Brexit Effect on International Business in UK

Running head: BREXIT EFFECT ON INTERNATIONAL BUSINESS IN UK
Brexit Effect on International Business in UK
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1BREXIT EFFECT ON INTERNATIONAL BUSINESS IN UK
Brexit or "British exit," is a reference to the decision of the United Kingdom to quit
the European Union on the date of June 23, 2016. This decision resulted in defied
expectations and completely global markets upside down. Due to a massive impact to the
British economy, the value of pound fell to its lowest level against the value of dollar in 30
years.
The issue of Brexit has been in the headlines of all the major international news
channels and this is because this issue has not only had impact upon the economy of the
United Kingdom but also on the European Union as well. The UK government’s planned
fiscal policy was to consolidate the financial as well as the economic structure of the nation
following such a huge departure from the European Union (EU). The decision to withdraw
from the EU was decided upon by holding a referendum. The essay attempts to understand
the issue of Brexit and the implications it had upon the United Kingdom and its economy.
The assignment also attempts to comprehend and analyze the fiscal policies framed by the
authorities in charge of the United Kingdom and to check whether those policies were
effective in safeguarding the economy of the United Kingdom from the impact of Brexit. The
paper attempts to analyze the failure of the fiscal policies of the United Kingdom as a tool to
guide the economy of the UK from the implications of Brexit, by explaining in detail about
the impacts of recession, budget deficit and tax cuts. The assignment also analyzes the
Brexit’s advantages and disadvantages in the economy of UK.
The negotiation of Brexit has put a normalization effect on fiscal policy. The
government uses fiscal policy in making business decisions, adjusting tax rates and
controlling a nation’s economy. This economic policy is a key factor through which a
nation’s budget is controlled and it is responsible in controlling the money supply of a central
bank. The fiscal strategy along with monetary policy control a nation’s economic growth.
Specific study of Financial Times Stock Exchange or FTSE 100 (the U.K), it can be stated

2BREXIT EFFECT ON INTERNATIONAL BUSINESS IN UK
that there was a positive and statistically significant response of post fiscal shock (Auerbach
and Gorodnichenko 2016). The fiscal policy is classified into two parts- Expansionary fiscal
policy, which says higher expenditure and lower taxes lead to increase in government
borrowing. The situation is applied during recession period. Another type of fiscal policy is
Deflationary fiscal policy, which is used to control inflation. It states that lower expenditure
and higher taxes is an indication of fall in government borrowing. The UK economy has
faced worst economic trauma during Brexit. Unemployment, larger deficit budget and other
serious economic issues happened in the economic system. The fiscal policy has increased
tax rate and decreased spending cost to solve the inflation problem. It has also helped in
reducing deficit budget and as a result, the total economic growth of UK has been improved.
The fiscal policy is an attempt to maintain consistent public finances but the political
influence restricted the implementation of fiscal policy to normalize economic cycle.
However, there is a huge contribution of automatic fiscal stabilisers in regulating economic
cycle by receiving lower tax revenue at the time of recession (Sims 2013).
However, there are certain causes that make the fiscal policy ineffective. The
uncertainty of fiscal policy is one of them. Economic recession is responsible for this
uncertainty that obstructs in planning fiscal policy. Economic recession can be defined as the
negative economic growth for successive two quarters of a financial year. Both recession and
inflation are serious economic problem. Usually, the fiscal policy increases the tax rate and
cut down the spending to control the inflation. However, at the time of recession, the
government increases the aggregate demand and as a result, the tax rate is reduced with an
increase in spending. That is, recession works against the policy of fiscal (Hollmayr and
Matthes 2015). Thus, it becomes difficult to plan fiscal policy accurately. The recession also
affects the fall in GDP indirectly and consequently the level of unemployment rises. Besides,
a recession is responsible for increase in budget deficit. Therefore, the total government debt

