Leaving the EU could cost UK economy £100 billion and…
On Moday, CBI director-general, Carolyn Fairbairn, will warn that leaving the EU would cause a serious shock to the UK economy and negative echoes that could last many years after that.
In an economics lecture at the London Business School the CBI will analyse the potential impact of the UK leaving the EU – on trade, investment, jobs and growth. To quantify the impact on the economy, the CBI commissioned professional services firm PwC to examine two different exit scenarios: one at the optimistic end of the range, and the other recognising the likelihood of difficult trade negotiations but nonetheless with trade deals being concluded. Both scenarios use moderate assumptions – significantly more pessimistic cases could be constructed.
Under both PwC scenarios, UK living standards, gross domestic product (a measure measure of a nation’s total economic activity) and employment are significantly reduced compared with staying.
The analysis indicates a cost to the British economy of leaving of as much as £100 billion – the equivalent of around five percent of GDP – by 2020. Even in a scenario where a Free Trade Agreement with the EU is secured rapidly, the analysis indicates GDP could be three percent lower by 2020. GDP per household in 2020 could be between £2100 and £3700 lower, and the UK’s unemployment rate between 2 and 3 percentage points higher, than if the UK had remained in the EU. GDP growth in the years 2017-2020 could be seriously reduced – and possibly be as low as zero in 2017 or 2018.
Richard Blackmore, CBI East Midlands Director, said: “This analysis shows very clearly why leaving the European Union would be a real blow for living standards, jobs and growth.
“The savings from reduced EU budget contributions and regulation are greatly outweighed by the negative impact on trade and investment. Even in the best case this would cause a serious shock to the UK economy.
“By 2020, the overall cost to the economy could be as much as £100 billion and 950,000 jobs. Household income in 2020 could be up to £3,700 lower than it would otherwise have been. The economy would slowly recover over time, but never quite tracks back to where it would have been. Leaving the EU would mean a smaller economy in 2030.
“The findings from PwC’s independent study also explain why the majority of UK businesses are in favour of remaining within the European Union. Even under optimistic assumptions, an exit triggers serious economic disruption.”
Under the ‘FTA scenario’, the UK negotiates a free trade agreement with no tariffs on exports and imports between the UK and Europe by 2020. As it is no longer in the Single Market, it experiences a modest rise in non-trade barriers. The UK is assumed to maintain existing free trade agreements with other countries currently held by the EU, and signs a new trade deal with the US.
The ‘WTO scenario’ is based on the UK failing to secure a deal with the EU and therefore trading under World Trade Organisation rules after leaving. Tariff and non-tariff barriers with the EU rise significantly. The UK loses its existing free trade agreements with other countries, but renegotiates them on the same terms by 2026 and signs a deal with the US in the same year.
This new analysis comes a week after the CBI reaffirmed its member mandate to make the economic case to remain in the EU following a thorough consultation process. In addition, it published an independent ComRes survey of CBI members – who employ one third of all private sector employees – which found that 80 percent believe being part of the EU is best for their business and 77 percent said it was better for the UK economy as a whole.
In her lecture, Carolyn will focus on the lack of attractive alternatives to full EU membership and the impact of leaving on trade, regulation, investment and uncertainty.
The CBI director-general will give the economics lecture to senior business leaders, alongside Rain Newton-Smith, CBI Economics Director.
On the prospects of securing a deal with the EU, Rain Newton-Smith, will say: “A process for leaving is set out in Article 50 of the Lisbon Treaty, but it’s worth saying that Article 50 has never been triggered. By choosing this path the UK would be taking unprecedented action.
“We know that the European Commission would draw up an exit agreement. This would then be agreed by qualified majority in the European Parliament and Council, before being offered to the UK. The UK can’t participate in the discussions about its withdrawal at the Council and it can’t vote on it in the Parliament.
“In trading terms as well, the EU would hold the balance of power. Some see the fact that we import more from the EU than we export to it as proof that they need us more than we need them.
“But this ignores the fact that 45 percent of the UK’s exports go to the EU, it’s our biggest export market by far – compared to just 7seven percent of total EU exports which come here. So while it may be in both sides’ interest to complete a trade deal, the balance of power would be far from equal.”
On trading with the EU, Carolyn will say: “If the UK leaves the EU without a free trade deal, 90 percent of British exports to the EU, by value, could face tariffs. Some sectors could be hit particularly hard. Under WTO rules, UK textile exports to the EU could face tariffs of nearly 10 . Transport equipment could face tariffs of about 7%.
“Products imported from the EU into the UK could also face tariffs – passing the costs onto customers through higher prices. Even as part of the EEA or EFTA, rules of origin reporting and VAT payments at borders make it harder for small firms to trade with the EU.
“So, in short, leaving the EU could mean the return of significant barriers to trade.”
On trade deals with other countries, Carolyn will say: “For the UK, being part of the EU lets us go ‘toe-to-toe’ with other economic giants around the world in its negotiations. Some argue that, outside the EU, the UK could get deals signed faster. We wouldn’t have to consider the complex positions of 27 other countries in our negotiations.
“However, by leaving, the UK would drop out of the EU trade deals with other countries which it has at the moment – and have to renegotiate them from scratch. This is in part a capability point. We haven’t had the trade negotiators to do this for about 40 years. It is also a capacity point. We’d need to negotiate many new deals at the same time.
“The UK would also risk being at the back of the queue, with many countries preferring to negotiate comprehensive deals with regional blocs. And as a country of 64 million people the UK would inevitably have less influence than a bloc of over 500 million.
“As a consequence, it’s hard to imagine the outcome would be better deals than the UK has today, unless we somehow managed to negotiate better free trade deals than currently exist anywhere in the world: with the EU; with the 50 countries covered by EU trade deals, and with countries like the US with which the EU is still negotiating.
“Over the next five years, the UK’s trade position would not be improved by leaving, and would almost certainly be worsened.”
However, Nigel Baxter, who is regional chairman of Business for Britain East Midlands, believes many SMEs want to see a fundamental change in the UK’s relationship with the EU and that too much control over the British economy has been given away to EU politicians. According to Business for Britain, the East Midlands sends £1.05 billion to the EU every year.
Nigel Baxter, regional chairman of Business for Britain East Midlands
He said: “The SME sector makes a Herculean contribution to the British economy in terms of investment, wealth creation and jobs. That means it has an influential voice which must be listened to. Being handcuffed to even more EU rules and regulations will stifle enterprise and growth making it harder to create jobs.”