Brexit: Will it improve living standards in the UK?

The big EU questions: With only days to go before the vote on British membership of the EU, the debate so far has been characterised by bias, distortion and exaggeration. So from now until 23 June we will be running a series of question and answer features that will explain the most important issues involved in a detailed, dispassionate way to help inform your decision

Why are we asking this now?

Because one of the central arguments of the pro-Remain camp is that Brexit will inevitably leave people worse off relative to staying in the EU. The Leave camp, on the other hand, generally insist Brexit would leave us no poorer – and could even make us more prosperous than if we stay in the 28 state bloc.

Why would Brexit make us worse off?

There are two parts to the argument – and it is important to distinguish them. The first is that the immediate financial and economic shock of a Brexit vote on 23 June would damage confidence, cost jobs and even possibly lead to a recession – all within the next few months. This is the warning that has been sounded by the Treasury, the International Monetary Fund and even the Governor of the Bank of England, Mark Carney.

The second part of the argument is that in the longer term – over the next 15 or so years - not being in the European Union would mean the economy does not grow as much as it otherwise would. This is the analysis that has been made by independent organisations such as the London School of Economics and The National Institute of Economic and Social Research (NIESR).

It has also been made by the Treasury. The Treasury’s central estimate is that Brexit would make GDP lower by 6.2 per cent in 2030 relative to staying in, equivalent to £4,300 for every UK household today. This is the amount by which George Osborne says UK households would be worse off as a result of Brexit.

What do the Brexit camp say to about these economic warnings?

They dismiss them as baseless scaremongering. Some among the Leave camp tacitly accept that there would be some short-term disruption – but they say the pain would be short-lived. They also claim that the long-term economic forecasts of Brexit are based on erroneous assumptions. They also point out that the UK would not have to make a contribution to the annual EU budget anymore, claiming we would benefit by being able to spend up to £9bn more a year on the National Health Service or other services and subsidies.

So why could leaving the EU hurt living standards?

The Remain camp claim that, in the short term, the economic uncertainty generated by a leave vote would damage confidence, which would cause a sharp cut back in investment by households and businesses. This would directly damage overall output, which would cost jobs and hit incomes. The Institute for Fiscal Studies, using these projections, calculate that this would mean lower tax revenues than otherwise, meaning the Government would have to prolong austerity for a further two years beyond 2020 in order to bring the state’s budget into balance.

And in the longer term?

The story of damage here is more complex. Economists argue that outside the European single market for goods the UK would trade less with Europe. They say that trade, historically, has been shown to boost domestic productivity through the ratchet of free market competition and that productivity growth boosts overall GDP growth. They argue that less trade would mean less productivity growth which would mean less GDP growth which would mean lower wages and incomes than otherwise.

Is it all about trade then?

No. An associated assumption is that the UK being outside the EU would mean less job-creating foreign investment into the UK than otherwise. The point out that some foreign multinationals – such as Japanese carmakers and American banks – have established factories and offices in the UK because they know they can export to the EU easily from here. If they face tariffs it suddenly becomes non cost effective.

Finally, there is migration. In economic models such as the one used by NIESR and the Office for Budget Responsibility, which makes forecasts for the Treasury, higher net migration means higher GDP growth. NIESR estimates that if net migration levels were slashed by around two thirds in the wake of Brexit the economy would be around 9 per cent lower by 2065. That would mean we would have to pay higher taxes to pay for rising healthcare and pension costs to the tune of around £400 per person in today’s money.

What do the Brexit camp say on trade?

They deny that trade volumes would fall. But they do not seem able to agree on sort of trade arrangement with the EU and the rest of the world should aim for after Brexit. Some have spoken of the UK joining the European Economic Area in the manner of Norway, which would retain our access to the single market. Others have spoken of a broad free trade deal with Europe in the manner of Canada’s new arrangement with the EU.

Others say we should not bother with trade deals at all and simply unilaterally scrap all our tariffs, which should mean a major fall in import prices. While this would mean our manufacturing exporters face crippling tariffs, some Brexiteers say the overall benefits of this radical policy would outweigh the costs. Pro-Brexit economists also say there would be economic benefits from an ability by the UK to de-regulate the economy in the wake of Brexit. And on immigration they claim that scrapping EU free movement and establishing an Australian-style points system for incomers would enable Britain to import better-skilled migrants with higher productivity.

Which side is more credible?

Many on the Leave side have sought to suggest warnings about the impact of Brexit on living standards are a part of a grand establishment conspiracy to frighten voters into opting for the status quo. The Treasury and George Osborne have certainly been guilty of exaggeration by shouting that a Brexit is certain result in an instant recession. Yet no independent economists thinks Brexit vote on 23 June would give an immediate boost to growth. And, in the longer term, the overwhelming consensus of independent economists is that Brexit would be a negative, rather than a positive, influence on growth and therefore living standards. More than 200 practising UK economists have signed a letter arguing precisely that.

By contrast the “Economists for Brexit” have managed to muster just eight supporters. Numerous economic models, with their parameters clearly laid out, have pointed to a negative long-term impact of Brexit. By contrast the pro-Brexit economists have offered no detailed forecasts to support the contention that Brexit would be economically beneficial. The only real argument the pro-Brexit economists can muster is that “groupthink” is a perennial pitfall for the profession – and that this is what we are seeing now over Brexit.

The EU referendum debate has so far been characterised by bias, distortion and exaggeration. So until 23 June we we’re running a series of question and answer features that explain the most important issues in a detailed, dispassionate way to help inform your decision.

What is Brexit and why are we having an EU referendum?

Does the UK need to take more control of its sovereignty?

Could the UK media swing the EU referendum one way or another?

Will the UK benefit from being released from EU laws?

Will we gain or lose rights by leaving the European Union?

Will Brexit mean that Europeans have to leave the UK?

Will leaving the EU lead to the break-up of the UK?

What will happen to immigration if there's Brexit?

Will Brexit make the UK more or less safe?

Will the UK benefit from being released from EU laws?

Will leaving the EU save taxpayers money and mean more money for the NHS?

What will Brexit mean for British tourists booking holidays in the EU?

Will Brexit help or damage the environment?

Will Brexit mean that Europeans have to leave the UK?

What will Brexit mean for British expats in Europe?