Stay or Leave – 1. Better off?

Both the Stay and the Leave campaigns claim that we will be “better off” inside/outside the EU. They can’t both be right, so which is it?

In September 2013 the House of Common Library published an information paper investigating the likely outcome of a British exit from the EU.  The paper appears to be well founded and unbiased. It should be read by everyone before voting, because even though it points out that there are no easy answers, it does explode some of the myths that are being peddled on the subject by both sides.  The following is a precis of what it has to say on the “better off” issue (though I advise people to read the original here http://www.parliament.uk/briefing-papers/sn06730.pdf

The authors examined eight statements of the effects of a British withdrawal, pointing out that the conclusions reached in each case reflected the stance of the organisation that commissioned or conducted the study (see chart below).

EUstudies

a UK Independence Party How much does the European Union cost Britain? Based on conclusion that ‘for 2010, the combined direct and indirect costs of EU membership will amount to… £77 billion net’

 b Civitas A cost too far? ‘Most likely’ estimate of annual cost is put at 4% GDP per year

c Institute for Economic Affairs (Minford et al) Should Britain leave the EU? Midpoint of estimated range of ‘3.2-3.7 per cent of GDP in ongoing costs’

d Institute of Directors EU membership – what’s the bottom line? Estimated net cost of 1.75% GDP per annum

e US International Trade Commission The impact on the US economy of including the UK in a free trade agreement with the US, Canada and Mexico Estimate refers to the impact on UK GDP (-0.02%) of the UK withdrawing from the EU and ‘joining’ NAFTA

f European Commission The internal market – ten years without frontiers. Estimate refers to the impact on EU GDP of the existence of the internal market

g National Institute of Economic and Social Research The macroeconomic impact of UK withdrawal from the EU. Estimate refers to the permanent impact on the level of GDP of the UK withdrawing from the EU

h Department for Business Innovation and Skills, written evidence to Lords EU Select Committee inquiry into Re-launching the Single Market. Estimate refers to the trade benefits of EU membership since the early 1980s and refers to impact of membership of income per capita. Based on argument that “EU countries trade twice as much with each other as they would do in the absence of the Single Market programme” and OECD estimates of the impact of trade exposure on income per capita.

As shown, results ranged from UKIP’s contention that we will be more than 6% of GDP worse off nationally to the estimate of the Department for Business Innovation and Skills, that we will be about 6% better off.  Clearly these contradictory conclusions are an inadequate basis for decision making.

However, the authors do make an interesting observation which does enable one to discriminate between the two camps.  The studies that say we will lose by staying in are ‘static’ – they choose a year, calculate the fiscal, regulatory and trade effects as they actually happened, and from this produce an overall profit and loss statement. The studies that say we will gain by staying in, look at the future of membership, assuming that steadily growing trade flows and future inward investment will offset the cash cost of membership exposed by the ‘static’ studies.

The authors refrain from comment on these two different methodologies but it’s pretty clear that the static approach is based on known historical facts, whereas the futurology approach is based on assumption rather than fact.

My own view is that it’s clear the organisations who believe the UK should stay in have rigged their data by the simple expedient of making optimistic assumptions about future investment and trade volumes, whereas the organisations who think we should leave have used accurate historical data.

My conclusion: No-one can say whether Britain would be better off economically out of the EU because there are too many variables and too many unknowns. However, it’s important to understand that this is true for both camps: those who are convinced we’ll be better off staying in are just as self-deluding as those convinced we should leave, and neither side should be listened to uncritically.

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