An In-depth Analysis of Brexit's Economic Consequences for the UK

This report examines the economic impacts of Brexit on the UK economy, focusing on the uncertainty surrounding the deal and its potential consequences. It analyzes fiscal and monetary policies to alleviate recession, discussing expansionary approaches and their drawbacks, such as increasing fiscal deficits and currency devaluation. The report further explores the debate between free trade and protectionism for the UK, highlighting the advantages and disadvantages of each approach. It concludes by summarizing the findings and emphasizing the importance of sustainable economic strategies. The report also addresses potential problems related to fiscal and monetary policies including trade deficits, inclusive growth delays, and the impact of inflation and wage levels.

Running head: ACCOUNTING AND FINANCE
Accounting and Finance
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Executive Summary
The objective of the paper is to analyze the impacts of Brexit on the UK economy. Over the last
couple of years, Brexit is an emerging concern for the UK. Though the deal is not accomplished
a significant uncertainty has been grown up since 2016. In the view of the deal, the UK will exist
from the EU and will no longer avail the trading facility like other member countries. This paper
evaluates the possible consequences of the Brexit deal.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Conclusion.......................................................................................................................................3
Reference list...................................................................................................................................3

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Introduction
Recession refers to the deteriorating condition of the economy. The downturn phase of
the business cycle approaches towards the recession. In such a condition, the economic growth
drops down to a significant level. Economic uncertainty and political disturbance are often
responsible for the cause of recession. Brexit is a great concern for the UK economy. The
withdrawal of the UK from the EU is termed as Brexit. The initial referendum is proposed in
2016. However, the deal is not finalized yet. On this account, the UK economy is experiencing
huge economic uncertainty. The average change in the growth rate is expected to be around
0.5%. This average growth rate is reported to fall by 0.3% during the last couple of years owing
to the growing political uncertainty and global economic crisis. The unsettled Brexit deal will cut
the trade volume if the UK economy as it will no longer be part of the European Union. The
facility provided by the EU to its member countries will be limited in terms of tariff rate and
subsidy amount (Felbermayr et al. 2017).
Discussion
Fiscal and monetary policy to alleviate the recession during recession
Recession is illustrated as a result of adverse demand shock. Average purchasing power
of the economy drastically falls during sluggish economic growth. People try to save more
reducing the monetary expenses for product and services. Following the fundamental demand
theory, credit price falls in response to the decreasing demand for liquid money. During
recession, inefficient firms exit the business facing the extreme fall in the demand curve. There is
a high chance for the firms to get merged into the production process with the aim of countering
the negative impacts of the recession. However, controlling the recession is a complex task

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(Tetlow and Stojanovic 2018). A strong cooperation is required between government and the
factors of production. The core objective of the government is to direct the firms and individuals
towards the gradual development of the economy. This gradual development can be achieved if
policy implements in an appropriate way. The government plays the vital role to decide the
nature of the policy tool. The most popular government policy to control the economic activity is
known as fiscal policy. The policy is of two types, such as, expansionary and consolidating fiscal
policy. In case of recession, expansionary fiscal policy gets applied as it provides fiscal
assistance to the public to enhance their purchasing power (Pollard 2018). Meanwhile, it offers
subsidy to te producers reducing the tariff rate on the final products. The producers will be able
to augment the revenue with the help of this subsidy.
In the context of the UK economy, Brexit is an uncertain deal which is not fixed till now.
The overwhelming uncertainty related to this political deal has been aggravating the situation
since the last couple of years. Investors feel skeptical in investment process and it economic
progress slows down. Government acts as an external source of fund. Fiscal policy is aimed at
initiating the structural development process. It has been observed the most of the economic
crisis has been observed to be revived driven by the strong fiscal policy. Public expenditure,
income tax and revenue are the main sources of the government expenditure (Pettifor 2017). This
treasury is used to support the sustainable development program of the economy.
Monetary policy is the discretionary policy. The policy is completely controlled by the
Central Bank. At the time of recession, there is a scarcity of money supply. Average
consumption level drastically falls and brings regressive impacts on the total employment and
investment. Decreasing employment level results in deterioration in the per capita income. In this
context, finance authority attains to reduce the interest rate. In this way, the quantity of loans gets

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intensified shifting the cumulative demand curve towards the rightwards direction. This financial
approach is considered as expansionary monetary policy (Armour 2017). Government is always
in favor of immediate application of expansionary monetary policy instead of expansionary fiscal
policy. Three important tools under the monetary policy include open market operation, reserve
requirements and the discount rate. In case of expansionary monetary policy, Central Bank of the
UK will be proposed to lower the reserve requirements. Eventually it influences the commercial
banks to keep the interest rate low on loans. It has been observed that interest rate is the prime
controller of the inflation rate (Hantzsche, Kara and Young 2019). During recession, many
producers unnecessarily hike the price level to make significant profit. This successively leads
the economy to inflation situation which accounts for diminishing economic welfare. On this
account, the British Government should raise the wage level. This inevitably makes an
improvement in the nominal wage, but, real wage remains constant. Therefore, increase in the
real wage cannot be considered as a permanent solution for the recession alleviation program.
The government should look out for a sustainable solution. The expansionary policy
raises monetary pressure on the Federal Reserve (McCombie and Spreafico 2018). Wealth
generation program counters with serious threat on the face of recession. As a result of the
collaborative action, the economy gains a sustainable strength to overcome the recession in terms
of employment couple with stable inflation rate. Being a developed country, inflation is one of
the existing economic issues of the UK economy. The country has not achieved the employment
level in accordance with the economic growth.
Potential problems related to policies

