While a political solution to the Brexit crisis is yet to be found, our academic understanding of why the Brexit vote happened has developed significantly over the last three years. Studies have found that areas that supported Leave had an overall weaker economic structure, with lower levels of income and life satisfaction, fewer high status-jobs, an aging demographic, and lower levels of educational attainment. A recent paper shows that austerity-induced cuts to the welfare system since 2010 played an important role in shoring support for the UK Independence Party and Leave. The headline finding suggests that the 2016 EU referendum would have resulted in a clear victory for Remain (or the referendum might never have happened) had it not been for austerity.

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The new UK Prime Minister Boris Johnson has just under three months to hammer out a process for the UK to leave the EU. The official mantra now is for the UK to leave the EU “do or die” by Halloween. Yet, the so-called “No Deal” Brexit that now appears likely does not resemble what the electorate was offered in 2016. A No Deal Brexit is the anathema to the Vote Leave campaign’s promise that any departure from the EU would be gradual and smooth. In fact, if that happens, most of the Leave side’s promises, such as the UK’s continued participation in the single market, would be broken.

While a political solution to the Brexit crisis is yet to be found, our academic understanding of why the Brexit vote happened has developed significantly over the last three years. Studies have found that areas that supported Leave had an overall weaker economic structure, with lower levels of income and life satisfaction, fewer high status-jobs, an aging demographic, and lower levels of educational attainment. In a recent paper, forthcoming in the American Economic Review, I show that these “left-behind” parts of the UK were particularly reliant on the welfare state – and hence, particularly vulnerable to welfare cuts.

My analysis shows that austerity-induced cuts to the welfare system since 2010 played an important role in shoring support for the UK Independence Party (UKIP) and Vote Leave. I gathered data from all electoral contests that took place in the UK since 2000, and assembled a detailed individual-level panel data set covering almost 40,000 households since 2009. Through these data, I studied to what extent an individual’s or region’s exposure to welfare cuts since 2010 was associated with increased political support for UKIP in the run up to the Brexit referendum in 2016. The analysis suggests that this association was so strong that the 2016 EU referendum would have resulted in a clear victory for Remain (or the referendum might never have happened) had it not been for austerity measures such as extensive cuts to public spending.

Beyond shifting support to UKIP and Leave, individuals exposed to specific benefit cuts demonstrated marked increases in wider political dissatisfaction. They became much more disaffected with the UK’s political system, increasingly believing that “public officials do not care”, that “they have no say in government policy” and that their vote does not matter.

The Impact of Austerity

The vast benefit cuts starting in 2010 predominantly hit already struggling regional economies that were recovering very slowly from the global financial crisis. Millions of working families were left worse off. Aggregate figures suggest that overall government spending for social welfare and protection, such as unemployment, housing, tax credits and disability-related benefits contracted by 16% in real per capita terms (see the chart below), reaching levels last seen in the early 2000s. And the Office of Budget Responsibility estimates a total of £45.4 billion will have been cut from the welfare budget from 2010 to 2021. By 2020, relative to 2010, day to day real government spending per capita will be 15% lower.

While the healthcare system was not affected by direct cuts, the aging population led to significant increases in demand for healthcare, worsening the quality and access for many and contributing to the now regular crises that bring the healthcare system to near collapse during seasonal demand peaks. Overall public spending on education also contracted with much of the burden of the cost of university education being shifted from public to private responsibility – resulting in a near tripling of tuition fees across many universities. At the same time, the tax cuts curtailing public revenues mostly benefited the wealthy or those on higher incomes.

At the level of districts, spending per person fell by about 23% in real terms between 2010 and 2015. The poorest parts of the UK were hit the hardest since they were most reliant on welfare and transfers to begin with: some local authority districts had to cut spending by up to 46%. Many austerity-measures affecting individuals (e.g., cuts to housing benefits and tax credits) were implemented through the Welfare Reform Act of 2012. It was estimated that these measures combined would cost every working-age Briton, on average, around £440 per year, with combined estimated fiscal savings of £18.8 billion per year.

Of course, the overall impact of the cuts was far from uniform across the UK: it varied from around £914 per working age adult per year in Blackpool to just above £177 per working age adult per year in the City of London. And the loss of benefit income due to cuts had further consequences for local economies. I estimate that for every pound in benefit-income that was lost, local area incomes contracted by around 2.4 pounds due to the multiplier effect. A simple back of the envelope calculation suggests that the VAT revenues on the foregone economic activity due to the welfare reforms could have easily paid for the UK’s annual contribution to the EU budget – rendering one of the Leave campaign’s major sticking points inconsequential.

From Austerity to Brexit

My analysis shows that voters hit hardest by the cuts were more receptive to the Leave campaign, which shouldn’t be surprising as campaigners promised fiscal windfalls from leaving the EU that could prop up ailing public services. In the years leading up to the 2016 EU referendum, UKIP, the main populist party advocating for Brexit, saw significant electoral gains, largely driven by areas and among voters most affected by the welfare cuts. I found that UKIP vote shares increased by between 3.5 to 11.9 percentage points due to the welfare cuts, suggesting that the tight 2016 EU referendum could have resulted in a victory for Remain had it not been for austerity. Leave won by a margin of 3.8 percentage points.

