Speech: HM Treasury analysis on the EU referendum: George Osborne's speech
George Osborne, Chancellor of the Exchequer
It’s great to be here at the brilliant National Composite Centre in Bristol, and good to be joined by my colleagues Liz, Stephen and Amber.
The engineers, scientists and designers who work here deliver world-leading research and innovation in composites for some of Britain’s most important industries.
One sector that particularly benefits from the work of the National Composite Centre is aerospace. The South West is a great showcase for Britain’s successful aerospace industry.
Half of everything our aerospace sector exports is sold to the European Union, and our aerospace industry relies on imports from Europe to make their finished products.
We’re here to talk about Europe today.
In a little over two months’ time the people of the United Kingdom will decide whether our country should remain in the European Union or leave it.
It’s the biggest decision for a generation – one that will have profound consequences for our economy, for living standards and for Britain’s role in the world.
But what many people are saying at the moment is that they don’t have enough facts and information to make an informed decision.
And so it’s up to all of us who fought so hard to give people this referendum, so they could take this momentous decision, to provide those facts and that information.
That’s why today the government is publishing a comprehensive Treasury analysis of the long-term economic impact of EU membership and the alternatives.
This is a sober and serious look at the costs and benefits of remaining in the EU, or leaving it.
Not just for Britain, but for the individual families of Britain.
To put it simply: are you better off or worse off if Britain leaves the EU?
Has your family got more money each year, or less?
And is there more or less money available to your government to spend on public services and lower taxes?
To find the answer to those questions, the Treasury has gone back to first principles and looked at the current costs and benefits of our membership of the European Union – essentially what we put in and what we get out.
We’ve also looked at how that would change if the EU were to reform along the lines it has committed itself to.
And we’ve looked at the costs and benefits of leaving the European Union.
Not the immediate shock – a future Treasury study will look in detail at that.
But rather the long term impact that our exit from the EU would have on family finances and the nation’s finances.
We’ve done that by examining in detail what the alternatives to EU membership look like for Britain’s economy. We know now pretty clearly what those alternatives might be, although we don’t know which one Britain would pick, or our European neighbours would accept.
There’s seeking membership of the European Economic Area, where you get access to part of the single market but you have to pay into the EU and accept free movement, without any say over either. That’s the Norway model.
There’s relying on our existing membership of the World Trade Organisation where, like Russia or Brazil, you put nothing into the EU but get nothing out in terms of preferential access. That’s the WTO model.
And then there’s the halfway house of trying to negotiate a bilateral trade deal with the EU, where you get some trade access but you’re not part of the Single Market. That’s the Canada model.
It’s a complete fantasy to claim we could negotiate some other deal, where we have access to the EU’s single market but don’t have to accept the costs and obligations of EU membership. Other member states have made it very clear in recent weeks that’s not on offer – and how could it be?
How could other European countries give us a better deal than they have given themselves? Never forget that while 44% of our exports go to the rest of the EU, less than 8% of their exports come to us.
So in today’s analysis we look at the costs and benefits of our existing membership of the EU, and test that against the three realistic alternative models – like that of Norway, the WTO and Canada.
Shortly I will ask my colleagues Liz, Stephen and Amber to go through each alternative in turn.
But first let me say something about the underlying economic assumptions that were made, and upon which the analysis rests.
We assume that the underlying objective of economic policy is to increase living standards through the creation of jobs, rising household incomes, and low and stable prices for consumers.
You may have other policy objectives that you think trump those objectives – but the purpose of economic policy is higher living standards.
It’s well established in economic literature that those higher living standards are ultimately driven by long term improvements in productivity: in other words, increasing the value of what British workers produce per hour. And it is also a well-established doctrine of British economic thinking over centuries that greater economic openness and interconnectedness helps raise productivity.
That’s because greater openness to trade and investment increases competition, enhances incentives for firms to innovate, and gives them access to finance – this enables them to invest and employ people, and it gives consumers access to more choice and lower prices.
