The cost of BREXIT

 

The central estimate cost of BREXIT according the HM Treasury, after 15 years

Be like Norway, and lose around 4% of GDP (£2,600 per family per year)
Be like Canada of Switzerland, and lose around 6% of GDP (£4,300 per family per year)
Be like WTO members like Russia or Brazil, and lose around 7.5% of GDP (£5,200 per family, per year)
 

HM Treasury’s analysis considered three alternatives:

– membership of the European Economic Area (EEA), like Norway
– a negotiated bilateral agreement, such as that between the EU and Switzerland, Turkey or Canada
– World Trade Organization (WTO) membership without any form of specific agreement with the EU – like Russia or Brazil
 

It seems that the first would not be attractive to those urging Brexit as leaving the EU to join the European Economic Area would maintain considerable (but not complete) access to the single market, but there would be a customs border with the EU. It would mean accepting EU regulations, the free movement of people, and financial contributions to the EU (though perhaps less than now) without getting any say over the rules. In the long term, reduced openness in this way hits productivity, which then feeds through into lower GDP and living standards.

Estimates

They made a range of estimates for each alternative. The middle point between both ends of the range, showed an annual loss of GDP per household after 15 years as follows:

– £2,600 in the case of membership of the European Economic area, like Norway
– £4,300 in the case of a negotiated bilateral agreement like Switzerland, Turkey or Canada
– £5,200 in the case of membership of the World Trade Organisation (like Russia or Brazil)
 

The negative impact on the economy (GDP) would result in a total reduction in tax receipts of £36 billion, equivalent to around an 8p increase in the basic rate of income tax. This would significantly outweigh any potential gain if we were to make lower financial contribution to the EU – which are a little over 1p for every £1 of tax paid once the UK’s rebates and receipts are taken into account.

HM Treasury estimates that the total reduction in tax receipts under each scenario would be as follows:
– £20 billion in the case of European Economic Area membership, like Norway
– £36 billion in the case of a negotiated bilateral agreement, like Switzerland, Turkey or Canada
– £45 billion in the case of World Trade Organisation membership, like Russia or Brazil

A reduction of £36 billion in tax receipts would result in higher government borrowing, large tax rises or major cuts in public spending. For example, it would be equivalent to more than a third of the NHS England budget, or to raising the basic rate of income tax by around 8p from 20p to 28p.

The UK is estimated to be between 3.4% and 4.3% of GDP (economic output) better off inside the EU than with membership of the European Economic Area like Norway, after 15 years, equating to a long-term loss of £2,600 a year for each household in the UK.

What about a negotiated bilateral agreement like Canada, Turkey or Switzerland?

A negotiated bilateral agreement provides less access to the single market than the European Economic Area alternative, in particular in relation to services, which are of critical importance to the UK – 80% of the UK’s workforce are employed in the services sector, and the UK has the largest share of services exports of any major advanced economy.

The bilateral agreements that involve most access have the greatest obligations: no other country has been able to agree significant access to the single market without having to accept EU regulations, the free movement of people and financial contributions to the EU. After 15 years, the UK is estimated to be between 4.6% and 7.8% of GDP (economic output) better off inside the EU than with a negotiated bilateral agreement, implying a long-term loss of GDP of £4,300 a year for each household in the UK.

Or why not adopt the rules of the World Trade Organisation like Russia or Brazil?

World Trade Organisation membership would amount to a significant closing of the UK’s access to global markets and would likely see the introduction of more trade barriers, including tariffs. It appears the least attractive alternative, economically.

Relying solely on the rules of the World Trade Organisation would result in a significant reduction in the openness of the UK economy to the outside world. It would be the alternative with the most negative long-term impact.

After 15 years, the UK is estimated to be between 5.4% and 9.5% of economic output (GDP) better off inside the EU than adopting the rules of the World Trade Organisation instead.

In 2015 terms, leaving the EU and relying on these rules would mean a long-term loss of GDP of £5,200 a year for each household in the UK.

In terms of the long-term economic impact, the analysis shows that leaving the EU and relying on World Trade Organisation rules would be the least attractive of the three alternatives.

In short, staying in the reformed EU appears by far the most attractive economic option so far, though Michael Gove advocates a loose arrangement like that betwen the EU and Albania or the Ukraine…

Author: CMJ, 19/04/2016