carried out by the Scottish Government and our partners, including for the Chief Economic Adviser, and reflects the Scottish Civil Contingencies Planning Assumptions, also published today.
33. The risks and impacts related to a ‘No Deal’ exit from the EU are likely to be wide-ranging and significant, cutting across a range of policies and operational matters. There would be the immediate ‘life and limb’ type impacts and there would be a range of issues that will impact on the economy and on people in a short term and longer term manner. Additionally, there are likely to be a number of issues where the impact may not arise until a later point, or the impact will arise early on but be felt in the longer term. This overview tries to capture the main areas of impact to Scotland in all of these categories:
- Delays at the Border: there would be significant disruption to people and goods crossing borders. This will be most keenly felt for exports crossing the channel at the short straits (Dover), with the reasonable worst-case scenario being 40-60% of current flow on day one, rising to 50-70% within 3 months. This will impact on the supply of goods currently being imported and exported through the Dover Straits, including food and medicine, and is likely to result in an increase in demand and therefore costs for all other routes.
- Regulated, integrated and just-in-time industries: the business models of these industries would be affected by new customs procedures, compliance requirements and even modest reductions in traffic-flow across the Channel. The EU is the destination for 56% of Scottish industrial good exports, worth £6.6 billion in 2017. This is predicated on time-sensitive freight movements, just-in-time delivery, integrated supply chains and, fundamentally, customers and suppliers operating within the same legal and regulatory frameworks which, combined with open borders, ensure frictionless trade. Significant effects would be likely from the sudden and urgent need to adapt to trading with the EU as a third party, the short term adjustment cost and thereafter ongoing higher administrative cost of doing business for manufacturing, chemicals, pharmaceuticals, and food-and-drink industries. The application of EU tariffs would also add cost and friction, and reduce competitiveness for some sectors. We do not think it is possible to project businesses’ ability to adapt accurately, because economy-wide adjustment at this scale is without precedent for modern economies.
- Ability to Export Food: our ability to export food would be severely constrained through a combination of prohibitive tariffs, regulatory burdens and logistical barriers. This includes tariffs of up to 40% for lamb exports, of which around 95% of all UK exports go to the EU, the complete closure of markets for our seed potatoes, and significant regulatory costs to provide export health certificates for products of animal origin, estimated at an extra £14 million per year. Moreover, there is a significant risk to our seafood sector in getting fresh and live product to market in the continent through the likely disruption at the port at Dover where traffic flow is expected to reduce to as little as 40% of normal flow. This could have catastrophic consequences for an industry that is heavily reliant on frictionless trade and efficient supply chains to get its perishable and high value product to market quickly to maximise its value. Food and drink exports are four times more important to the Scottish economy than they are in England to the English economy, and many rural and remote communities in Scotland are reliant on the industry. The industry itself has estimated that the potential disruption of a no-deal could result in the loss of up to £2 billion in sales.
- Health and Social Care System: There would be myriad impacts on the NHS and on social care support in Scotland as a result of a ‘No Deal’ EU exit. A significant proportion of medicines, medical devices and clinical consumables are imported from the EU, meaning that the imposition of customs controls and tariffs if the UK leaves the EU with ‘No Deal’ has the potential to substantially disrupt supplies of medicines, medical devices and clinical consumables. This is also highlighted in the National Audit Office report of 27 September which describes “a risk of delays to supplies for health and social care if the UK leaves the EU without a deal” in the immediate aftermath of a ‘‘No Deal’’ exit. EU withdrawal also poses a significant risk to the recruitment and retention of staff in the health and social care workforce. These sectors employ sizeable numbers of EU citizens, with particular concentrations of EU staff in some regions and specialties. There are also issues relating to the mutual recognition of professional qualifications, reciprocal healthcare, research and clinical trials.
- Service Sectors: Without agreements on freedom of movement and establishment, Scotland’s £117 billion service industry would face significant disruption and barriers to trade. £5 billion of service exports are currently to the EU. For small Scottish service providers, the requirement to set up a presence in other EU countries, where this does not currently exist, may be too costly, and the loss of regulatory alignment or the impact of trade reservations may make it impossible for trade to continue (e.g. some legal services). The EU would treat UK businesses as third-country service providers immediately on exit, meaning, for example, that UK professionals’ qualifications would no longer automatically be recognised in Member States. The abrupt loss of regulatory permissions to service cross-border contracts after exit for the financial services sector would also pose a significant risk. For all but three member states, UK, Republic of Ireland and Malta, the majority of services trade is carried out within the single market which means Member States would be likely to look elsewhere in the single market for services.
