Treasury's Brexit analysis: how George got his magic number

£4,300 lost to each household and £36bn black hole in tax receipts – but how did the Treasury work out its claims?

Union flag and the European flag

The analysis comprises three post-Brexit scenarios: leaving the EU but staying in the European Economic Area, negotiating a bilateral agreement or joining World Trade Organisation.
Photograph: Ben Pruchnie/Getty Images

The headline figure that George Osborne will want voters to take away from the Treasury’s Brexit analysis, published on Monday, is £4,300 – the long-term loss to the economy per household from a vote to leave the EU, it claims.

The chancellor will also want the public to remember the £36bn black hole in tax receipts the Treasury has forecast as the cost of going it alone. There will doubtless be many reminders between now and 23 June that those billions amount to 8p on the basic rate of tax.

But how did the Treasury’s number-crunchers get to these numbers? They started out by assessing three alternatives to EU membership. Under the first, the UK leaves the 28-nation union and becomes a member of the European Economic Area (EEA), like Norway. Under the second, the UK negotiates a bilateral agreement, such as that between Canada and the EU. Under the third, the UK gets World Trade Organisation (WTO) membership without any form of specific agreement with the EU, like Russia or Brazil.

The Treasury’s economists analysed the probable impact of these Brexit scenarios on foreign direct investment and trade. They plugged these effects into an economic model and calculated the likely impact on GDP and productivity 15 years from now – when the economy was expected to be over the short-term effects of Brexit.

Those effects were then calculated per household, in 2015 terms, and presented for each of the three alternatives to EU membership. The effect on GDP was used to calculate an impact on tax receipts.

The worst of the three outcomes was for the Russian-style WTO membership, where GDP is 7.5% smaller, the equivalent of £5,200 per household. The hole in the public finances is £45bn. Under the Canadian model, highlighted by the chancellor, GDP is 6.2% smaller, the equivalent of £4,300 per household. The knock to tax receipts, the Treasury says, is £36bn.

Finally, under the Norwegian-style EEA model, the UK economy is forecast to be 3.8% smaller, the equivalent of £2,600 per household. Tax receipts are £20bn smaller, equating to 4p on the basic rate of tax. “None of the alternatives come close to matching the net economic benefits to the UK of EU membership,” the Treasury concludes.

The analysis seeks to emphasise what the UK has to lose under each alternative scenario. Leaving the EU to join the EEA would transform the UK from a rule-maker to rule-taker in the Treasury’s eyes, and risk hitting productivity and living standards.

British Chancellor of the Exchequer George Osborne

British Chancellor of the Exchequer George Osborne Photograph: Matt Cardy/AFP/Getty Images

Being in the EEA “would maintain considerable [but not complete] access to the single market”, but would mean having to introduce a customs border with the EU. It would also mean accepting EU regulations, the free movement of people and financial contributions.

The WTO model would be the worst outcome in economic terms, according to the analysis. It would amount to a “significant closing of the UK’s access to global markets” and probably see the introduction of more trade barriers, including tariffs.
The Canada model would also increase the costs of trading with Europe. It would give the UK some access to the single market, “but this, in particular, would be limited for the UK’s large service sector”.

The headline estimates were all based on the EU as it is now, without further reform. If the bloc manages to complete the next phase of its single market reforms, there would be an additional benefit for the UK economy to the tune of 4% of GDP in 15 years’ time, the Treasury said.

Under this rosier view of the EU’s economic future, the cost to the UK of leaving and having a Canada-style deal would be 8.2% of GDP, or £5,700 per household, the Treasury estimates.

Aside from painting a gloomy picture of life outside the EU, the Treasury sought to underscore the benefits of membership so far. The single market helped UK exporters by creating a customs union and by removing tariffs and quotas on goods trade with the EU, the UK’s biggest export market. Being part of the EU also helped the UK access markets further afield, thanks to the bloc’s free-trade agreements with other countries.

The authors of the 200-page analysis drew strong links between the UK’s membership of the EU and the relatively high proportion of foreign direct investment it attracts. They found that under all three alternative models to EU membership the UK’s trade and investment flows would be lower.

The report plays down the arguments from Brexit campaigners of savings to be made from no longer sending money to the EU, or from there being fewer regulations outside the union.

The Treasury says that even assuming that contributions to Brussels stop post-Brexit, putting £7bn back into the UK’s public coffers, there is still a £36bn hole in the public finances, compared with staying in the bloc.

The blow to tax receipts from Brexit would, the Treasury says, “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”.

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