In January, the prime minister, Theresa May, warned the EU that “no deal for Britain is better than a bad deal” when it comes to Brexit. Although her government is now edging away from that position, the statement raised the question of what no deal would actually mean for the pharma industry
To answer the question of what a ‘hard Brexit’ would mean, The Economist Intelligence Unit recently assessed how our economic and healthcare forecasts would change if the UK did drop out of the EU in 2019 with no deal at all – which means no mutually agreed transition arrangement, no immediate prospect of a formal trade agreement, and scrambling even to assert its trade rights under World Trade Organization (WTO) rules. We drew up a detailed Hard Brexit scenario of how it could happen, and compared that to our baseline forecast, which is that the UK will manage to secure a phased agreement (a scenario we call Softish Brexit).
Under the Hard Brexit scenario, we assumed that the negotiations that are now underway would break down in late 2017 or early 2018, probably because of disputes over free movement of labour. When the two-year transition period ended in 2019, the UK would have to renegotiate its existing EU trade agreements under its own name (including WTO ones). Even under the best circumstances, this would take several months. In the meantime, trade would be disrupted and that would lead to a dramatic slowdown in the economy, with GDP growth falling to 0.3% by 2019 and proving very slow to recover. By 2021 total GDP would be around 2% lower than under Softish Brexit.
One effect would be to cut health expenditure and pharmaceutical sales. We calculate that, given lower tax revenues to fund the NHS and lower consumer spending on health, total health spending in 2021 would be £2bn lower. Compared with projected total spending of £207bn, that is not a huge amount (although it is on top of the £22bn in NHS ‘efficiencies’ already expected). That is largely because we assume that, as now, health spending would be ring-fenced in government budgets, and even in household budgets. However, the effect would be exacerbated if the government, instead of adopting an expansionary monetary policy to dampen the effects of Hard Brexit, instead reacts by trying to turn the UK into a low-tax economy, competing with the likes of Ireland. That could cushion business, but it does mean that in the short term there would be even less money for the NHS.
‘The economic damage of Brexit will be limited, although we still expect growth to be slower than it would have been inside the EU’
Moreover, one counter-intuitive effect of our scenario is that we actually expect the UK’s pharmaceutical spending to rise under a Hard Brexit scenario, ending up around £600m or 2.8% higher than it would be under a Softish Brexit. That is largely because we expect the exchange rate to be worse under Hard Brexit, which would make imported drugs more expensive – and the UK runs a big trade deficit in pharma. One sideeffect of this extra spending on drugs will be less money for other parts of the healthcare system. Given that we also expect that NHS wages will go up as it becomes more difficult to recruit staff, the squeeze on actual patient spending will be much harder than the headline numbers seem to suggest.
To repeat, this is not our core forecast. Although negotiations will be difficult and there are multiple points where talks could break down, we do still think that the UK and EU will manage to agree a transition deal (probably at the last minute). Under this scenario, the UK would leave the single market in 2019 but would gradually phase in a free-trade deal and customs agreement with the EU. In that case, the economic damage of Brexit will be limited, although we still expect growth to be slower than it would have been inside the EU.
The healthcare sector will still face huge disruption over recruitment, patients’ reciprocal rights to treatment, medical research and procurement. As for the pharma industry, it will still face higher trade barriers. There would be no actual tariffs on pharmaceutical trade under either of our scenarios – even the WTO rules set tariffs at zero for humanitarian reasons. However, the UK pharma industry is relying on an amicable deal with the EU to reduce the non-tariff barriers. If we fail to secure EU agreement on issues such as mutual recognition of marketing approvals, our ability to secure third-party trade deals, harmonised rules on clinical trial data, or the ability to be involved in pan-European research projects, then the effects will be far-reaching.
Softish Brexit in itself will be no picnic. The European Medicines Agency will still leave the UK and the pharmaceutical industry will still find it harder to trade in the EU. However, as the House of Commons Foreign Affairs Committee warned in its March report, a Hard Brexit would be ‘a very destructive outcome leading to mutually assured damage for the EU and the UK’. Let’s hope it doesn’t come to that.
Ana Nicholls is chief healthcare analyst at the Economist Intelligence Unit