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The international traders are expected to incur huge cost while continuing the
international trade. The current study has attained to illustrate some drawback associated with
both the fiscal and monetary policy in the following way.
Drawbacks of fiscal policy
Increasing fiscal deficit: The fiscal deficit condition of the UK economy is expected to get
aggravated if expansionary fiscal policy continues. The increase in the public expenditure often
exceeds the country’s reserve funds. In this case, the country seeks external monetary help from
the foreign economies (Van Reenen 2016). This external fund borrowing augment the deficit
condition as this borrowing needs to be repaid after a certain point of time. Further, it brought
regressive impacts on the budgetary allocation program due to shortage of monetary resources.
Trade deficit: On the account of recession, the country is directed to borrow resources from
abroad nations to meet the production deficiency caused by recession. Hence, it raises the import
volume as compared to the export (Menon and Salter 2016). The surpassing import volume over
the export disrupts the trade balance and reduces the fund of the foreign currency.
Inclusive growth delays: As fiscal expansionary policy is taken to counter the recession effect,
it shifts its focus from the inclusive economic growth to the structure specific growth. It has been
observed that excessive fiscal expenditure delays the development program and ignores the
environmental concerns (Dhingra et al. 2016). Excessive focus on a particular sector overlooks
the compromising impact on other sectors. Therefore, expansionary fiscal policy hardly
guarantees the inclusive growth of the UK economy.
Drawbacks of monetary policy

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Devaluation of currency: In the context of the expansionary monetary policy, the policymakers
lower the currency value to attract the domestic market attractive for the foreign investors. It has
been noticed that foreign investors bear less investment cost in terms of the domestic currency.
Therefore, domestic goods are turned into cheaper in abroad during recession. On the contrary,
the domestic customers pay higher prices to buy foreign goods (Simionescu et al., 2017).
Outflow of foreign currency devalues the domestic currency in the international market.
Fall in real wage: According to the Philips curve, the country is only capable to achieve to the
full employment level in the long run. The sudden increment in the average wage level enhances
the nominal wage, whereas, the real wage remains constant. The sudden financial infusion may
though intensify the purchasing power, the disposable income gets declined. Therefore, the
proportionate increase in the wage in accordance with the price level will likely to keep the real
wage at high.
Inflation rate: The study examines that inflation rate is generally accompanied by the
continuous growth in money supply. The consumption level gets enhanced when there liquidity
money enters into the market. People can continue the purchasing process even if the market
price gets hikes. Therefore, it causes the inflation in the economy (Breinlich et al. 2017).
Considering the fact, the paper asserts that inflation rate is an important loophole for the
expansionary monetary policy. Hence, the monetary authority cuts down the interest rate to
intensify the investment process. This eventually lowers the investment cost and improves the
cumulative production level.
Free trade versus protectionism for the UK economy

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Free trade allows the country to participate in the trade activity without government
intervention. Trade operation continues in the absence of tariff rate. The product and service
need not to suffer from extra trade barriers, like tariff and trade restrictions related to goods
(Dhingra et al. 2016). This consequently helps the traders to gain more profit as compared to the
protectionism trade policy. More goods and services are expected to be trading if country agrees
with the free trade policy. The UK is reported to have free trade agreements with Japan and
Mexico. In addition to that the country operates its trade business with other member countries of
the EU depending on associated and partnership trade business (Jensen and Snaith 2016).
Nonetheless, these trade associations with the European members will no longer exist if Brexit
deal is finalized. In this regard, the trade of the k economy is expected to get devastating impacts.
Free trade is the key integral component to boost the international trade. Free trade is advocated
by the political and regional parties. In this regard, an international body is assigned with the
power to formulate the trade agreements among the countries (Kierzenkowski et al. 2016).
Currently, the World Trade Organization plays the vital role to fix the trade standards among the
different countries.
The greatest example of free trade can be illustrated as the actions taken by the Great
Britain. Since the 1920s, the British Government has been trying to reduces the regulations on
both export and import goods. The other significant objective of the free trade is to exchange the
knowledge and services provided with minimal cost. Consecutively, the trade agreement happens
for those commodities on which the country own comparative advantageous position. This helps
the country to achieve a comparative advantageous position in the market. On the contrary, the
protectionism policy puts limitation on the inter-state as well as cross-countries. Some of the
experts believe that protectionism policy protects the domestic companies from the global

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competition. This has been observed that economy suffering from lack of technical strength and
market efficiency, applies protectionism policy (Gudgin et al. 2018). The UK economy is
endowed with advanced technology and strong infrastructural facility. On this account, trade
restrictions in terms of tariff imposition on the trade goods generate loss for both producers and
consumers. This cumulative version of loss is termed as dead weight loss which reduces the
economic welfare for the community.
Conclusion
In a concluding note, the paper states that expansionary fiscal policy is intended to boost
the economic growth through the development of produced and human capital. In this way, the
economy will be able to achieve its long-term goal. In the view of uncertain effect, the
government is always advised to adopt a combination of monetary policy and fiscal policy. The
comprehensive impacts of these two policies are much better than the impacts of a single policy.
Further, free trade is assumed to have positive impact on the welfare even if the Brexit deal
passes. The UK economy will be allowed to do trade outside the member countries of UN. Trade
liberalization is the fundamental step of the free trade agreement. Nonetheless, the economists
are worried about the free trade policy as it causes trade disparity among the member countries.
Unequal trade distribution is considered as one of the negative aspects of the free trade situation.
It has been observed that developed economies enjoy the spill-over effect of the free trade.
Henceforth, many developing countries do not make trade agreements with the UK.

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Reference list
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