HM Treasury analysis: the long-term economic …

1 HM Treasury analysis: the long-term economic impact of EU membership and the alternatives Cm 9250 April 2016 HM Treasury analysis: the long-term economic impact of EU membership and the alternatives Presented to Parliament by the Chancellor of the Exchequer by Command of Her Majesty April 2016 Cm 9250 Crown copyright 2016 This publication is licensed under the terms of the Open Government Licence except where otherwise stated. To view this licence, visit government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. This publication is available at Any enquiries regarding this publication should be sent to us at Print ISBN 9781474130899 Web ISBN 9781474130905 PU1908 ID 15041633 04/16 19585 55437 Printed on paper containing 75% recycled fibre content minimum Printed in the UK by the Williams Lea Group on behalf of the Controller of Her Majesty s Stationery Office Contents Foreword 5 Executive summary 7 Introduction 13 Section 1 EU membership 23 Section 2 The

2 Alternatives to EU membership 85 Section 3 Macroeconomic analysis of the alternatives to EU membership and the benefits of EU reform 121 Annex A Modelling openness 151 Annex B Modelling public sector receipts and 187 UK contributions to the EU budget Glossary of key terms 195 List of tables 199 List of figures 200 List of charts 200 4 HM Treasury analysis: the long-term economic impact of EU membership and the alternatives Foreword 5 Foreword On 23 June, the people of Britain will make the most important decision for a generation whether to remain in the European Union. It is one that will affect them, their families and their children for decades to come. What s clear is that the British people are asking for the facts before they decide whether to vote Remain or Leave. I promised to set out a serious and sober assessment of the economic facts, to inform this vital decision for our country. That is what this analysis provides.

3 Of course, there are many factors to weigh not just the economic ones. Does Britain want to continue to be a country that faces out to the world? Do we want to be promoting our case at the top table of the world s institutions? Is our national security best served by retreating from the world? But my first duty as Chancellor is to seek to deliver economic security and higher living standards for the people of Britain, and that is the prism through which this document considers the costs and benefits of EU membership. Using detailed analysis and rigorous economic modelling, this document sets out the Treasury s assessment of the long-term economic impact of staying in the EU compared to the alternatives. The short-term economic impact will be assessed in a future government publication. It is widely accepted that leaving the EU would mean a new relationship based on one of the following models: membership of the European economic Area, like Norway a negotiated bilateral agreement, like those of Switzerland, Turkey or Canada, or membership of the World Trade Organization without any specific agreement with the EU No country has been able to negotiate any other sort of deal, and it would not be in the EU s interest to agree one.

4 The conclusions of this document are clear: none of the alternatives support trade and provide influence on the world stage in the same way as continued membership of a reformed EU; and all of them come with serious economic costs that would affect businesses, jobs, living standards and our public finances for decades to come. To put it simply, families would be substantially worse off if Britain leaves the EU. 6 HM Treasury analysis: the long-term economic impact of EU membership and the alternatives If we take as a central assumption that the UK would seek a negotiated bilateral agreement, like Canada has, the costs to Britain are clear. Based on the Treasury s estimates, our GDP would be lower, families would be 4,300 worse off and our tax receipts would face an annual 36 billion black hole. This is more than a third of the NHS budget and equivalent to 8p on the basic rate of income tax. This analysis shows a vote to remain is therefore the best way to ensure the continued growth of the UK economy and future prosperity for this and future generations.

5 Britain is stronger, safer and better off in the EU. I hope that armed with these facts, the people of Britain will feel better informed and able to make this historic choice with confidence. George Osborne Chancellor of the Exchequer April 2016 Executive summary 7 Executive summary On 23 June 2016, the British people will make the most important decision for a generation whether the United Kingdom (UK) should remain a member of the European Union (EU). This document provides rigorous and objective economic analysis of the long-term impact of remaining a member of the EU compared to the alternatives. The HM Treasury analysis uses a widely adopted gravity modelling approach, which distinguishes the specific effect of EU membership and the alternatives from all the other influences that determine trade and foreign direct investment (FDI). The consequences for productivity and Gross Domestic Product (GDP) are then estimated based on the most relevant external evidence on the impact of trade and HM Treasury modelling of FDI.

