Out-Law News 2 min. read

BREXIT: Treasury analysis finds UK worse off under each of the alternatives to EU membership


UK economic output would drop by an estimated 6.2% while up to 3.3 million jobs could be at risk under any one of the main alternatives to continuing membership of the European Union, according to "economic analysis" by the Treasury.

This is part of Out-Law's series of news and insights from Pinsent Masons lawyers and other experts on the impact of the UK's EU referendum. Sign up to receive our Brexit updates by email. 

All three alternatives considered by the Treasury would create barriers to trade and investment with the EU, ultimately resulting in lower productivity and lower wages, according to the report. The three models considered as part of the report were membership of the European Economic Area (EEA), like Norway; a negotiated bilateral agreement with the EU, like Switzerland or Canada; and relying on trade terms through membership of the World Trade Organisation (WTO) with no specific agreement with the EU, like Russia or Brazil.

"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," said George Osborne, the UK's chancellor of the exchequer, in a speech in Bristol.

"[And] 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," he said.

According to the analysis, more than 80% of UK trade will be with either the EU or with other countries but through EU free trade agreements once all arrangements currently under negotiation are finalised. At the same time, membership of the EU's single market has "significantly increased" trade into the UK and made it one of the top global destinations for foreign direct investment, the report said.

Membership of the single market removes tariffs and quotas impacting on trade between different EU member states. It also creates a customs union, reducing cross-border costs and non-tariff barriers to trade such as regulations, standards and specifications, according to the report.

As an example of why this is so beneficial, the report stated that Norwegian companies must fill in a form "with 50 boxes and guidance that is 78 pages long" whenever they want to export products to an EU country. These forms are relatively easy to comply with when exporting raw materials, but would be extremely complicated where the exports were complex finished products such as cars or machinery, according to the report.

At the same time, EEA member countries must still contribute to the EU, accept EU regulations and permit the free movement of people, without being able to influence EU rules. However, this model would still leave the UK better off economically than through a negotiated bilateral agreement or relying on membership of the WTO but no dedicated agreement, according to the report.

After 15 years, the report estimates that the UK would be between 3.4% and 4.3% of gross domestic product (GDP) better off within the EU than as a member of the EEA; between 4.6% and 7.8% of GDP better off within the EU than with a negotiated bilateral agreement; and between 5.4% and 9.5% of GDP better off within the EU than as a member of the WTO. This would in each case amount to a long-term loss of around £2,600, £4,300 or £5,200 per UK household per year, compared to the benefits of EU membership, according to the report.

The permanent reduction in GDP compared to EU membership would also result in lower tax receipts, estimated as reduced by £20 billion, £36bn or £45bn annually respectively, according to the report. The resulting economic deficit would have to be filled through higher government borrowing, large tax rises or major cuts to public spending. The reduction in tax receipts in the case of the middle, bilateral trade agreement scenario compared to EU membership would be the equivalent of an 8p increase in the rate of income tax, according to the report.

The Treasury intends to produce further reports on the short-term impact of a vote to leave the EU ahead of the referendum on EU membership, which is due to take place on 23 June.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.