3BREXIT EFFECT ON INTERNATIONAL BUSINESS IN UK
also increases. The budget deficit occurs when a nation’s expenses exceed the nation’s
revenue. It is the summation of a country’s revenue account deficit and capital account
deficit. Expansionary fiscal policy generally leads to increase in budget deficit. In
expansionary policy, the government borrows money from many private-sector organizations
and spends more than its budgetary constraints. Now, to meet the commitment of a debtor,
the government increases the tax rate. This increases the budget deficit. The more the
government borrows money, the higher the budget deficit becomes. Tax cuts is another
significant example of expansionary fiscal policy (Kierzenkowski et al. 2016). The monetary
policy of United Kingdom has focused on sustaining aggregate demand since Brexit in order
to boost the growth and prevent deflation in the nation. The fiscal policy has remained
constrained by the large budget deficit and aggregate stocks of public debt4 (White et al.
2013).
Fiscal policy affects changes in taxation and government expenditure. Fiscal policy is
very important to the economy. The government borrowing, direct, and indirect taxation can
affect the aggregate demand and consequently, the job market and economic growth get
affected. The fiscal policy is also responsible for redistribution wealth and income. After
Brexit, the government spending has increased consistently. The government spending has
shown a sharp increase after the year 2017.The fiscal policy, which includes tax related
policy, changes the disposable income. If there is higher interest rate due to fiscal policy, then
the retailers have to pay more for credit. Higher rate of interest eventually evokes foreign
investors. As a result, the value of U.S. dollar rises and ultimately the retailers get more
purchasing power to buy goods from foreign suppliers. Therefore, the growth of the business
in boosted.
The decision of UK to withdraw from the EU was named as Brexit- a mix of Britain
and Exit. The decision was decided upon by holding a referendum on June 23, 2016.

4BREXIT EFFECT ON INTERNATIONAL BUSINESS IN UK
Following Brexit, the economy of the United Kingdom did get the impact in the form of the
national currency, the British Pound, falling to its lowest level in comparison to the US
Dollar. Political impact was huge as the then British Prime Minister David Cameron, whose
party campaigned and supported Britain to stay at the European Union (EU) also resigned
after Brexit. Theresa May, the home secretary, succeeded him and was elected the next Prime
Minister of the United Kingdom following Brexit. The referendum results indicated that the
whole of England supported Brexit while the Scotland and Northern Ireland was partially in
support of Brexit (Cowell 2017).
The decision to withdraw from Brexit was deliberated upon for months and top-level
economists and think tanks were employed to frame the fiscal policies to be framed for the
United Kingdom following the Brexit. The process of leaving the EU was initiated upon by
Theresa May when she triggered Article No. 50 of the Lisbon Treaty of the EU. Brexit in no
way means that the UK will be unable to trade with the European Union in the future, but
would need to do such trading under the new trading agreements. A majority of the citizens
of the United Kingdom felt that they were not getting any benefits as a member of the
European Union (EU) and that the United Kingdom government has to pay a hefty
contribution fees to the European Union (EU) and not getting any returns as expected
(Wadsworth et al. 2016)
The leading economists and analysts predicted that Brexit would result in the
reduction of UK’s real per-capita income level and that Brexit will make UK poorer as there
will be new obstacles for trading. According to the predictions, investments will be as low as
Brexit will lower the credibility of the United Kingdom’s economy. The estimates have
suggested that free trade, which are enjoyed by the European Union members, will no longer
be available to the United Kingdom because of which the costs and tax barriers will lower the
profits on doing business with the United Kingdom (Egebark and Kaunitz 2014).

