Is the Treasury’s long term report on Brexit reasonable?
In its report entitled ‘the long-term economic impact of EU membership and the alternatives’ , published on 18th April 2016, the Treasury claimed to provide a reasonable estimate of the costs of Brexit taken from ‘within a range of realistic assumptions’.
Later, when giving evidence to the Treasury Select Committee on 11 May, George Osborne and Mark Bowman defended their analysis as setting out ‘a range of plausible estimates’ based on ‘very realistic and reasonable assumptions’ before selecting the ‘central point within the range’. They also claimed there is a ‘consensus amongst the economic community’ and that they made ‘cautious neutral assumptions’.
In fact, the Treasury’s report provides some of the most negative estimates of the cost of leaving the EU.
A reasonable estimate?
The Treasury estimate that after 15 years of leaving the EU the UK will have a GDP between 3.8 and 7.5 per cent lower than it would be if we maintained our current membership, and in particular 6.2 per cent lower if we had a bilateral agreement with the EU.
This seems excessive compared to a number of other reports that have, unlike the Treasury, tried to take a more realistic set of assumptions, and considered the positive impact of likely trade deals and changes to regulation. A report compiled by PwC on behalf of the CBI showed that exiting the EU with an FTA would only lead to a 1.2 per cent reduction in GDP by 2030. A report by Open Europe finds within a realistic range, exiting the EU with a strong trade deal with the EU could lead to a 0.6 percent increase in GDP by 2030.
The report is also misleading in its claims that the EU would be permanently poorer, at no point does the report highlight the fact that the UK economy is still expected to continue to grow even in the event of a Brexit.
In contrast, the study by PwC found that GDP per capita in 2030 would be between 25% to 28% higher if the UK leaves the EU, compared to 29% if we choose to stay.
Is it reasonable to be so precise?
Indeed one should be wary of the precision of these kinds of economic forecast. With all of the variables involved it is very difficult to accurately predict what will happen. As we point out in this piece, official forecasts can change often, and sometimes dramatically. Predictions made in November 2015 by the OBR on the performance of the UK economy for the period 2015-2020 were off to the tune of £27 billion surplus, and later revised again as productivity figures changed to a £56 billion pound loss. Using the same measure as the Treasury, this margin for error (29 billion) equates to over £1000 per household.
This underlines the inability to give precise figures for 5 years into the future, let alone for 2030.
Despite the fanfare generated by the Treasury’s report, it is clear that its predictions should be taken not so much with a pinch of salt, as a whole cellar.
- Justin Protts and Tom Adamson-Green – EU Research Fellows