A Treasury analysis suggests the costs of Brexit would be high

THERE is much dispute in the Brexit debate over the economic effects of leaving the EU. Even Brexiteers accept that there would be some short-term costs from uncertainty, but they claim that in the long run Britain could still be better off. Most objective economic studies disagree, finding that there would be long-term costs as well. On April 18th the Treasury weighed in with a 200-page analysis. Its conclusion is that they will be high: the central estimate touted by George Osborne, the chancellor, is that GDP may be 6.2% lower than it would otherwise have been by 2030, an annual cost that he reckons works out at some £4,300 ($6,000) per household.

To get to its estimates, the Treasury analysis looks at three possible models for a post-Brexit Britain. These are membership of the European Economic Area (EEA), like Norway; a negotiated bilateral free-trade deal similar to Switzerland’s or Canada’s; and reliance on trade under normal World Trade Organisation (WTO) rules. It estimates the static consequences for Britain’s trade and investment, which are negative in every case. It then uses economic modelling to capture the dynamic effects on productivity that flow from lower trade, less foreign investment and a smaller capital stock; and it adds in a fourth factor, the persistent effect from the short-term loss of GDP that is likely to follow Brexit.

The resultant numbers are large. Even for the EEA option, which best preserves British access to the EU’s single market, the analysis points to a GDP loss of around 3.8%. The Swiss/Canadian negotiated option, which gives some access but not for most services (including financial services), yields Mr Osborne’s central estimate of 6.2%. For the WTO option, which would mean losing privileged access to the single market and facing some tariffs on trade, the figure is 7.5%. As a body much concerned with its own revenues, the Treasury also assesses the effects on public-sector receipts. On its central estimate, these would be £36 billion lower—a sum that, as the authors point out, is roughly equivalent to 35% of annual spending by the National Health Service in England.

The Treasury’s numbers are bigger than those in some other recent studies, but that is mainly because they include the dynamic effects on productivity. A similar dynamic study by researchers at the Centre for Economic Performance, London School of Economics (LSE), came up with even bigger losses. To the disgust of Brexiteers, the Treasury agrees with the Bank of England that the benefits of EU membership considerably outweigh the costs. And it dismisses the possibility of a boost from less regulation in a post-Brexit world by pointing out that Britain is relatively lightly regulated already.

Brexiteers have been quick to dismiss the entire analysis. Yet they can hardly accuse the Treasury of naive Europhilia. The department is more often accused of being Eurosceptic. And the chief economist who oversaw its Brexit analysis is the very man who led its investigation some 13 years ago into the five tests for euro membership, after which Britain chose, during Gordon Brown’s chancellorship, to stay out of Europe’s single currency.

The other rallying cry from Brexiteers is to insist that, after Brexit, Britain would get a special deal that is better than Norway’s, Switzerland’s, Canada’s or the WTO option. Yet French and German ministers have dismissed this idea. The Treasury itself points out that no other country has been able to agree significant access to the single market without accepting EU regulations, the free movement of people and contributions to the EU budget. It says other countries would not want to give Britain a better deal than they have themselves. And to Brexiteers who claim that Britain’s trade deficit with the EU puts it in a strong bargaining position, the Treasury observes that only 3.1% of EU GDP depends on trade with Britain, whereas 12.6% of British GDP depends on trade with the EU.

Moreover, there are reasons to believe that the Treasury’s estimates may be optimistic. It assumes a lower effect on productivity from lost trade and investment than the LSE study does. It is based on an assumption of no net budget contribution, whereas Norway and Switzerland both pay heavily to Brussels. And it projects no net reduction in immigration as a result of Brexit, whereas Brexiteers tend to favour tougher migration controls that most economists reckon would further reduce GDP.

In short, the Treasury’s conclusion that the economy would suffer a substantial loss in the event of Brexit is largely convincing. Mr Osborne has rightly observed that some voters may, even so, want to opt for Brexit for other reasons. But they should do so in the full realisation that it is likely to cost them quite heavily.