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EU Referendum Report: EconomyBack

EuropeanHaving spoken about trade and employment in previous issues and following recent figures released by the Office for National Statistics (ONS), which showed that UK inflation fell in April, this week we will examine how the outcome of the referendum might affect the UK’s economy.

The economy is another complicated and heavily theoretical area and like much of the policies in the debate, only a ‘time will tell’ approach is most certain. However, both sides have put forward their theories.

Remain

In campaigners say EU membership means a stronger economy, creating jobs, trade and investment in Britain. Around 50 per cent of all British exports go to the EU and Remainers state that three million jobs in Britain are linked to trade in Europe. Independent policy think tank, Open Europe, estimates that Brexit could lead to GDP shrinking by up to 2.2 per cent by 2030.

This week (16 May 2016), the Chancellor of the Exchequer, George Osborne, revealed new Treasury analysis showing that ‘within fifteen years of leaving the Single Market, Britain would suffer from at least £200 billion less trade every year in today’s terms, and would miss out on at least £200 billion of overseas investment’.

Of each of the three trade models sited as possible in a post Brexit Britain, those wishing to remain in the EU believe that none will offer the same economic development that is achieved and gained from within the EU. According to HM Treasury, the UK would be “permanently poorer if it left the EU and adopted any of [the three potential trade] models”.

‘The central estimates – defined as the middle point between both ends of the range – for the annual loss of GDP per household under the 3 alternatives, after 15 years are:

  • £2,600 in the case of EEA (Norway)
  • £4,300 in the case of a negotiated bilateral agreement
  • £5,200 in the WTO

The negative impact on GDP would also result in substantially weaker tax receipts. This would significantly outweigh any potential gain from reduced financial contributions to the EU.’

HM Treasury argues that ‘[a]fter 15 years, even with savings from reduced contributions to the EU, receipts would be £20 billion a year lower in the central estimate of the EEA, £36 billion a year lower for the negotiated bilateral agreement and £45 billion a year lower for the WTO alternative.’ (April 2016).

Central estimates across the ‘In’ camp are that GDP would be lower if the UK left the EU. Economic estimates of a lower GDP have been projected as such:

  • The Organisation for Economic Co-operation and Development (OECD) believes GDP would be 5% lower
  • HM Treasury (HMT) believes GDP would be 6.2% lower
  • London School of Economic (LSE) believes GDP would be 9.5% lower
  • Confederation of British Industry (CBI) believes GDP would be 3-5% lower
  • Oxford University believes GDP would be 3.9% lower (by 2030)

Leave

Brexit followers argue that the UK would be significantly better off outside of the EU and the economy would grow. The UK would no longer have to pay towards the EU, enabling the money currently paid to be used for national resources and distributed elsewhere.

It is estimated that the UK contributed almost £8.5 billion in 2015 to the EU.  Open Europe has also projected that if favourable trade agreements were made, leaving the Union could mean GDP increasing between now and 2030 by up to 1.6 percent.

In response to the Treasury’s report, Brexiters stated that what the analysis really showed was how far Britain had lost control of its borders. This statement was made as it emerged the forecasts were based on three million more EU migrants moving to the UK, over Britons going abroad.

Brexiters also pointed to what they believed were gaps in the analysis presented by HM Treasury.  For example, the Treasury provided details on the losses from new tariffs on EU trade after Brexit but failed to include possible new revenue from deals with non-EU countries.

Lord Lamont, the former Tory chancellor, said: “Few forecasts are right for 14 months, let alone 14 years. Such precision is spurious, and entirely unbelievable.”

Following the release of the Treasury report, a group of eight economists published their support for Brexit. The group, Economists for Brexit, state that the UK economy would increase by 4% outside of the EU.

Prof Minford, professor of applied economics at Cardiff University, said: “Our analysis shows that walking away from the EU, not negotiating a new agreement with the EU while getting rid of EU trade barriers will bring about a 4% of GDP gain to the economy, consumer prices will fall about 8%, and our hugely competitive services sector will take the place of diminishing manufacturing output.”

He argued that the UK would not need a new trade agreement if it left the EU because 70% of exports were traded outside the bloc under WTO rules.

“The remaining 30% would also become subject to WTO rules and would be sold to the EU subject to its general tariffs which average around 4%, in the same way as exports from Japan or the US.”

Assessment

The FT provided a fair verdict on the economy debate. ‘With clear and easily specified economic risks in the short and medium- term, Brexit does not easily pass any cost-benefit analysis. But supporters of the EU should be wary of making overconfident claims, since trade is only one driver of growth and prosperity.’