Now I accept there are those who advocate a completely different economic approach – a closed, command economy, and no free trade or competition or private business.
But that’s never been the consensus in Britain, or the rest of the world these last few decades.
And those most prominent in advocating our withdrawal from the EU do so, in part, with the claim it will lead to freer trade and freer markets – so they share these basic assumptions about the advantages of economic openness too.
In this document the Treasury therefore assess the alternatives to EU membership, and see whether they enhance or diminish our economic openness and interconnectedness and by how much.
First, is market access increased or reduced? In other words, do British businesses and consumers face tariffs, quotas and unfair competition or other barriers?
Second, is Britain’s economic influence enhanced or curtailed? What say do we have over the rules and standards that apply to the goods and services we trade in?
Third, are the costs to Britain greater or less? What do we end up paying for a different trading relationship? We know the answer to these tests with Britain’s current membership of the EU.
When it comes to market access, there are no tariffs or quotas applied to British exports to the 500 million consumers who live in the European Union.
But a Single Market is about more than the absence of quotas and tariffs – it means common standards, so there aren’t invisible barriers and obstacles to trade.
So, for example, when a highly skilled car maker is building a car, they know it can be sold directly and without any hindrance into the continent of Europe.
It also means a British-based architect or engineer can get off the plane in Munich or Madrid and immediately start doing business.
And it means that any European airline can offer the best service at the best price to provide that journey.
That’s what the Single Market means – and the Treasury analysis shows EU membership has increased trade with EU members by around three quarters.
Greater openness leading to higher productivity and rising living standards.
We also know that our current EU membership gives us influence over the rules and standards of that Single Market – we have votes over what they are, our Commissioners can help design them, our Ministers and elected MEPs can shape them, and on key issues like common tax standards we have an absolute veto.
But we are not in the single currency and we are not in the Schengen free border area – so we have a special status in the EU.
That gives us the best of both worlds: influence over the single market without the obligations that membership of the euro and open borders would bring.
And we know what the costs and the financial rewards of being in the EU are.
We pay into the EU budget, but our citizens, businesses and universities also receive money from the EU budget.
The net direct cost is equivalent to a little over 1 pence for every £1 we raise in taxes.
But we have also received over £1 trillion of overseas investment into Britain, much of it driven by the fact we are in the EU and its Single Market.
Indeed, we have received more of this overseas investment than any other EU member state – and that drives better jobs and rising living standards too, bringing money into the exchequer to spend on public services.
So we know how our existing membership of the EU performs against these tests of openness and interconnectedness.
We also know the advantages that future reform of the EU can bring for Britain.
For the EU is not perfect. The Single Market can be expanded, the costs can be reduced, and the influence of Members States can be enhanced.
That’s what the new settlement, negotiated by the Prime Minister, supported by the Cabinet, delivers.
The Treasury analysis shows that achieving EU-wide reforms to deepen the Single Market and complete major ongoing trade deals offers a huge prize for Britain.
It could add up to 4% to our GDP over the coming 15 years – that’s thousands of pounds more for each British household.
So Britain’s membership of the European Union contributes to the openness of our economy – and that leads to higher quality jobs, rising living standards and lower prices.
And we know there will be better jobs, higher living standards and even lower prices if Europe reforms.
That’s the future on offer if Britain remains in a reformed EU – a future where we are stronger, safer and better off.
What does the Treasury’s rigorous economic analysis show about the alternatives?
Let me hand over to my colleagues Liz, Stephen and Amber. They will go through each of the alternative models – like that of Norway, the WTO and Canada – and look at what they would mean for British families.
Elizabeth Truss, Secretary of State for Environment, Food and Rural Affairs
The document published today shows how one of the big advantages of being in the European Union is the ability we have to shape the rules.
