by GK Strategy 4th June, 2018

Why the price of Brexit won’t affect its popularity

Last week’s Guardian/ICM poll shows that Britons are becoming more negative about the effects of Brexit on the economy. Those expecting a negative impact outnumbered those with positive expectations by 15 percentage points, up from 5 in January 2017.

The puzzling thing about all this is that economic predictions seem to have little or no impact on the popularity of Brexit, with polling figures remaining more or less static.

Coming from an economics background, this lack of movement reveals something interesting about the characteristics of Brexit. Let me explain how economic theory describes this, before looking at what lies beneath.

Referendums are unique political events that lend themselves to economic interpretation in a way that is far less complex than general elections. For elections, parties present a wide range of policies and voters are asked to make a choice on the basis of what is on offer. Referendums are different, with voters given two (often overly simplistic) options.

In essence, the choice on Brexit can be boiled down to a decision between economic stability and sovereignty. Consequently, in this simplified model we can see support for Leave as the demand for sovereignty. While these were not necessarily the natural consequences of a vote either way; they were the dominant arguments used by campaigns on both sides and the basis for most people’s voting behaviour.

What last week’s poll suggests is that the price of sovereignty has increased but its demand has not changed.

Using less abstract examples, this appears counterintuitive. If apples become more expensive, people tend to buy more oranges. But this is not necessarily the case – there are things for which people are willing to stump up more for when costs change and the reasons for this are more to do with the good than of those who are paying. Take Uber’s surge pricing – their data shows that people are more likely to pay extra at peak times.

Economists class things for which a small increase in price result in a large drop in demand as price elastic. Vice versa, things for which changes in price hardly affect demand are viewed as price inelastic.

Taking the examples described, sovereignty is more like Uber surge than apples. But why?

Let’s start with emotions. The Brexit campaign, vote and aftermath were characterised by polarisation around the two sides. Ultimately, the Leave campaign was more successful in mobilising people using emotive statements and catchphrases. Gerry Gunster, an American political consultant who advised Leave.eu said: “It was clear from the start that we wanted a people’s campaign. We wanted to focus on sovereignty. “Take back control”, “I want my country back”, that [sic] sort of slogans. They are priceless. Who does not want to get his [or her] country back?”

By describing sovereignty as ‘priceless’, Gunster reveals the inelastic nature of Brexit.

Another key point here is that the period leading up to the vote was one of overwhelming decline in living standards for the vast majority of British households, particularly for those that voted to leave. This makes it difficult to separate the effects of Brexit from underlying structural problems.

Mark Carney’s announcement last week that British households are currently £900 worse off than was predicted pre-referendum this raised eyebrows, but the truth is that people do not feel significantly worse off than they were two years ago.

The immediate economic disaster warned by some on the Remain side never materialised – the real test will surely come next year when Britain bids farewell to the EU.

These two factors go some way to explaining the why growing negative perception of Brexit’s costs is not driving buyer’s remorse.

If the price of Brexit so far hasn’t affected its popularity, what might? The most recent YouGov data available on what voters consider the most important issues facing the country puts both health and immigration above the economy. To win over voters on Brexit issues, politicians and policymakers should move away from economic arguments and instead focus on issues that resonate.

For more information on how the UK’s decision to leave the EU could affect your business, contact joe@gkstrategy.com

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