The economy, like trade, is hard to judge and unfortunately will be one of the policy topics where an only time will tell approach is 100 per cent accurate. Part of this uncertainty comes from the academic set itself.

Until recently (April 2016), near all the economists speaking out on the issue had come out in support of remaining in the EU. Leading reports, endorsements and statements came from the likes of the CBI, HMT, LSE, Oxford Economics and the OECD and the International Monetary Fund (IMF) (as discussed above).

However, camp Brexit has a new recruit, in the form of the Economists for Brexit. Authors include Patrick Minford, former adviser to Margaret Thatcher and lecturer at Cardiff Business School, Dr Gerard Lyons, a former chief economist at Standard Chartered and current adviser to Boris Johnson, the former Mayor of London and Roger Bootle, Chairman of Capital Economics, Europe’s largest macroeconomics consultancy and specialist adviser to the House of Commons Treasury Select Committee.

This has tilted the economic debate and has somewhat confused matters. What could once be claimed as policy win for the Remainers, is now uncertain. The policy factors themselves are also now confused. For example, both sides use the WTO model as positive evidence for their arguments. On the one hand, team Remain states that £5,200 (central estimate) would be lost if the UK was to adopt the WTO model (HM Treasury) or a 5% lower GDP (CBI). The Brexiters argue that the WTO model would be more than sufficient for the UK to trade under. Professor Minford argues that 70% of exports were traded outside of the EU bloc already under WTO regulation.

So which is the most reliable source?

HMT’s report has been criticised as unbalanced. As explained by Open Europe’s Co-Director, Raoul Ruparel, ‘[i]t looks at the benefits of EU membership and the costs of leaving but not [look at] the costs of EU membership nor the potential benefits to leaving’.

Last week (12 May 2016), Governor of the Bank of England, Mark Carney, defended the Monetary Policy Committee’s report on the health of the UK economy. The report had come into question following comments that it was too politically biased. This is a problem that both sides of the debate offer. Carney defended this by stating:

“Assessing and reporting risks does not mean becoming involved in politics,” Mark Carney told peers when providing evidence to the House of Lords economics committee (last month).

“Rather, it would be political to suppress judgement.”

As the BBC stated, the Bank has certainly not “supressed judgement”.

The report states that “[t]he most significant risks to the [economic] forecast concern the referendum,”

“A vote to leave the EU could materially alter the outlook for [economic] output and inflation… [which] could lead to a materially lower path for growth and notably higher path for inflation,”

Those on the side of Brexit state it is wrong for the Bank of England to become so political. Whilst Carney responds that ‘it would be wrong for the Bank – responsible for financial stability – not to give its considered view, given the “shock” impact of a Brexit vote’, it is not simply the EU referendum that lowered the Bank’s forecasts. Other issues are at play, as is pointed out by the BBC, ‘Britain’s chronic productivity problem’ and the overall slowing growth of the global economy, has all impacted on the report. In light of the debates surrounding the report, it is perhaps wise to look at other projections.

On to the next…

The FT’s Economics Editor, Chris Giles, has praised the OECD as the go to report. Whilst it much be acknowledged that the OECD receives some funding from the EU, Giles does comment that the OECD is often at odds with the EU and thus, is looking at this impartially. ‘The OECD has attempted to model everything’. This is in stark contrast to every other report. The problem however, is that there is almost too much analysis, which has created some levels of uncertainty but is, nevertheless, the most comprehensive report.

‘It assumes there will be tariffs with the EU from late 2018 until a free-trade agreement in goods is signed in 2023 and that non-tariff barriers will be erected in the UK and the EU, harming trade. It envisages less migration from the EU, less foreign investment, research and development, causing managers to face less competition. It also assumes there will be deregulation in the UK after leaving and much lower budget contributions to the EU.’

This is not an outlook that is hard to envisage. Part of the main arguments for leaving the EU is to put migration back in the hands of the sovereign state and to lower regulation and budget contributions to the EU. Trade deals would take time to negotiate and tariffs would be implemented post Brexit until trade negotiations and deals were reached. This would create a time of economic uncertainty for the UK and economic recovery would be dependent on the deals established.

The OECD does not state that a relationship with the EU would cease but in the long term new policies would take until (at least) 2024-30 to make.

This is not to say that the UK could not relight its economy but a generation of negotiations and economic rebalancing and trust would need to pass. Potentially a risky move in the current strained global economic climate. It is difficult to argue that the UK’s economy would remain stable in the immediate result of Brexit. The real question is how quickly it could recover and with the pace of negotiations likely to be slow, it could take over a generation for the UK to bounce back.

Posted by Sue Robinson on 20/05/2016