Brexit could reduce tax revenue by £45bn, Treasury claims

18 Apr 16

Tax receipts could be as much as £45bn lower if the UK votes to leave the European Union, leading to large tax rises or major cuts in public spending, the Treasury has claimed today.

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Publishing an analysis of the possible impact of Brexit, the government said that all three likely scenarios for Britain’s relationship with the EU would shrink the national economy after 15 years.

A deal where the UK became a member of the European Economic Area, establishing a trading relationship with the EU similar to Norway’s, would reduce economic output by 3.8% after 15 years, according to today’s report. This would rise to 6.2% if the country were to negotiate a bilateral agreement, such as that between the EU and Switzerland, Turkey or Canada, and could be as much as 7.5% if the UK simply trades with the EU under World Trade Organisation terms.

As a result, tax receipts would be £20bn lower 15 years after leaving the EU and trading under an EEA agreement, according to the paper, rising to £36bn from a bilateral agreement and £45bn for WTO terms.

A reduction of £36bn in tax receipts would be equivalent to more than a third of the NHS England budget, or to raising the basic rate of income tax by around 8p from 20p to 28p, according to pro-EU ministers.

Launching the report today, chancellor George Osborne said leaving the economic bloc “would be the most extraordinary self-inflicted wound” for the country.

“It’s the biggest decision in a generation and will have profound consequences for our economy, for living standards and for Britain’s role in the world,” he stated.

“The analysis shows that a vote to leave would mean Britain would be permanently poorer, to the tune of £4,300 a year for every household [in the case of a negotiated bilateral agreement]. Under any alternative, we’d trade less, do less business and receive less investment. And the price would be paid by British families. Wages would be lower and prices would be higher.”

The impact of lower tax receipts on the public finance would “significantly outweigh” any potential fiscal gain from reduced financial contributions to the EU, which has been estimated by Vote Leave campaigner Bernard Jenkin as £20bn annually. According to the Treasury, this would result in higher government borrowing, large tax rises or major cuts in public spending.

Responding to the document on Twitter, Jenkin, the chair of the Public Administration and Constitutional Affairs Select Committee, said the claim that the UK would be “permanently poorer” was untrue.

“UK will continue to grow and create millions of new jobs, in or out of EU,” he remarked. “This is an utterly misleading and disreputable way to conduct the EU debate, and it will not work.”

Responding to the report, Jonathan Portes, the principal research fellow at the National Institute of Economic and Social Research said it was based on two key assumptions: that Brexit, under any plausible scenario, significantly reduces the UK's openness to trade and investment, and that this in turn results in a significant reduction in UK productivity performance.

“The first assumption is obviously open to question, with some Leave campaigners arguing that the UK could both preserve its current trading relationships with the EU and conclude further free trade agreements with non-EU countries,” he stated. “However, if the government is indeed correct that this would be difficult or impossible, then the Treasury's conclusion that productivity and hence output would fall is reasonable, and their estimates of the quantitative impact, while at the high end, are not outside the range of credible independent estimates.”

However, the Treasury's modelling was largely based on the historical experience of entering free trade areas and/or customs unions, and the impact of leaving one might very well be different, he added.

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