5BREXIT EFFECT ON INTERNATIONAL BUSINESS IN UK
Studies show that trades can take many years to sign; this encourages the UK
government to focus its resources on agreements with the countries that offer future, but not
current demands for British exports. This shows that the countries that increases in
importance most specifically as potential export markets are South and East Asian countries
are set to lose economic clout most significantly (Barseghyan, Battaglini and Coate 2013).
Recent British government impact papers set out the UK sectors that would be the
hardest by shifting to the country’s automotive sector, chemicals producers, wholesale, and
retail services. The most significant economic impact would be on those areas of the UK
where such businesses are most heavily concentrated, such as the northeast of England. Other
studies come to different conclusions, because of subtly different assumptions (Pisani-Ferry
et al.2016).
The EU is threatening sanctions in order to stop Britain destroying the continent’s
economy after Brexit.It also includes blacklisted taxes and penalties against companies
funded by the state. According to the presentation, which has been shown to the member
states of the European Union, the measures taken reveal that the block intends to put
unprecedented safeguards against the UK's decision of withdrawing from the European
Union. They intend to do this by levying taxes on United Kingdom (Kaufmann 2016).
In the aftermath of the political turmoil caused by Brexit, it comes as no surprise that
many businesses have resorted to “get-by” mode to survive, seeking only to weather certainty
by making no ongoing attempt to adapt business strategy and processes. This however, is a
flawed logic. Shortly after the Brexit vote, UK Prime Minister Theresa May promised to
make the country’s departure from the European Union a success. When opportunities arise,
the businesses that have implemented a true approach to their operations, breaking the mould

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of “getting-by” will be those well placed to capitalize on market change (Dhingra et al.
2016).
The Centre of Economic Business Research (CEBR) conducted an analysis for the
Open Britain organization. It is a campaign against a tough Brexit. It outlines the potential
impact to secure a trade with the bloc that covers goods but not services. This report
elaborates on how to restrict the movement of labour. It is one of the EU’s four freedom that
could restrict to access the single market in services (Dhingra et al. 2016).
The commitment of the Conservative party includes the holding of a plebiscite on the
UK’s membership of the European Union in 2017 (Hunt and Wheeler 2017). Losses
encountered during trade alone could be quite considerable. With optimistic assumptions, the
total static and dynamic trade losses would sum upto 2.2% of the Gross Domestic Product
(GDP). On the other hand, pessimistic calculations would lead to a long-term loss of almost
10% of national income. The dream of splendid isolation may appear to be a very costly one
indeed (Ottaviano 2014).
From the above analysis, it is clear that making the decision to withdraw from the
European Union (EU) was not an easy choice to make for the United Kingdom and it was a
decision, which required months of discussion and debates. The policy makers and
economists of the whole world and not just the United Kingdom were divided upon the whole
issue of Brexit. Finally, when the United Kingdom decided to leave the EU, the policy
makers of the United Kingdom had to frame a fiscal policy to safeguard the economy of the
United Kingdom from the impacts of Brexit. Some hard decisions were taken and even
though some aspects of the fiscal policies did fail to achieve the required results but overall,
the policies did manage to salvage the business environment of the UK’s economy. There has
been some advantages as well as disadvantages of Brexit as well. Many economist had

7BREXIT EFFECT ON INTERNATIONAL BUSINESS IN UK
predicted that Brexit will have adverse effects upon the UK’s economy but it has been proved
wrong since the customer’s confidence has not shaken from the UK’s economy and investors
have spent in the United Kingdom following Brexit. From the above analysis, it is evident
that the decision of Brexit was a mixed outcome for the United Kingdom and has not been as
severe as was predicted to be.

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References
Auerbach, A.J. and Gorodnichenko, Y., 2013. Output spillovers from fiscal policy. American
Economic Review, 103(3), pp.141-46
Barseghyan, L., Battaglini, M. and Coate, S., 2013. Fiscal policy over the real business cycle:
A positive theory. Journal of Economic Theory, 148(6), pp.2223-2265.
Cowell, R., 2017. The EU referendum, planning and the environment: where now for the
UK?. Town Planning Review, 88(2), pp.153-171.
Dhingra, S. and Sampson, T., 2016. Life after BREXIT: What are the UK’s options outside
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Egebark, J. and Kaunitz, N., 2014. Do payroll tax cuts raise youth employment?.
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