Our record shows that reforms are more likely with Britain around the EU table:
Throughout the 80s we drove trade liberalisation in Europe, with action to break down barriers to the free movement of goods, services, capital and people which meant the creation of the Single Market as we know it today.
In the early 90s it was Britain who pushed to dismantle national barriers to air travel and open Europe’s air transport up to competition, which led to the creation of low cost carriers, and helped cut the cost of air travel by 40% in just 8 years.
And in the last decade it’s been Britain pushing to deepen the Single Market in digital services – simplifying rules for cross-border online purchases, and supporting a package to end mobile roaming charges in the EU.
So we’ve proven we can influence the rules from the inside. The question is could we shape them from the outside? If we left the EU some say we could be like Norway.
Norway isn’t in the EU, but it is in another group called the European Economic Area
On paper it looks pretty similar to our relationship with the EU.
We would still be in a European club – albeit a different one.
We’d still pay contributions to support other EU member states.
We’d still implement EU legislation.
But there would be a crucial difference.
We’d have no say over the rules.
Our Prime Minister would no longer have a seat at the European Council, where EU leaders take decisions about the future direction of the continent.
No British Minister would be there when farming issues were decided – or indeed any other issue that impacts our country.
We would have no vote in the Council of Ministers – the body where the 28 EU Member States decide on legislation.
But we’d still have to implement their decisions on the internal market, and follow their rules on State Aid and competition.
The current EEA members take this on the chin.
For Norway, that means losing a vote share that inside the EU would be worth 1%.
That’s a pretty low price.
But what about Britain?
Our vote share would drop from one of the highest, alongside France and Germany, to zero.
Our strong, reforming voice would be silenced.
That’s what I call a loss of British sovereignty.
But it’s not just the lack of influence that worries me about the Norway model.
It’s the fact that the EEA tariff-free trade doesn’t cover key areas like the vast majority of agriculture and fisheries, so Britain’s farmers would be hit.
It’s the fact that EEA members aren’t part of the EU customs union, so British firms would face new customs checks and bureaucracy if they wanted to trade with Europe.
Every time Norway exports a product to an EU country, they have to fill in a form with 50 boxes and guidance that is 78 pages long.
This must be frustrating for Norway, even though many of their exports are raw materials, making these forms easier to comply with. But it would be a nightmare for Britain as many of our exports are complex finished products like cars or machinery.
All this new bureaucracy would significantly reduce our openness and interconnectedness – reducing the competitiveness of British firms and acting as a drag on our productivity.
And being part of the EEA means still accepting EU regulations, contributing to the EU, and permitting the free movement of people,
So if we decided to be like Norway, we’d have worse access to the Single Market. We’d keep paying into Brussels but we’d be a rule-taker instead of a rule-maker.
The Treasury has run the numbers and joining the EEA would significantly reduce our openness to trade, and as a result, productivity and investment would fall.
Let’s be clear on this – because we know that increasing productivity is the key to increasing living standards. If productivity falls we will see lower wages in Britain; consumption will fall and people will be permanently poorer.
The analysis published today shows that following this path would mean a long-term reduction in GDP of around 4% every year.
And this long-term reduction in GDP will hit our tax receipts as people and businesses earn less.
The impact on tax receipts of joining the EEA would be £20bn a year within 15 years’ time. Not a one-off hit, but an ongoing painful reduction as our country raises less money, and has less money to spend on public services.
Those are the facts on the European Economic Area.
So the analysis shows if we want to minimise the significant damage to our economy from leaving, we would, effectively, have to re-join another European club on worse terms – no vote, no power, still paying into the EU, and with much less protection against the abuse of free movement.
For a country the size of Britain, with the strong voting clout we already have in the EU, this would represent shooting ourselves in the foot.
Stephen Crabb, Secretary of State for Work and Pensions
Next I want to talk to you about global trade. There are some who imply there’s a tension between trading with Europe and trading with the rest of the world.
That is simply wrong. Both are good and we need to do both.
And that’s exactly what we will do if we remain a member of the EU.
