LONDON (Reuters) - British finance minister George Osborne said on Monday that a vote to leave the European Union could cost each household 4,300 pounds ($6,100) a year by the early 2030s.
Following is a look at how he reached this conclusion:
- What post-Brexit scenario does the report assume?
Osborne assumed Britain would reach a trade deal similar to the one Canada is about to seal with the EU. Factory goods would have free access to the EU but there would be agricultural tariffs and only some access for services.
Fifteen years after an EU exit, gross domestic product would be 6.2 percent lower than otherwise, equivalent to 1,800 pounds per person or 4,300 per household, Osborne’s team calculates.
- How did the finance ministry reach its estimate?
The government looked at how much impact the higher tariff and non-tariff barriers would have on trade and foreign investment, then at how these would reduce productivity, and how those factors combined would affect GDP.
Estimates come from academic studies - including one that researched the closure of the Suez Canal from 1967 to 1975 - the finance ministry’s own calculations, and the economic model used by Britain’s NIESR research institute.
The ministry said it used relatively modest assumptions about the impact on productivity and assumed Britain would keep stronger economic ties with the EU than its exit from the bloc might suggest.
- What key factors did the finance ministry not consider?
Migration flows are assumed to stay unchanged even if a trade deal ends the automatic right of EU citizens to move to Britain, something sought by many Brexit campaigners.
The ministry said it was unclear what the net impact of Brexit would be on migration so it used official population projections which go into government budget forecasts.
- What other scenarios did the finance ministry look at?
There were two other scenarios. The first looked at a trade deal similar to the one between the EU and Norway, which follows the bloc’s regulations closely, pays into the EU budget and allows in EU migrants. This would reduce GDP by around 3.8 percent after 15 years.
The second assumed Britain would fail to reach a trade deal with the EU and have to rely instead on its rights as a member of the World Trade Organisation, which would cut GDP by around 7.5 percent.
A trade deal similar to one between Switzerland and the EU would cut British GDP by something towards the lower end of the main scenario’s range of a hit of 4.6-7.8 percent. Something similar to Turkey’s more limited trade deal would cause damage at the higher end.
- How does this compare with other forecasts?
Few studies have looked at the long-term impact on productivity caused by a loss of trade. One, by the London School of Economics, suggested that if Britain reached a trade deal with the EU similar to Norway’s, GDP would be 6.3 percent to 9.5 percent lower after 10 years, twice the hit assumed by the finance ministry.
- What do critics say about the report?
The free-market Adam Smith Institute said the Canada-style trade deal Osborne chose as his main scenario was “very unlikely”, and that Britain was more likely to reach a Norway-style deal.
Former finance minister and Brexit campaigner Norman Lamont said the precision implied in the forecasts was “spurious, and entirely unbelievable.”
NIESR’s Jonathan Portes said the failure to look at the impact of migration was a “major omission”. Whether trade would fall after a Brexit was arguable, he said, adding that the report’s estimate of the effect on productivity and GDP was reasonable although it appeared to be “at the high end”.
Reporting by David Milliken
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