- Vulnerable communities: A key concern is the impact a ‘No Deal’ exit would have on people. ‘No Deal’ would impact on everyone, reducing their opportunities in work, travel and study and damaging their financial resilience. It would particularly affect a wide range of vulnerable communities. Increases in prices and reduced availability of some goods are likely to impact low income households who are already struggling. Families with children, disabled people, older people and those with less secure employment status are also likely to find costs of living more challenging. At the same time, the negative economic impacts of ‘No Deal’ are likely to increase the numbers in poverty, and such increases could be considerable: this would then increase demand on essential public services. Those impacts may also be especially felt in particular geographic communities where sectors most affected by ‘No Deal’ are concentrated.
- EU trade deals with third countries: the UK has been working to rollover the existing trade deals the EU has with around 40 other countries or trade blocs. Scotland currently benefits from reduced tariffs and friction when trading with these countries. If the UK is unable to agree that these deals should be continued after exit then Scottish exports (including of food) will no longer benefit from the current preferential trading terms. This will inevitably have an impact on export levels. The UK has managed to rollover 15 to date. It should be noted that these do not provide 100% replication of the equivalent EU agreements, and therefore do not provide the same protection for Scottish interests as would be offered by remaining party to those EU agreements. At present, a number of Scotland’s top trading partners are not included in the list of deals which have been carried forward, with Singapore, Canada and Japan being of particular concern although the loss of preferential trading with some smaller markets may have effects on particular products. The UK is continuing efforts to increase the extent of the rollover but Canada and Japan are not expected to agree, either because the UK has already committed to unilaterally reducing its tariffs on imported goods in a no deal scenario or because they are seeking a fresh negotiation respectively.
- UK nationals resident in or travelling to the EU: UK nationals living in the EU would be required to satisfy Member States’ immigration rules. It is up to each individual Member State to put in place domestic laws regarding the status of UK nationals post-exit and Member States are at different stages of this process. The requirements to remain would vary between Member States. UK nationals travelling to the EU might face additional procedures, and it is likely that delays would occur for UK nationals at EU ports, airports and juxtaposed controls.
- Cross-border networks: While the UK would unilaterally allow UK organisations to continue to transfer personal data to the EU as now, a gap is expected before the EU grants the UK data adequacy. Any regulatory action could cause organisations to be cautious, in a way which disrupts personal data flows. We do not have confidence that businesses, law enforcement agencies, universities, colleges, and public sector organisations would have alternative legal arrangements in place.
- Justice and security: The UK would lose access to all EU law enforcement information systems and databases such as the Schengen Information System II (real-time alerts for missing/wanted individuals and objects) and the European Criminal Records Information System. Alternative measures for data sharing will be far slower, more cumbersome and much less effective. The UK would also no longer participate as full members in Europol or Eurojust. The European Investigation Order and European Arrest Warrant would not be available, which would make cross-border criminal investigations and extradition procedures slower, more cumbersome and more resource intensive. While Police Scotland and the Crown Office and Procurator Fiscal Service have worked together to establish operational plans to mitigate the loss of these tools and measures, the impact will be significant.
- Northern Ireland: Overall, the cumulative impact in Northern Ireland is expected to be longer and more severe than in Great Britain, not least because of the volume of trade flows between Northern Ireland and the Republic of Ireland. Uncertainty around the treatment of the Irish land border could also have impacts on the Cairnryan Ports. There is also a possible risk of an increase in traffic to and from Northern Ireland to the UK via the Cairnryan ports, if traffic shifts from the Dublin/Holyhead route. If implemented, the impact of UK proposals for customs arrangements in Northern Ireland could make it attractive entry route to smuggling and other serious organised crime.
Economic impacts of ‘No Deal’
34. There is a significant and live risk that a ‘No Deal’ exit would lead to a major dislocation to the Scottish economy through a number of channels: disruptions to logistics, supply, trade, investment, migration, and market confidence. The uncertainty relating to this is already impacting business and consumer confidence in Scotland and has led to increased stockpiling and reduced investment intentions.
