Brexit: What would a no-deal mean for your finances?

What was previously unthinkable now seems increasingly likely, and a no-deal Brexit seems perfectly possible. Theresa May used to proclaim that “no deal is better than a bad deal”, but it always seemed unlikely this was any more than a bluff – a feint in negotiations.

Now hopes of an agreement appear to be fading both here and abroad, and the Prime Minister has given the clearest sign yet that a no-deal Brexit could be a real option, saying the country must be prepared for the possibility.

There’s plenty of debate and analysis about what a no-deal situation might mean for trading partnerships and business. However, the impact on individual households and their personal finances is likely to be just as profound.

A no-deal Brexit won’t just mean the economy wobbles or even plunges into recession. It could affect almost every aspect of people’s lives, including their buying power and the goods and services actually available for purchase. No-deal Brexit would be a major financial event.

Existing impacts

The actual referendum result alone has already arguably affected the no-longer-round pounds in British people’s pockets.

Ben Martin, the founder of the BrexitTracker (a dashboard that reviews more than 130 economic indicators) says: “Since the referendum, Brits are already spending 9.9 per cent more on their foreign holidays, 7.5 per cent more on fuels and 5.50 per cent more on tobacco and newspapers. And we’re getting paid less, as overall wages only grew by 0.30 per cent, far below consumer inflation.”

Certainly, people are concerned about future costs. Research agency Trinity McQueen surveyed 2,000 adults and found that 83 per cent said grocery bills had increased over the last six months, with 60 per cent arguing that brands are using Brexit as an excuse to hike prices.

However, 71 per cent said they expect food prices will rise after we leave the EU and two-thirds are worried that energy costs are going to climb in the next 12 months.

Anna Cliffe, joint-managing director of Trinity McQueen, comments: “Our key finding is around uncertainty. Many of us feel unsure about what the future economy may bring and believe that prices will continue to increase once we leave the EU.

“We particularly see more pessimism and uncertainty amongst younger people, who were more likely to vote remain.”

There may be price hikes ahead

Those prices are likely to rise further if the country crashes out of the EU without a trade deal or transitional agreement in place.

Research from KPMG UK reveals that some food items – it gives the ingredients of a fry-up as an example – could incur price increase of more than 12 per cent if the UK began trading under World Trade Organisation customs rules. That’s more than four times the rate of inflation.

Ian Dunt, editor of Politics.co.uk and author of the book Brexit: What the Hell Happens Now?, says that fluctuating food prices will be one of the most obvious financial impacts of a no-deal exit from the EU.

“If we have no deal then food prices are going to do some really wacky things,” he explains. “The stuff we are used to getting from Europe would suddenly have massively high tariffs put on it, while our guys producing food domestically would have tariffs on their exports and would lose customers in Europe, meaning they would put up prices in the domestic market to recover those extra costs.

“Then if the UK said we will try unilaterally reducing all our agricultural tariffs, that would leave us open to cheap imports. An awful lot of British farmers would lose their jobs, but we would get lots of cheap food but not high quality – think chlorine-washed chicken from the US. So prices would start to come down.

“But then in the long term, once we’ve eradicated our own industry, the prices would start to rise again. So they would go up in the short term, down in the medium term and back up in the long term. They’d be volatile, is what I’m saying!”

And food is just one household expense where Dunt anticipates rising prices. He predicts an extra 15 per cent on the cost of cars as tariffs bite, plus rocketing energy bills because the UK would not have the legal mechanism to run its nuclear power plants if it pulled out of Euratom.

Worse still would be what UK consumers could no longer access if the country’s existing frameworks shuddered to a halt with no deal. Flights out of the UK require a deal, importing radioactive substances to treat prostate cancer, authorising new drugs to come to the market – all these would be impossible without legal frameworks to manage them, and the UK does not have such frameworks in place.

What’s more, there is very little time to set up regulatory bodies, which would involve hiring staff and buildings, plus extensive training.

“The main trouble financially is not so much a personal finance thing but a state finance thing. An awful lot pf people would lose their jobs, in manufacturing and the financial services for example. That means lost revenue to the Treasury.

“There would be a massive reduction in immigration and immigrants are net contributors. There would be a lot of people on the dole… [No deal] looks like an absolutely catastrophic event for public finances. The impact of that on average family would be huge – massive cuts in public spending and a massive rise in taxes.”

But doesn’t this all sound a little too apocalyptic to be true? Dunt believes unfortunately not: “It sounds hyperbolic but this is just the legal reality of the situation. It sounds completely apocalyptic and absurd, but it is what no deal means.”

Oh come on, there must be something to be cheery about?

Ben Martin has one bright spot for homeowners with large mortgage debt. He says: “It hasn’t been all bad – as base rate fell in August 2016, from 0.50 per cent down to 0.25 per cent. While the Bank of England is now talking up the chances of a base rate rise, a no deal will cool any increases to mortgage costs.”

So there’s that.

But of course, not everyone believes the outcome is likely to be as catastrophic as people fear. Tim Focas, director of financial services at Westminster thinktank Parliament Street, told The Independent: “Despite apoplectic predictions of escalating consumer prices, failure to reach an agreement with the EU is actually likely to lead to prices falling.

“One of the reasons for this will be Britain’s withdrawal from the Customers Union – which is economic protectionism on a European scale. For decades now, extortionately high common tariff barriers have been enforced with the sole objective of making it harder for businesses from other parts of the world to sell their products and services across Europe.

“While this may be good for keeping zombie businesses on the continent alive, the average Joe is hit by higher retail costs on their electrical goods in particular. Brexit is an opportunity to push for unilateral free global trade and to remove tariffs on businesses based in the high-growth economic regions.”

Such an outcome would be difficult to engineer; WTO rules state that countries cannot discriminate with tariffs – if we set 5 per cent for cars with EU, for example, it would also have to be 5 per cent for cars from other countries.

If the UK continued trading with the existing EU tariff arrangements then European countries could continue importing into the UK as normal, while the country would be hit with higher tariffs on its exports.

“You’d be allowing the Europeans to trade with us as they did, but all of our exporters would face all these huge tariffs,” adds Dunt. “It would be like Britain repeatedly stabbing itself in the chest and would provoke a tabloid reaction that seems politically impossible.

“In the short term what [Focas] is suggesting seems borderline impossible. In medium term it’s possible and he could be right that it would reduce the cost of food and electrical equipment, but the cost domestically would be there. We would have to massively reduce standards for things like emissions and quality.”

Commentators on both sides of the debate disagree about exactly what a no-deal Brexit might do to and for the nation’s finances, but it’s all too possible we are about to find out.

European Commission spokesperson Margaritis Schinas has said the “ball is entirely in the UK court” over reaching agreement on the divorce deal and moving onto discussions of trade.