Yes, nearly half of our exports go to Europe, but our exports to the rest of the world have gone from £150 billion to £290 billion in just 10 years – that’s a 95% increase.
And to those who say that’s proof we don’t need the EU, just look at where they’ve increased the most.
We currently benefit from trade deals the EU has negotiated with over 50 other countries.
And as today’s document explains, those deals have been great for Britain.
Our exports to South Korea have grown by over 100% in just four years since the EU Free Trade Agreement was signed. Exports to Chile have grown almost 300% in a decade.
Those other countries will have given up a lot in negotiations to gain access to a bloc with 500 million customers and a quarter of the world’s GDP.
But if we vote to leave, we’ll only have two years before all the trade deals we have via the EU would fall away. The clock would be ticking, yet renegotiating trade deals with more than 50 countries as a single country would take many, many years.
And that’s if we can even get the talks off the ground: the US Trade Representative recently said the United States is “not particularly in the market for free trade agreements with individual countries”.
Some argue there’s no need to worry – we could just fall back on the existing World Trade Organisation rules. Now let me be absolutely clear. The WTO is a brilliant organisation and one that Britain is proud to be a member of.
But their rules are a sort of ‘minimum standard’ for global trade – and they fall way short of the Single Market and Free Trade Agreements we currently access through the EU. Under WTO rules we’d face common export tariffs.
The EU would charge an average tariff of 36% on dairy products. 12% on fish. 12% on clothes. 10% on cars.
Our services exporters would be hit too – as they’d lose their automatic right not to be discriminated against through being part of the Single Market.
And we’d have to decide where to set British import tariffs.
Would we choose to set high tariffs on food, to protect British farmers?
Or would we set low tariffs on food, to protect British consumers?
Regardless of what we decided on import tariffs – there’s a catch.
WTO rules would require us to offer the same tariff to all countries.
So if we wanted to offer low tariffs to our neighbours in Ireland, we’d have to do the same for all other 160 countries in the WTO.
So for example, we’d have to offer low tariffs to countries like Brazil and Argentina while they apply high tariffs on our key exports, like Scotch Whisky at 20% in Argentina, and cars at 35% in Brazil.
Trade deals are about give and take, but we’d have turned up to the table having already played all our cards. The analysis published today shows that the WTO scenario represents the most extreme break from the EU, and it is also the alternative that is the worst for the British economy.
The sharp reduction in trade would be accompanied by a reduction in foreign direct investment into the UK as we’d no longer have the same degree of unrestricted access to the EU Single Market of 500 million consumers. Think of all the global firms that have headquarters in the UK so they can sell into Europe – if we leave the EU, they could leave Britain.
The Treasury’s rigorous analysis of the trade and investment impact of the WTO option shows that after 15 years Britain’s economy would be around 7.5% smaller.
And the fiscal cost of the WTO option is the most painful of all – in the long term our country would have to cope with annual tax receipts that are £45 billion lower. Every year.
Conclusive proof that when it comes to trade, openness and economic growth, it’s better to go for the best deal available rather than the lowest common denominator.
Amber Rudd, Secretary of State for Energy and Climate Change
As the document today explains, one of the most valuable benefits of EU membership for Britain is the Single Market. And that Single Market is not just in goods, but in services too.
So what does a Single Market in services mean, and why does it matter?
It matters because 80% of our GDP comes from the services sector, and 80% of our workforce are employed in the services sector.
Britain is the country that designs the building, arranges the finance, insures the business, draws up the contract, produces the TV series, creates the advertising campaign and audits the accounts. High skilled service industries like these are vital for our future.
The Single Market means that all of our exports can be sold to Europe tariff-free.
And crucially it isn’t just tariff barriers that the EU has eliminated for Britain.
The Single Market seeks to eradicate non-tariff barriers too. So a British architect or a British lawyer can go and work in any other European country and have their professional qualifications recognised.
