OECD gets down to brass tacks: Brexit is a tax

by Alan Wheatley | 27.04.2016

The OECD has done a service to the referendum debate by calling out Brexit for what it is: a self-imposed tax. It reckons quitting the EU would reduce UK economic output by £2,200 per household by 2020, and by £3,200 a decade later, compared to what it would be if we stay in the EU.

Some might dispute the tax label. After all, no one will actually turn over more money to Her Majesty’s Revenue & Customs. But Angel Gurria, the OECD’s boss, said Brexit would act like a tax by imposing a persistent and rising cost on the economy without delivering more public services or reducing the deficit in return.

“It’s a good way to put it,” the secretary-general of the Organisation for Economic Co-operation and Development, told an audience at the London School of Economics. “It’s an easy-to-understand notion.”

The Paris-based OECD is a respected policy forum for 34 mainly rich countries. Its judgment of the economic damage that Brexit would inflict is squarely in line with analyses by the CBI, the LSE and the Treasury. But its report, released on Wednesday, is the most authoritative yet by dint of the OECD’s role. Here are five findings that the Vote Leave campaign need to rebut.

1) Big short-term cost

The Treasury’s report dwelt on the hit to the economy by 2030. The shock would come much sooner, the OECD says. GDP would be 3% lower than otherwise as soon as 2020. Crumbling confidence, tighter financial conditions, increased trade barriers and curbs on labour mobility would all take a toll. The jobless rate, now at 5.1% or 1.7 million, would jump by 1.5 percentage points. Business investment would slump by 10%, share prices would drop by 15% – hitting people’s pension pots – and the budget deficit would leap, more than offsetting the savings from paying into the EU budget.

2) An even bigger longer-term cost

Quitting the EU would slowly corrode the economy as hurdles to trade reduce competition and the inflow of new ideas and products. Brexit would make the UK less attractive for foreign direct investment if we lost access to the Single Market. The result would be less capital investment with a knock-on impact on innovation and productivity – the key to rising living standards. In the OECD’s central scenario, we will forego GDP growth of 5.1% by 2030 if we leave the EU. On a pessimistic set of assumptions, the lost output climbs to a whopping 7.7%, or £5,000 per household – even after accounting for a post-Brexit drop in immigration.

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    3) Negotiating new trade deals would be a slog

    The Leave campaign counters that we could swiftly renegotiate access to the Single Market on favourable terms. This is a delusion, Gurria said. Remaining countries would drive a hard bargain because they would want to deter others from following Britain’s lead. “There is no objective reason why the UK could get a better deal than it has now,” he said. Britain’s important financial services industry, which now enjoys “passporting” rights to do business in the rest of the EU, would be particularly vulnerable.  In its report, the OECD noted the EU’s 36 Free Trade Agreements (FTAs) with 53 non-EU countries would no longer apply to the UK: “New FTAs might be less advantageous than with the EU, with the bargaining position of the UK weaker than that of the EU as a whole.”

    4) EU membership is good for UK incomes and jobs

    Since we joined the EU in 1973, UK GDP per head has doubled, increasing more than non-EU English-speaking countries such as the US, Canada and Australia. Sensible domestic policies have helped, but the example of Ireland shows the value of proximity and unrestricted access to the EU, the single largest market in the world. Ireland’s per capita income has quadrupled since 1973.

    5) Immigration is an economic plus for the UK

    Immigrants account for roughly half of the growth in the economy since 2005, with EU citizens contributing slightly more than people from outside the bloc. Immigration has been a key factor behind the strong labour market: out of around 2.5 million jobs created in 2005-15, immigrants supplied 2.2 million of them, with nearly 60% originating from the EU. What’s more, as InFacts has documented, they make a positive contribution to the public finances.

    Edited by Michael Prest

    Tags: , Categories: Articles, Brexit, Economy

    3 Responses to “OECD gets down to brass tacks: Brexit is a tax”

    • Unfortunately whatever prospect of concrete economic damage it is provided to the quitters, they won’t believe it. Yet the quitters have not published a single economic report or study that can support their theories. But yet, too many people only think in matter of what is immediately in front of their noses (immigration and EU contributions) but not on what is in front of their feet and the road ahead. They think that “solving” those 2 issues, no consequences at all (if not a “better off” future) will be provoked.

    • Is it rational to take notice of OECD predictions without first establishing their reliability? Has the OECD ever accurately forecast GDP growth or shrinkage in any country after a fourteen year period?