Why was UKIP and Leave so successful? The evidence suggests that support for UKIP and Leave represented, for many voters, a way to voice protest against the UK’s domestic political settlement. Only 43% of 2014 UKIP voters stated that they support UKIP because of its goal to Leave the EU – this compares with 26% who stated that they supported UKIP as they are “unhappy with other three parties/to send a message/as a protest vote.” The marginal Leave-supporter that swung the EU referendum in favor of Leave is unlikely to have been a die-hard long-time EU sceptic, but rather, a disaffected and disillusioned voter. The narrow vote of the English to leave the EU in 2016 was, to a significant extent, a manifestation of the political fallout from austerity.

The Challenge of Causal Identification Causal identification of the political effect of benefit cuts is notoriously difficult, as the cuts were not randomly allocated. Nevertheless, the effects I observed are very consistent with other outcome data that should be responding to these types of shocks, both in their extent and their timing. For example, areas with more residents affected by the abolishment of the council tax benefit (which in aggregate affected 2.5 million households), saw a marked increase in support for UKIP, but only after this specific benefit cut was implemented after April 2013. The timing coincides with a significant contraction of local economic activity, as benefit income was taken out from regional economies; similarly, the timing coincides with an increasing number of people reporting to be falling into arrears in paying their council tax. This is not surprising, as council tax benefit previously covered council tax obligations on behalf of low-income households. This pattern consistently appears across other outcomes. The use of demanding econometric modeling, the combination of consistent evidence both in the timing and in the size of the effects of the welfare cuts measured across different data, along with the absence of pre-austerity trends make it very unlikely that the observed effects are merely coincidental. To allay further concerns about whether we should treat these estimates as capturing a causal effect of austerity, I turn to exploring shifts in political preferences by studying individual-level panel data covering almost 40,000 households. This allows me to zoom in on three specific benefit cuts affecting distinct subpopulations for whom effects are unlikely to be confounded, for example, by other unobserved shocks or by selection into or out of benefit receipt (one focus population is, for example, people with a lifetime disability who had the quality of their benefit cut). Most importantly, the analysis allows the study of shifts in political preferences exploiting only within-individual variation and further allows me to control for a host of other potential unobservable factors.

The effect of austerity is detectable not only in aggregate voting outcome data, but also when looking at how people’s political preferences shifted once they had experienced a benefit cut. For example, consider one of the welfare-reform measures implemented through the 2012 Welfare Reform Act: the so-called “bedroom tax.” This benefit cut aimed to reduce housing benefits paid to low income families living in social-rented housing. It placed a maximum number of bedrooms allowed per household, which led to around 600,000 households losing a significant part of their housing benefit due to having “an excess bedroom.” This predominantly affected older, low income working age families whose children had moved out.

I studied households vulnerable to this cut and those that weren’t, and compared their political preferences and a host of other outcomes in the years following. Not surprisingly, households exposed to the bedroom tax increasingly fell into arrears paying their rent after the cut became effective, with some households moving into smaller housing. My results show that individuals living in such households increasingly shifted toward supporting UKIP and Leave.

Austerity Amidst Growing Grievances

The political and economic crisis that austerity helped to unleash was long in the making. By curtailing the welfare-state, austerity activated a broad range of existing economic grievances that had developed over a long period of time, as a result of many different factors, such as job or wage losses due to increased trade, immigration, and automation.

Many of these economic trends are set to continue. And the welfare state plays an important role in ensuring that there’s social consensus to embrace globalization, international exchange, and technological progress. Public policy needs to deliver solutions for those who lose out or feel left behind. This is where welfare spending comes in, from continued investment in education, training and other forms of welfare benefits, to helping individuals weather the transition between jobs.

The UK’s welfare system did fulfill this function, at least in part, up to 2010. My research shows that from 2001 to 2010 the UK’s welfare-state was responsive, expanding benefit and transfer payments to those who became, in relative terms, increasingly worse-off economically. The welfare state was tackling some of the grievances and the growing inequality brought about by rapid economic changes. Yet, with the onset of austerity from 2010 this trend of expanding benefit payments to those losing out came to an abrupt halt. The increase in support for UKIP and the Brexit vote can be linked to this reshaping of the social contract.

The consensus among economists is that the UK economy in 2019 is considerably smaller than what it would have been without the 2016 vote — even with Brexit not having happened yet. A No Deal departure is set to produce an economic shock that will hit millions of working poor, many of which have been swayed to support Brexit in 2016, based on promises that entirely contradict the No Deal realities. Even worse, the hollowing out of the welfare state that contributed to the Leave victory in 2016 leaves many of the working poor in a worse position to weather any prospective economic downtown. One can only hope that the sunlit uplands that were promised in 2016 appear much sooner than the 50 years or so that prominent leavers admit it would take for material benefits of leaving the EU to emerge. If anything is clear, Brexit is a guarantee for more political, economic, and social instability to come.