Sunday, May 01, 2016
There's no magic money tree if we leave the EU
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

There are two things that even the most casual observer of the EU referendum debate will have heard. One is that we “send” £350m a week to Europe. The other is, in a pattern familiar in politics, those who favour Brexit have come up with various ways in which this money could be better spent, the latest being to settle the junior doctors’ dispute.

If there is one thing I can impress on you as we approach our date with destiny on June 23, it is to expunge that £350m figure from your mind, because it is wrong. That is not an easy thing to do because it is so often said. But ignore any politician who says we send £350m a week to the EU. Tear up any leaflet that makes that claim.

A second thing I would urge is to reject what I would call the crude accountancy approach to Britain’s contribution to the EU budget, or others might term a reductio ad absurdum about this debate. In other words, the effect on Britain’s public finances, or for that matter the balance of payments, will be dwarfed by the wider effects of a decision to leave the EU. The analogy is not perfect, but it is a bit like deciding whether or not to buy a prestigious car on the basis of the cost of replacing the wiper blades. There is a lot more to it than that.

Let me start with the contribution itself. The odd thing about the £350m figure is that it is widely used by many Brexit campaigners who profess admiration for Margaret Thatcher, while conveniently ignoring the EU rebate she successfully negotiated at Fontainebleu in 1984 and which for three decades has reduced Britain’s budget contribution before anything is “sent” to Brussels.

The rebate has outlasted her, and it will outlast the current generation of politicians should Britain remain in the EU. The rebate was worth £4.4bn a year in 2014, the latest full year for which data is available, and averaged of £3.5bn over the period 2010-14. It is deducted from the £17.4bn annual gross contribution over that period.

That is not the only necessary deduction. An average of £5bn a year flowed back to Britain’s public sector during 2010-14, reducing the net contribution to £8.9bn, or £170m a week. Roughly £2bn a year comes from the EU to the private sector in Britain. On this basis, the net contribution over the latest five years averaged £7.1bn a year, £135m a week. In 2014 alone, it averaged £110m a week; less than a third of the claimed £350m.

These figures, I should say, come from correspondence between Sir Andrew Dilnot, the head of the Statistics Commission, the independent statistical watchdog and Norman Lamb, the Liberal Democrat MP who had complained about the use of the £350m figure. Sir Andrew agreed that it was “potentially misleading”, which means it should not be used.

The method in the Brexiteers’ madness may be that, even though they know £350m is misleading, any figure which runs at more than £100m a week is still a very large number. They, in other words, do not mind a debate about it. £110m or £135m a week is a lot of money to most people.

It is, however, small in relation to government spending; well under 1%. Could that money, small though it is in terms of the public finances, be used instead for domestic priorities? The answer to that comes in two parts.

The first is that any post-Brexit trade deal with the EU comes with a bill attached. Both Norway and Switzerland have deals which give them less favourable access to the single market than Britain has now, and no influence over the way single market rules are made. Norway pays only a slightly smaller per capita contribution as Britain.

Switzerland pays less, but misses out on, amongst other things, the financial passporting scheme that Mark Carney, the Bank of England governor, has said is very important for London’s role as a global financial centre. Switzerland would dearly love to have it. Nobody can say what the bill to access the single market would be but it is not impossible that it would be larger than now. The budget rebate would, after all, die with the end of Britain’s EU membership.

Even more important than this is the second key point, which is that any savings on the budget contribution would be dwarfed by the wider economic effects. As foreshadowed here last week, the Organisation for Economic Co-operation and Development (OECD) added its voice to the many warning of the economic costs of Brexit.

Angel Gurria, its secretary general, said Britons would pay a “Brexit tax”, equivalent to a month’s salary by 2020, adding that it would be “a pure deadweight loss, a cost incurred with no economic benefit”. It was an odd way of putting it but I think we know what he meant. Gross domestic product would be 3% lower than under a remain scenario by 2020 and between 2.7% and 7.5% lower by 2030.

As he put it: “While no one knows precisely what the costs would be, what is striking about our estimates and those produced by most others is that all the numbers under a Brexit case are negative. The best outcome under Brexit is still worse than remaining an EU member, while the worst outcomes are very bad indeed.”

On the budget contribution, the OECD’s assessment noted that “net transfers to the EU budget are relatively small, at 0.3% - 0.4% of GDP per annum in the years ahead, and the saving from a reduction in these transfers would be more than offset by the impact of slower GDP growth on the fiscal position”.

Like the assessments of the International Monetary Fund, the Treasury and the London School of Economics, the assumptions used in coming to such verdicts can be challenged. But all are remarkably similar and, in the case of the Treasury like the OECD, imply that far from Brexit helping the public finances by reducing budget contributions, the net effect would be “higher government borrowing and debt, large tax rises or major cuts in public spending”. Tax receipts by 2030 would be between £20bn and £45bn lower.

Some economists are attempting a fightback against what is becoming the prevailing wisdom. Three I know very well – Patrick Minford, a long-term “better off out” campaigner, Roger Bootle of Capital Economics and Gerard Lyons, economic adviser to Boris Johnson – are part of Economists for Brexit, which launched on Thursday. They are in a small minority against the economic mainstream but I shall take their views into account in my overall assessment.

Oxford Economics, which has no axe to grind in the debate, says that even the most benign Brexit outcome - one that does not harm the economy over the medium to long-term - would produce a “negligible” dividend for the public finances.

So the Brexiteers should stop pretending that leaving the EU would suddenly free huge sums to spend on what we like. There is no magic money tree. It is an insult to voters’ intelligence to suggest there is.