Guidance

Trade dividend estimate: an explanation of methodology

Published 19 June 2019

During a speech made to the Institute for Government in May 2019, Dr Liam Fox stated:

In 2017/18 alone, we [DIT] helped UK businesses export goods and services worth around £30.5 billion, using analysis by the Institute for Economic Affairs, it is estimated that this could potentially generate around £10 billion for the Exchequer.

This calculation relates to export wins generated by the Department of International Trade (DIT). It uses the same methodology defined in September 2018 by the Institute for Economic Affairs (IEA) to estimate the impact of total UK exports.

This is a rounded estimate based on the following formula:

£30.5 billion [A] x 0.80 [B] x 1 [C] x 0.40 [D] = £9.76 billion

Formula Part A

The value of UK export wins over 2017-18 was £30.5bn. These are defined as any deal, contract, sale, or other specific type of agreement for an eligible UK company resulting from support provided by the DIT network. Each export win is self-reported by a UK company, capturing the expected value over a five-year period

Formula Part B

20% is deducted to reflect the proportion of the value of exports accounted for by the use of imports. This is a more conservative figure than the latest estimate of 15% suggested by the Organisation for Economic Co-operation and Development.

Formula Part C

A 1% increase in the value of exports is assumed to result in an increase in UK Gross Domestic Product (GDP) by 1%. The real value of export-led growth is affected positively and negatively by several factors including:

  • export income being magnified as it ripples through the economy
  • higher inflation and interest rates, if the economy is operating near to full capacity
  • businesses diverting production from domestic consumption to satisfy export demand

Formula Part D

A £1 increase in GDP is assumed to translate to a £0.40 improvement in the budget balance as higher income generally translates into higher tax revenues and lower government spending. This relationship can be affected positively and negatively by several factors including:

  • higher tax amounts paid by more productive exporters, or those paying higher wages
  • taxes on the consumption of exports collected by overseas governments