And the creation of passporting rights in the 90s means that financial services firms like banks, insurers and investment managers can establish themselves anywhere in the EU, and trade across the whole Single Market, with lower cost and lower complexity.
The figures speak for themselves.
Our service industries are growing at a rate of nearly 3% a year on average.
Our services exports have increased from £130bn to £220bn in the past decade alone – with Europe being by far our biggest market.
I accept the European Single Market for services is not yet complete – that’s why commitments to complete it formed such a key part of the Prime Minister’s recent negotiation.
But the results clearly show that the Single Market has benefitted our services sector.
Now I want to look at the final alternative scenario the Treasury has modelled: a negotiated bilateral agreement.
They’ve looked closely at countries like Switzerland and Canada who’ve negotiated bilateral trade deals with the EU.
The Canada free trade agreement seems to be the most popular with those who want to leave, so let’s look at its benefits and costs, and contrast it to EU membership.
It’s been held up as the most comprehensive Free Trade Agreement the EU has ever made.
It’s a vast, detailed agreement that runs to over 1500 pages – although 800 of those pages are exemptions and barriers to free trade.
And remember it’s not in place just yet.
Canada spent 7 years negotiating the deal, waiting outside the door as those on the inside decided whether to agree.
But when it comes into force it may work well for Canada and for the EU.
However, I’m not so sure it would work well for us.
Their deal does offer some liberalisation in services it’s true. But the Canadians export about a tenth of the value of services to Europe than we do.
And the Treasury analysis finds that around 50% of our service exporters would face materially less access to the EU market than they currently enjoy if we were to replicate the Canadian deal.
In addition, Canada doesn’t have access to the financial services passport.
This would be a real problem for Britain. If we left the EU and lost access to passporting rights the evidence suggests that financial services jobs would move out of Britain.
But it’s not just services where the Canadian deal wouldn’t work for us.
On agriculture, key sectors are excluded from the Canadian deal.
Take beef for example. We currently export over 90,000 tonnes of beef a year to Europe tariff-free, and if we wanted to sell more then we could.
The Canadian agreement allows them a quota of 50,000 tonnes, above which they would be subject to some tariffs equivalent to around 70%.
If we voted to leave then a reciprocal deal would badly hurt British beef farmers.
And how about another example – cars. Our car manufacturing sector is thriving, but as you’ve already heard from Stephen, the EU places a 10% tariff on cars from outside the EU.
This would cost our industry more than £1 billion a year, and the Canadian deal only eliminates them after 7 years.
So even though the Canadian Free Trade model is put forward as the best and most comprehensive option by those who want to leave, it’s clear there are some crucial gaps for a country like Britain.
The Treasury analysis published today shows that a Free Trade Arrangement like Canada’s would have a significantly negative impact on our trade, investment and productivity.
After 15 years Britain’s economy would be around 6% smaller, compared to 3.8% smaller were we to join the EEA.
So even the best bilateral trade deal the EU has agreed with an outside country is significantly worse than the access you’d get to the Single Market through the EEA.
George Osborne, Chancellor of the Exchequer
So you’ve heard today the serious and sober Treasury analysis, which sets out the costs and benefits of Britain’s membership of the European Union.
The costs of accepting common European standards; and the benefit that gives us of unique access to a Single Market of 500 million people.
The costs of being one voice among many when it comes to setting those standards; and the benefits of the influence that gives us to shape those rules to our advantage, and extend our trade access around the world, so that when it comes to our economic environment, Britain is a rule-maker not a rule-taker.
The costs of directly contributing a little over 1 penny in every 1 pound of taxes; and the direct benefits of the billions of pounds of foreign investment which flow more to Britain than any other European country and boosts our public finances.
Deliver the economic reform we’ve agreed in the European Union, and the benefits are even clearer.
The analysis shows that our economy could be 4% greater if we extend that Single Market and do more free trade.
