Leaked Treasury report warns of painful 'economic shock' if Britain crashes out of the EU without a deal

Exclusive: Report on post-Brexit economy seen by The Independent outlines 'serious consequences' for businesses and citizens – including higher taxes and rising food prices

The report casts doubt on the wisdom of Theresa May’s ‘no deal would be better than a bad deal’ mantra, saying that the alternative – reverting to WTO tariffs – could be worst of all outcomes (Getty)

Theresa May’s plans to rely on World Trade Organisation tariffs in the case of a hard Brexit will cause a “major economic shock” and is worse than any other option, according to an unpublished Treasury document leaked to The Independent. Crashing out of the EU without a trade deal is the "alternative to membership with the most negative long-term impact" on the economy, it warns.

Relying on WTO tariffs would have serious consequences for companies, jobs and food prices, it states. The 36-page report uses language far stronger than that employed in the Treasury's published analysis of Brexit's long-term impact on the economy.

Opponents of a hard Brexit claimed the Treasury's view is unchanged from when the document was first drawn up, saying Parliament must be able to reject the damaging WTO option if Brexit talks ended in failure.

In the Commons on Monday, the Government will try to overturn a House of Lords amendment to the bill triggering negotiations, which calls for a meaningful parliamentary vote on the exit deal. Ms May has said that “no deal would be better than a bad deal”, meaning Britain would have to adopt WTO rules if it left the EU without an agreement.

Brexit supporters dismissed the Treasury paper as part of “Project Fear”, saying any early predictions of an economic crisis had already been discredited by the UK’s performance since the referendum.

The document claims that consumers would no longer benefit from the end to mobile phone roaming charges, EU compensation for delayed flights or cancelled holidays, or protections covering purchases in an EU country. It warns that the WTO regime would mean “new taxes on British trade” – tariffs and duties in the 53 countries with which the EU has free trade agreements. The UK’s privileged access to these markets would be “terminated”, and it “would take years” to strike trade deals and be difficult to replicate the current terms.

“UK agricultural exports to the EU would face new tariffs of 14.4 per cent on average, and non-agricultural goods an average tariff of 4.3 per cent – enough to undermine the competitiveness of some UK businesses,” it says. “The UK would have less access to the [EU] single market than Pakistan, Rwanda or Yemen.

“The EU would trade with the UK on the same terms as it does with countries like China – with no preferential access.”

The report describes the WTO’s coverage of services, which account for almost 80 per cent of the UK economy, as “out of date, based on a set of commitments that are 20 years old. It lacks the ambition the UK’s modern economy needs.“ It argues that, without a trade deal, the EU would have no scope to lower tariff rates for the UK without cutting them for all members of the 164-nation WTO.

“After we left the EU, we’d need to renegotiate the terms of our WTO membership,” the document, drawn up a month before the referendum was held, says. “This would trigger bureaucratic negotiations with other WTO members, lasting for months or years …This could be a very complex exercise involving a review of every tariff line – over 5,000 – to determine what rate the UK wished to apply.”

Although Britain could lower tariffs on EU imports to soften the blow of rising prices, it would have to reduce them by the same amount on all imports from WTO members. “This would put the UK in a weak position if we wanted to negotiate trade deals to secure more market access for UK exporters – other countries might avoid coming to the table if we’d already opened up access to our market.”

A spokesperson for the Treasury said: “We do not comment on leaked documents. The Treasury pre-referendum analysis is published online.”

Open Britain, which campaigns against hard Brexit, seized on the report. Labour MP Wes Streeting, a leading supporter of the group and member of the Commons Treasury Select Committee, said: “This report shows the Treasury’s own internal view is leaving the EU with no deal would be a disaster for the UK economy. Civil servants have shown that crashing out of the EU on to the WTO would cause a severe economic shock. Ministers should rule out this perilous path for our country.”

He added: “Having ruled out the best possible deal, which is staying in the single market, our reckless Prime Minister has chosen to make this worst-case scenario a real possibility. It’s time to swap dogma for reason and give Parliament the final say over the future of UK-EU relations.”

But Richard Tice, co-chair of the Leave Means Leave group, said: "The Treasury has a woeful track record on Brexit and this report is more civil servant scaremongering which does not reflect the practical reality of how we can thrive under WTO. Such negativity damages our negotiating leverage. Ministers should push on with confidence.”

If the EU rejected a zero-tariff deal with the UK, he said, the Government should leave the EU without an agreement, relying on WTO rules and striking free trade deals with our global partners.

“Leaving the single market is an absolute necessity and if that means reverting to WTO rules then that is a perfectly sensible option,“ he added.

A study by the pro-Brexit group Economists for Free Trade last month found that if the UK removed all import tariffs, gross domestic product would grow by 4 per cent and Treasury receipts by 7.3 per cent.

Professor Patrick Minford, chair of the group, said: “While the naysayers will have us believe that the ‘WTO option’ of no trade deal with the EU will lead to economic decline, the reality is that we do not need any such deal with the EU to achieve prosperity. When we leave the single market, the UK will take up its full membership of the WTO and it is the pursuit of free trade from that point that will deliver economic success.”