In slightly less dramatic fashion than Martin Luther nailing his 95 theses to the door of a Wittenberg church, Economists for Brexit (EfB) posted their 31 page rebuttal to the Treasury’s economic orthodoxy on their website yesterday. Taking a dim view of analysis showing a Brexit would damage the British economy, EfB repeated their claim that we would reap benefits worth 4% of GDP.
The National Institute for Economic and Social Research (NIESR) also released a new study. Reasserting the view put forward by the International Monetary Fund, the Treasury, the OECD, and the London School of Economics, it found that a Brexit would be a “significant shock” to the UK economy.
A vote to leave would be followed by two years of increased risk and uncertainty as negotiations took place. NIESR estimated that this could see sterling fall by about 20%, pushing up prices for UK consumers. The fall off in economic activity would expand the government’s budget deficit.
The Brexit camp will retort that risk and uncertainty are short-run factors. Actually, two years is not so short; but, setting that aside, it is true that our new relationship with the EU would be worked out, and we would arrive at a new equilibrium. Unfortunately, that equilibrium would be bad for Britain.
There are two versions of this equilibrium. The first would involve continuing Britain’s close ties with the Single Market. According to NIESR’s research, this option–sometimes known as the Norway model–would see UK GDP 1.8% smaller in 2030 than it would otherwise have been. A variant involving a free-trade deal with the EU–the “Swiss option”–would see GDP down by fractionally more: 2.1%.
The second kind of post-Brexit equilibrium involves not doing a deal to retain access to the Single Market and instead continuing to trade with the EU under World Trade Organisation (WTO) rules. This would be worse, lowering UK GDP by 3.2% relative to what it would otherwise be in 2030. Unfortunately, Vote Leave supremo Michael Gove has ruled out staying in the single market, thus making the second and more painful post-Brexit equilibrium seem likelier.
NIESR’s projections are less pessimistic than the Treasury’s. The difference is that the Treasury assigns more weight to “productivity effects”–without the spur of continental competition, UK productivity gains will be slower. When NIESR adjusts its forecast to account for this sort of productivity shock, it projects that GDP would be lowered by 7.8% in the WTO scenario, close to the Treasury’s 7.5% reduction.
Supporters of the Leave campaign must reckon with the reality that Brexit will make us poorer.