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The Brexit Effect

Tuesday, July 5, 2016
Chief Economist Commentary
Sector News

Recent news headlines have been full of stories about the decision of voters in the United Kingdom to leave the European Union.

And for good reason.

This is a hugely consequential decision, one that imperils the biggest political achievement in post-war European history – the economic and political integration that has brought prosperity and peace to a continent which seven decades ago was ravaged by the Second World War, even as it was recovering from the effects of the Great War.  There has been much speculation about the impacts of this decision.  Clearly the stock markets have been reacting, mainstream political parties in England are either seeking or demanding new leadership and the very existence of Great Britain may, again, be under scrutiny. The UK’s National Council for Voluntary Organisations (NCVO) has already released a briefing detailing the long and short-term implications of Brexit on the British charitable sector.

So, what does this mean for the charitable sector in Canada?

The role of Economics in the Brexit Decision

Economists tend to view questions of free trade, economic integration, and globalization through an efficiency lens:  that is, do these arrangements improve overall national economic efficiency as measured by gross domestic product?  Economic integration clearly passes this test – study after study shows it increases the rate of growth of GDP.  But focusing on overall efficiency ignores a fundamental fact of real life – improvements in economic performance are often shared unequally.  Integration benefits some and imposes costs on others.

In Canada for example, evidence presented by Don Drummond, Evan Capeluck and Matthew Calver for the Centre for the Study of Living Standards shows clearly, that over the past couple of decades GDP growth has been good.  Measures of the extent to which benefits have been shared, however, have not grown in step. They cite empirical evidence that economic policies embracing integration and globalization are leaving a significant proportion of the general population behind.   This undercurrent of resentment related to income inequality has been a central theme in the commentary emerging from the UK.

Brexit and Immigration

Immigration has been cited as an issue creating some of the economic anxieties underlying the Brexit vote.  Combined with a desire to ‘return to the past’, the Brexit narrative has been dominated by a belief that an influx of people from the EU has been responsible for a decrease in prosperity.

But here again the evidence is reasonably clear – immigration is generally positive for economies.  If anything, immigration increases GDP growth and contributes to overall job creation.  Nor do immigrants create a net drain on government revenues – immigrants work and pay taxes that at a minimum offset the cost of programs to assist integration into a new community. 

For a nation like Canada – one that has a tradition of welcoming newcomers – the undertone of discontent in the Brexit decision (and, in fact, emerging in the US presidential election), is concerning.

Brexit and Charities

Charities are part of the economy and will feel the consequences of Brexit in a wide range of ways that are hard to predict.  In the short run, the major impact of the decision appears to be in financial and foreign exchange markets.  The sharp drop in the value of the British pound reduces the real income of the citizens of the U.K. and thus reduces their ability to donate to charities.  Similarly, declines in assets values will impact primarily on well off donors.  The performance of the Canadian dollar and financial markets will determine the extent to which these are issues here.

In the longer run, slower economic growth will reduce the capacity of charities to fund their operations at the same time as the disruptions created by Brexit will increase the demand for their service.  Charites may well face a longer term crisis in financial sustainability.  

Conclusion

The bottom line is this – economic integration has been successful in improving overall economic performance but governments have failed to translate this into increases in well-being for many citizens who experience inequality and exclusion.   Governments are beginning to be held to account for economic growth that has been good but has not been shared – it has not been inclusive and equitable.  It is important to respond to these developments not with shock, but with creative polices which promote smart growth – growth that is equitable inclusive (and of course environmentally responsible.)

Time has passed since the referendum but the larger implications of the Brexit vote in the UK, Canada and the rest of world remain uncertain. As we monitor the long-term consequences, it will be incumbent upon leaders at all levels in Canada to honestly reflect on the issues that underpin the movement for significant change.

 

About the Author

As the Chief Economist for Canada’s Charitable and Nonprofit Sector, Brian Emmett is tasked with measuring the impact of the sector and bringing economic issues facing charities and nonprofits to the forefront of public policy decision makers. Mr. Emmett is an economics graduate of the University of Western Ontario and the University of Essex in England, and has enjoyed a long and distinguished public service career. He was Canada’s first Commissioner of the Environment and Sustainable Development in the late 1990s and worked extensively on Canada’s Green Plan. He also served as Vice-President of the Canadian International Development Agency (CIDA) in the early 2000s and has been an Assistant Deputy Minister in a number of federal government departments.

The office of the Chief Economist for Canada’s Charitable and Nonprofit Sector is made possible through funding received by The Muttart Foundation, Ontario Trillium Foundation – an agency of the Government of Ontario, Vancouver Foundation, an anonymous donor, and the PricewaterhouseCoopers Canada Foundation.

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