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Treasury maths on £36bn fiscal hole adds up

by Jack Schickler | 18.04.2016

Alongside the Treasury’s analysis of the impact of Brexit on our economy comes a similarly eye-catching claim on public finances. 15 years after leaving the EU, in the central case, our budget would face an annual £36 billion black hole. This, George Osborne explains, is equivalent to more than a third of the NHS budget, or 8p on the basic rate of income tax.

That directly challenges a favourite claim of Brexiteers. Boris Johnson and Michael Gove have said that, if we left the EU, we could spend the billions saved from our EU budget contribution on domestic priorities like the NHS. Brexit could herald the “end of austerity”, according to John Redwood. Leave campaigners miss out half the picture – on balance, the economic cost of more trade barriers would mean less cash in the public till, not more.

It is true that we are net contributors to the EU’s budget. The Treasury calculates the average amount we pay in, after taking off the rebate, at £12.7 billion per year. But some of that is spent in the UK, or on development spending abroad that counts towards international targets. The Treasury assumes we would in any case continue funding these from the domestic purse, and so puts the “maximum possible gain” from Brexit at £7 billion.

But there is a far more important impact to consider. 15 years after Brexit, the Treasury reckons, UK GDP will be lower – 6.2% in its central scenario. InFacts believes this is a reasonable ballpark.

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Assuming taxes remain fixed as a proportion of our economic size – as they more or less have over the last 15 years – each 1% drop in GDP means about £7 billion less in tax receipts. The central scenario translates into £43 billion less income, or a net cost of £36 billion once the EU budget is accounted for.

The Treasury’s analysis only covers the long-term impact. The short-term dislocation is also likely to be severe. For both reasons, Brexit, far from giving us a pot of gold for public services, could force greater austerity.

Edited by Hugo Dixon