35. The Scottish Government report ‘No Deal’ Brexit: economic implications for Scotland’ sets out that a ‘No Deal’ exit has the potential to generate a significant economic shock which could tip the Scottish economy into recession. Depending on the way in which a ‘No Deal’ EU exit evolves, there is the potential for the economy to contract by between 2.5%-7% and for the level of unemployment to increase by as much as 100,000.
36. It is the assessment of the Scottish Government’s Chief Economic Adviser that a ‘No Deal’ exit will lead to an immediate economic shock in the final quarter of 2019, causing major disruption to the movement of goods and services, further reductions and delays in investment, creating cash flow problems for businesses, and leading to a further depreciation in the value of Sterling. These impacts could last for a number of months while a form of agreement is reached between the UK Government and the EU which enables constraints to be eased and the economy to then stabilise at a new, lower level of activity.
37. A worst case scenario could see the initial economic shock prolonged, as a result of protracted uncertainty over the future trading relationship between the UK and the EU. Such a scenario would lead to a slump in demand as a result of a sustained deterioration in consumer and business confidence, a squeeze on availability of finance for businesses and increased uncertainty in financial markets. This in turn reduces activity across the broader economy and leads to higher levels of unemployment and inflationary pressures. The longer that the initial shock persists, the greater the risk that it develops into a wider economic slowdown from which it would take longer to recover.
38. In comparison with the original EU exit deadline in March/April, the economic environment has become less favourable. Alongside the impacts of prolonged uncertainty impacting sentiment and business investment, global growth is forecast to slow in 2019. For example, the recent IMF world economic outlook report states that global growth remains subdued and argues that the principal risk factor to the global economy is that adverse developments — including a ‘No Deal’ exit — sap confidence and weaken investment and slow global growth. In such an environment, the reaction of global financial markets to a ‘No Deal’ outcome could be more negative than would have been the case in March/April. So far, negative market sentiment has focused mainly on the currency and has led to a depreciation of Sterling. In the event of a ‘No Deal’, a stronger negative response in UK equity and bond markets would create a negative feedback to the broader economy.
39. Moreover, the response of businesses to an October deadline may differ from March/April. In March/April, many businesses enacted contingencies and moved output around and stockpiled. It is not necessarily the case that the same sectors will respond in the same way as in October and there are seasonal factors, such as preparing for the Christmas trading period, that may also make their responses different.
40. There is broad consensus that a ‘No Deal’ exit will have a negative impact on the Scottish economy. It will cause major disruption to the movement of goods and services, further reductions and delays in investment, and lead to cash flow problems for businesses. Research and knowledge exchange in universities, colleges and businesses may be impacted if access to European programmes and collaboration is reduced. The speed with which the economy returns to growth would depend on the time taken to mitigate the disruption caused under a ‘No Deal’ exit. There remains uncertainty about the timing, duration and scale of the economic shock, but the primary responsibility for fiscal and economic stimulus lies with UK Government and we expect them to deliver on it.
Scottish Civil Contingencies Planning Assumptions
41. The Scottish Civil Contingencies Planning Assumptions are also published in full today. They provide a fuller overview of
the potential ‘reasonable worst case scenario’ should the UK leave the EU with
‘No Deal’ and no alternative arrangements with the European Union in place. These assumptions are derived from the UK Planning Assumptions that have been shared with us, but have been developed further using input from Scottish Responders and Scottish Agencies to identify the potential Scotland level impacts. The assumptions are intended to inform further thinking by Civil Contingency Category 1 Responders (such as Local Authorities, the NHS, Fire, Police and Ambulance), Government Agencies and national organisations (such as the courts and the prisons) and Scottish Government policy areas on the potential issues that may arise, so that they may be reflected in contingency planning.
42. It is important to recognise that the Scottish assumptions, as with the UK Government Yellowhammer assumptions from which they derive, are not a prediction of the precise scenario that we would face in the case of ‘No Deal’, but provide the spectrum of worst-case scenarios that it is reasonable to expect might occur. These assumptions are intended to aid planning for this and other less challenging situations. We recognise that the challenges resulting from a ‘No Deal’ could be experienced locally across the whole of Scotland in varying degrees of intensity. These assumptions will continue to evolve and further versions will be produced should additional information become available.