6 Through a range of realistic assumptions, many of them cautious, the HM Treasury analysis produces robust estimates, which are within the range of external studies. Much of the UK s economic success is built on its long history as an open trading nation. Openness to trade and investment will be a key driver of the UK s future economic security, boosting the productivity of the economy, which in turn delivers higher living standards, creates better quality jobs, reduces prices for consumers and makes households better off. The key economic criteria for judging the UK s membership of the EU against the alternatives are therefore what it would mean for the UK s economic openness and interconnectedness. This needs to be considered alongside the obligations that come with securing that access and the influence the UK has over those obligations. Annual impact of leaving the EU on the UK after 15 years (difference from being in the EU) EEA Negotiated bilateral WTO agreement GDP level (%) central GDP level (%) to to to GDP per capita centrala 1,100 1,800 2,100 GDP per capitaa 1,000 to 1,200 1,300 to 2,200 1,500 to 2,700 GDP per household centrala 2,600 4,300 5,200 GDP per householda 2,400 to 2,900 3,200 to 5,400 3,700 to 6,600 Net impact on receipts 20 billion 36 billion 45 billion a Expressed in terms of 2015 GDP in 2015 prices, rounded to the nearest 100.

7 8 HM Treasury analysis: the long-term economic impact of EU membership and the alternatives The judgement must be based on evidence. This document assesses continued membership of the EU against the alternative models, described in the government s document Alternatives to membership: possible models for the United Kingdom outside the European Union. No country has been able to negotiate a better deal and it would not be in the EU s interest to agree one with the UK. The 3 existing alternatives considered are: membership of the European economic Area (EEA), like Norway a negotiated bilateral agreement, such as that between the EU and Switzerland, Turkey or Canada World Trade Organization (WTO) membership without any form of specific agreement with the EU, like Russia or Brazil The analysis in this document shows that under all 3 models, the UK s economic openness and interconnectedness would be reduced. Trade and investment flows would be lower.

8 The UK would be permanently poorer if it left the EU and adopted any of these models. Productivity and GDP per person would be lower in all these alternative scenarios, as the costs substantially outweigh any potential benefit of leaving the EU. The central estimates defined as the middle point between both ends of the range for the annual loss of GDP per household under the 3 alternatives after 15 years are: 2,600 in the case of EEA 4,300 in the case of a negotiated bilateral agreement 5,200 in the WTO The negative impact on GDP would also result in substantially weaker tax receipts. This would significantly outweigh any potential gain from reduced financial contributions to the EU. The result would be higher government borrowing and debt, large tax rises or major cuts in public spending. After 15 years, even with savings from reduced contributions to the EU, receipts would be 20 billion a year lower in the central estimate of the EEA, 36 billion a year lower for the negotiated bilateral agreement and 45 billion a year lower for the WTO alternative.

9 36 billion is more than a third of the NHS budget and the equivalent of 8p on the basic rate of income tax. These estimates are based on the EU as it is today, without further reform. The total cost of leaving is likely to be higher. The new settlement for the UK negotiated by the Prime Minister in February 2016 included an ambitious agenda of economic reform in the EU. This will include the next stage of development of the Single Market, with a focus on bringing down the remaining barriers to trade in services, energy and digital, alongside completing major ongoing trade deals. If the economic benefits of reform are realised this could increase UK GDP by up to a further 4% which equates to 2,800 for every household in the UK. With the UK outside the EU these economic reforms would be less likely to happen. So the cost of exit in terms of the potential loss of GDP would be correspondingly greater. This document looks at the long-run economic impact of exit.

10 A range of external studies conclude that a vote to leave the EU would also lead to an extended period of uncertainty during the transition period, with negative economic consequences of fewer jobs, lower living standards and higher prices. The International Monetary Fund stated in April 2016 that an UK exit from the EU could do severe regional and global damage by disrupting established trading relationships and that negotiations on postexit arrangements would likely be protracted, resulting in an extended period of heightened uncertainty that could weigh heavily on confidence and investment, all the while increasing financial market volatility . A full assessment of the short-term implications of leaving the EU will be published in a further government document. Executive summary 9 The UK s economic membership of the EU The UK s membership of the EU has delivered significant economic benefits through increasing the openness of the UK economy and supporting trade and investment.