No economic upside to Brexit, says OECD chief

27 Apr 16

A UK exit from the European Union would impose a “persistent and rising” cost on the economy, akin to a tax that could cost British households as much as £5,000 by 2030, the OECD has warned

Adding its voice to analysis from the Treasury and the International Monetary Fund, the think-tank stated it can see no economic upside for the UK in the event of Brexit and that even the best possible outcome would be still worse than remaining in the union.

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Presenting the OECD’s report today at the London School of Economics today, secretary general Angel Gurría compared the “complex and permanent” consequences of Brexit to a tax on the economy and the pockets of UK citizens.

He continued: “Unlike most taxes, however, this one will not finance the provision of public services or close the fiscal gap. The ‘Brexit tax’ would be a pure deadweight loss, a cost incurred with no economic benefit.

“And this would not be a one-off levy. Britons would be paying it for many years.”

The OECD’s analysis found that by 2030, UK gross domestic product would be 5% smaller in the event of a Brexit compared to if it had stayed a member.

While in an optimistic scenario this could be downgraded to 2.7%, in a pessimistic scenario the UK could lose as much as 7.7% – a loss of output equivalent to £5,000 for every UK household by 2030.

In the short term, until 2020, the OECD said Brexit would shave 3% of GDP and leave households £2,200 worse off.

The move would also hit the public finances according to the report, with an increase in the budget deficit by 0.9% of GDP on average per annum over 2019-20.

This would offset any potential savings made from leaving the EU and leaves little room to relax fiscal policy. Thomas Sampson, a professor in the LSE’s Department of Economics, pointed out that this would require the government to borrow an additional £16bn than it currently does.

Gurría said that already the costs are piling up. He pointed to figures released by the Office for National Statistics this morning showing that the first three months of 2016 have seen the lowest quarterly GDP growth since 2012.

He added that business investment has also been weak, while the pound has weakened against the euro and the dollar and the cost of insuring exchange rate volatility has risen significantly.

This is largely attributed to the uncertainty caused by the referendum, which the OECD said would continue long after the votes have been counted if Britain chose to leave.

A formal exit wouldn’t occur until late 2018, with new trade negotiations following in 2019-20.

The OECD said this would mark a period of heightened economic uncertainty, with damaging consequences including reduced confidence, delayed spending decisions and increases in the cost of finance.

As well as the costs of uncertainty, the report stated highlighted the possibility for tariffs and barriers to trade, falling immigration, and a loss of foreign direct investment in the UK.

Gurría argued that the idea that the UK could achieve a more liberal trade regime than it currently enjoys is “delusional”. EU partners would be incentivised to make an exit costly, while trade agreements with the UK alone are not a significant priority for the rest of the world.

“The Brexit tax just gets bigger,” he said. “We see no economic upside for the UK whatsoever. The only question is where, on the spectrum of possible losses, the outcome winds up.

“Our conclusion is unequivocal. The UK is much stronger as a part of Europe.”

However work and pensions minister and leave campaigner Priti Patel said it was unsurprising that the OECD, which receives some of its funding from the EU, had not acknowledged any of the economic benefits of leaving the union.

She stated that Britain would be able to reduce immigration, cut red tape and the cost of doing business, and as the world’s fifth largest economy, would be able to negotiate good trade deals with the EU and other economies around the world.

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