Legal services would be more heavily affected than the UK economy as a whole should the country withdraw from the European Union, groundbreaking research commissioned by the Law Society has predicted.
An initial study produced by Oxford Economics said that the “stronger negative effects” were due to the law’s reliance on sectors likely to be adversely affected by a so-called Brexit, particularly financial and other professional services, and from the subsequent lower levels of business investment.
The Law Society warned a year ago that solicitors were concerned about the lack of certainty on the UK’s future relationship with the EU, which it said was important if the country was sustain its position as the largest legal services in market in Europe.
With the government committed to a referendum by the end of 2017, although there has been much speculation that it may happen next year, the society said publication of the report – which will be followed by a more detailed analysis later in the autumn – “begins our contribution to the national debate”.
Oxford Economics said the scale of the impact would depend on the economic drivers shaped by the success of the withdrawal negotiations and subsequent government policy actions, and the report modelled what could happen in ‘upside’, ‘downside’ and ‘central’ scenarios by 2030, assuming Brexit took place in 2020.
Whichever scenario applied, however, the effects on output and employment were “negative”, it said. This was based on looking at four key economic drivers: the introduction of trade tariffs on goods; a likely reduction in foreign direct investment; a decrease in inward migration (both skilled and unskilled) as the government would be able to restrict inflows of EU migrants; and the end of fiscal contributions to the EU budget.
The report explained: “Although the negative effects by 2030 are estimated to be relatively small in percentage terms, the absolute volumes of lost output forecast can be viewed in the context that in the downside scenario, projected annual output loss for the legal services industry in 2030 (£1.7bn in 2011 prices) equates approximately to the current combined annual UK revenue of Linklaters, Freshfields Bruckhaus Deringer, Clifford Chance and Allen & Overy (on a constant price basis).
“The upside scenario implies an annual loss of £225m legal services output in 2030 – approximately the current annual income of the tenth largest law firm ranked by UK revenue.”
It said the losses in 2030 would follow a gradual erosion of legal services output over time, when compared with the forecast of what would happen if the UK stays in the EU, “such that the cumulative loss of output and employment in the legal services sector (and UK economy as a whole) would be greater than simply the value of lost output in 2030 itself”.
The report added: “Moreover the loss of output compared with the status quo (the UK remaining a member of the EU) may persist for a relatively long period if the UK fails to achieve sufficient economic integration with other trading partners to be able to offset the impacts following withdrawal.”