The Brexit dividend debunked: why Theresa May’s claims on NHS funding are misleading

The Prime Minister has committed to spending increases for the NHS over the next five years and promised this would be at least partly funded by a ‘Brexit dividend’. This is not the first time that NHS spending increases have been linked to the UK’s exit from the EU – the now infamous £350 million per week pledge was a significant feature of the 2016 referendum campaign.

Talk of a ‘Brexit dividend’ is misleading

It implies the Government’s finances will be in better shape by leaving the EU than if it had remained. But the Government’s own numbers state that Brexit will, in fact, weaken the Government’s finances.

It is true that the UK currently pays more into the EU budget than the EU spends in the UK – though this only amounted to around £140 million per week (£7 billion) last year, not £350 million per week.
Taking this fact alone, you might conclude the UK could leave the EU, replace all EU spending currently taking place in the UK, and have £7 billion left over for the NHS.

The two factors to consider

However, two offsetting factors make focussing on this number alone unhelpful and uninformative.

First, in the short- to medium-term, the government expects to continue to make payments to the EU budget as part of the so-called ‘divorce bill’. If the UK made these payments but EU spending in the UK ceased, replacing EU spending (for example on agriculture or science) that would otherwise not take place would leave the Government little if any scope for using this money to fund the NHS.

Second, and most importantly, leaving the EU amounts to far more than a change in financial flows between the UK government and the EU. It represents a fundamental shake-up of the UK’s relationship with our nearest and largest trade partner – a change that will not occur without many knock-on economic impacts.

This means that the public finance impact of Brexit actually has relatively little to do with the financial flows between the UK and the EU. Modest changes to economic growth – and knock-on effects on tax revenues – will quickly outweigh any direct changes to the Government’s budget. That means that whether or not there is a ‘Brexit dividend’ depends crucially on the economic impact.

NHS spending will come from cuts, tax and borrowing

While the precise economic impacts of Brexit are highly uncertain, most economists who have examined this issue seriously expect that this will mean economic growth being lower than it would otherwise have been. Significantly, this is also what the official forecasts, accepted by the Chancellor as the government’s own, suggest.

Those forecasts imply that by 2020 tax revenues will be £15 billion lower than they would otherwise have been as a result of reduced economic growth linked to the Brexit vote. A loss of revenue of £15 billion is significantly higher than the UK’s net EU contribution.

On this definition, the Government’s own figures state that, as a central estimate, there will be no Brexit dividend – and in fact that the government finances will be in a worse state as a result of leaving the EU. So rather than from a Brexit dividend the PM’s increase in NHS spending will in fact come from some combination of spending cuts elsewhere, higher taxes and higher borrowing.

This article was originally published on the i, and is reproduced here with full permission. Thomas Pope is a Research Economist at the Institute for Fiscal Studies.