Business World

Saturday 1 October 2016

Brexit: How the UK Treasury calculated potential cost of €5,400 per household

Published 18/04/2016 | 14:17

George Osborne
George Osborne

The UK Treasury has released a 200-page document setting out the potential long-term consequences of Brexit, with George Osborne warning that leaving the EU would cost every household £4,300 (€5,400).

  • Go To

How has the Treasury reached the £4,300 figure?

Read more: 'Brexit will leave Britain permanently poorer'

Civil servants examined three potential futures for the UK outside the European Union after 15 years - a Norway-style deal which would see the UK becoming a member of the European Economic Area (EEA); a Canadian-style bilateral deal with the remaining members of the EU; or no deal with the EU and a relationship carried out under World Trade Organisation (WTO) rules. Using a complex series of models, the Treasury's central estimate is that, based on 2015 figures, a Norway-style deal would see a 3.8% fall in GDP, or £2,600 per household; the Canadian-style system would see a 6.2% fall in GDP, or £4,300 per household; the WTO approach would see GDP fall by 7.5% and leave households £5,200 worse off.

Read more: A possible Brexit would hit Irish-owned firms hardest

What approach did the Treasury use?

Officials insist they took a cautious approach to the figures as part of a "rigorous quantitative analysis". They estimated the impact on trade and foreign direct investment (FDI), then estimated the consequences for productivity. These economic shocks are put into a "general equilibrium macroeconomic model" to determine the impact on UK productivity and GDP. The annex of the document setting out the technical details contains a series of complex algebraic equations used to model the trade and investment flows, and the analysis also drew on research carried out into the impact on world trade of the closure of the Suez Canal to examine the link between trade and productivity.

What does the document say about immigration?

Very little, considering it is one of the main battlegrounds of the Brexit debate. In four paragraphs on the subject, the Treasury explains it used the same figures as the Office for Budget Responsibility (OBR), assuming that net migration will fall from 329,000 in 2014 towards 185,000 per year from 2021 onwards - a figure still far in excess of the "tens of thousands" goal set by the Government. One of the key arguments of Brexit campaigners is that leaving the EU would give the UK greater control of its borders - but the Treasury analysis did not alter its assumptions of the numbers coming to Britain.

Why did the Treasury analysis not consider whether net migration would be reduced?

The Government points out that "no country has been able to agree significant access to the Single Market without having to accept EU regulations, financial contributions to the EU and the free movement of people". So, in the case of EEA membership, the same rules would apply. The bilateral deal negotiated with the Swiss also involves accepting the free movement of people. The implications of the WTO approach would depend on the future government's policies - but any attempt to tighten the borders could be met by reciprocal action from the EU, making it harder for UK nationals to emigrate to Europe. New free trade deals with non-EU countries could also require more liberal immigration policies, the Treasury argued.

What would Brexit mean for the public finances?

For each percentage point reduction in GDP, the Treasury estimates a £7 billion loss to the Exchequer. The central estimates suggest that an EEA deal would result in public sector receipts being £27 billion lower each year, a bilateral deal would result in £43 billion less going to the Exchequer and for a WTO approach the figure would be £52 billion.

But wouldn't the UK be better off because it would no longer have to pay into the Brussels budget?

The Treasury assumes that no contributions are made to the EU, resulting in £7 billion a year being kept in the UK, but that still leaves a net loss to public sector receipts - and consequently the amount available to be spent on services - of £20 billion under the EEA model, £36 billion under the bilateral model and £45 billion under the WTO approach. The document says: "To put these numbers into context, the impact in the EEA alternative would be greater than what is currently spent on the combined annual budgets of the departments responsible for policing and prisons; while the impact in the WTO alternative would be more than what is currently spent on the entire schools budget for England."

Press Association

Read More

Promoted articles

Editors Choice

Also in Business