These economic costs and benefits of EU membership, with or without this brighter, positive future need to be weighed against the economic costs and benefits of all the plausible alternatives for Britain.
The Norway model – where we gain partial access to the Single Market, but face customs barriers and have no influence over the rules we’re forced to abide by.
Where we lose trade and investment, but still have to pay into the EU and accept free movement of people. The WTO model, where barriers are erected by our nearest and most important markets, everything we make from food to cars to clothing and all the services we provide – with severe consequences for our industry and the size of our economy.
The Canadian model, where our services that make up 80% of our economy cannot do business freely with Europe, and the integrated supply chains that are a feature of our advanced manufacturing face customs barriers for the first time in half a century.
Under any of these alternative models of the kind of relationship Britain might have with its principal export markets our influence is diminished; we trade less; we receive less investment; our openness and interconnectedness to Europe is reduced.
And you’d have to believe that we could more than compensate for that loss of trade and investment with Europe, by increasing trade and investment with the rest of the world.
But the evidence shows that our trade deals with more than 50 other non-EU countries would be jeopardised, and our ability to influence global trade rules would be hugely reduced.
We’d do less trade with the rest of the world outside the EU, not more.
The Treasury has modelled the economic impact of alternatives to EU membership.
As you’ve heard from my colleagues, the biggest impact comes if we just rely on being a member of the WTO.
The least impact comes if we try to form a relationship like Norway, but then we have to pay into European budgets and accept free movement – the very things those who want to leave claim they want to be rid of.
That’s why those most prominent in advocating British exit from the EU say we’d try to form an arrangement like Canada.
But we’re not Canada – our comparative advantage is in services and advanced manufacturing. 50% of all our services exports go to the continent of Europe.
So the economic analysis shows that this Canada-style arrangement comes at a real economic cost for Britain.
The central estimate is that in the long run GDP would be over 6% smaller and Britain would be worse off by £4,300 per household.
The people of Britain want to know the facts before they vote on 23 June.
The Treasury’s analysis steps away from the rhetoric and sets out the facts.
Britain would be permanently poorer if it left the European Union. Under any alternative, we’d trade less, do less business and receive less investment.
And the price would be paid by British families. Wages would be lower and prices would be higher.
And that means that Britain would be poorer by £4,300 per household.
That is £4,300 worse off every year, a bill paid year after year by the working people of Britain.
And that is the long term cost – in the short term we’d face a profound economic shock and real instability. This Treasury analysis is serious and sober – and it’s conclusive.
British families will pay a heavy economic price if we leave the EU.
And don’t believe the flimsy claim that at least we would get some money back by not paying our 1 penny in every £1 we raise in taxes to the European budget.
If we left the EU, we’d lose tens of billions of pounds in money for our public services, because our economy would be smaller and our families poorer.
The most likely bill our public services would pay if we left the EU is £36 billion.
That’s the equivalent of 8 pence on the basic rate of income tax.
Higher taxes and a smaller economy is not a price worth paying.
Of course, I know there will be many attempts by those who advocate exit to dismiss this Treasury analysis.
But it’s rigorous, it’s rooted in the facts and its conclusions are similar to every other credible independent analysis done around the world – from the recent global outlook of the IMF to the academic research of the London School of Economics.
And I would conclude by saying this:
It is a perfectly honest position to say that Britain would be worse off but that is a price worth paying.
But don’t pretend to the British people that leaving the EU comes at no economic cost.
There is a price to be paid if we leave – a £4,300 price that families will pay year after year.
Don’t let’s leave the EU on a false prospectus.
Let’s have the facts and the figures in front of us as we all make this huge decision on 23 June.
For me, in the end, it’s not just about the economics. It’s about who we are as a country.
The Britain I love is open, confident in its values and ready to shape the future of our world.
I don’t want Britain to be like Norway or like Canada or anyone else.
I want us to be like the Great Britain we are.
Strong. Proud. Prosperous.
Stronger, safer and better off in the European Union.