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The economic and financial costs and benefits of the UK’s EU membership Contents

2Claims made by the campaign groups

Background

12.Both leave and remain campaign groups have made claims about the economic impact of EU membership and Brexit. These claims, which are often described as ‘facts’, have been made in campaign literature, in speeches by prominent spokespersons, and in evidence before the Committee.10

13.As discussed in the introduction to this Report, many of these claims sound factual because they use numbers. They are not, however, facts, but claims underpinned by judgements and assumptions. Rarely have those judgements and assumptions been made adequately explicit. However, we recognise that the assumptions made to underpin analysis are those that would need to be made in any economic modelling, however advanced that modelling may be. We, therefore, should assess the weight given to the evidence not just on the assumptions made but on the sophistication of the modelling and analysis that underpins it.

14.The Committee took oral evidence from the major campaign groups and prominent spokespersons on both sides of the referendum debate. It also asked ‘permitted participants’ in the referendum to send campaign literature published during the referendum period.11 What follows is the analysis of their most prominent economic claims.

15.Most claims made about the economic impact of EU membership fall into one of five categories:

The crucial issue of the impact of trade policy is considered later in the report.

Claims about the size of the UK’s contributions to the EU budget

“our annual contribution [to the EU] is equivalent to £340 per household” (Lord Rose, speech on 12 October 2015)

“Let’s give the NHS the £350 million the EU takes every week.” (Vote Leave campaign literature)

“Instead of sending £350 million per week to Brussels, we will spend it on our priorities like the NHS and schools.” (Vote Leave website, ‘Leave looks like … ’)

“£19.1bn: the amount the UK would save by no longer having to contribute to the EU budget.” (Vote Leave website, The UK-EU balance sheet)

16.The EU’s resources come from contributions by Member States, including the UK. The process by which these contributions are calculated is complex, but they are closely related to Member States’ relative economic size.

17.The UK gets back a proportion of what it pays in to the EU budget, largely in the form of agricultural subsidies under the CAP and regional funding, although it has been an overall net contributor to the budget (i.e. it has paid in more than it gets back) in 41 out of its 42 years of membership.12

18.In addition, the UK has received an ‘abatement’, or ‘correction’, to its budget contribution since 1984 which means it pays less than it otherwise would. This was negotiated by the Government led by Mrs Thatcher, which argued that the UK’s budget contribution should more closely reflect the fact that it has a smaller agricultural sector, and consequently benefits less than some other Member States from the CAP. The abatement is applied before the UK pays its budget contribution (i.e. no money is paid out or rebated).13 As the Treasury points out, “it does not involve any transfer of money from the Commission or other member states to the Exchequer”.14 The rebate is calculated according to a formula that can only be altered with the agreement of all Member States, including the UK.

19.The EU also provides funding directly to private sector and non-governmental organisations in the UK, such as universities. A breakdown of these receipts is shown in the table below.

Table 1: UK receipts from the EU budget, 2014

£ millions

CAP–direct payments

2,546

CAP–rural development

555

Regional funding

1,324

Research and innovation

642

Erasmus*

84

Administration

120

Other

357

Total

5,628

Source: European Commission

20.The different channels through which the UK receives money back from the EU budget, and the different sources in which information on EU budget contributions and receipts is published, has led to campaign groups putting forward various figures to measure the UK’s contribution to the EU budget. The picture is complicated further by the different time periods used when presenting the numbers; for instance, Vote Leave has a ‘counter’ on its home page claiming to measure “total UK contributions to the EU” since joining (at the time of writing, it stands at £511 billion).

21.Figures on the UK’s budget contributions over the time periods typically used in campaign literature are shown in the table below.

Table 2: contributions to the EU budget

2014

Since joining (1973–2014) (£m)

Past decade (2005–14) (£m)

annual (£m)

Per week (£m)

£ per household (annual) (£m)

Gross contributions

473,939

147,443

18,833

362

698

Contributions including rebate

354,808

119,148

14,404

277

533

Contributions including rebate and public sector receipts

167,421

68,962

9,814

189

363

*Contributions including rebate, public and private sector receipts

n/a

54,179

5,711

110

212

Source: HM Treasury, European Union Finances (various edns.); European Commission

22.Successive Governments have generally used the annual figure, taking account of the rebate and public sector receipts, as a measure of the UK’s contribution (i.e. £189m per week).15 The Institute for Fiscal Studies describes a figure taking account of the rebate, and net of public and private sector receipts (i.e. £110m per week), as “the UK’s current overall net contribution”.16

23.By far the most prominent, and most controversial, figure for the UK’s EU budget contributions is that of £350m per week, used by Vote Leave. This is calculated on the same basis as the £362m figure in the top line of the table above; in effect, it does not account for the rebate, or include any receipts from the EU budget.

24.Matthew Elliott, Chief Executive of Vote Leave, said that this was “the core number”17 of Vote Leave’s campaign, and that it was used “again and again”.18 In their campaign literature, Vote Leave describes this as the amount of money that the UK “sends” to Brussels, and imply that leaving the EU–and hence not “sending” this money to Brussels–would enable this sum to be spent on other priorities, in particular the NHS. The message emblazoned on the Vote Leave campaign bus–“We send the EU £350 million a week. Let’s fund our NHS instead”–is a typical formulation of this claim. In the weeks leading up to the publication of this Report, the number has also been used in campaign videos, including one entitled How would you spend £350 million? Others from the Leave campaign have used this claim too. Michael Gove has said that “if we vote to leave [ … ] we can take back the £350 million we give to the EU every week. We can spend more on our priorities like the NHS”.19 Writing in the Times on 23 May, Sarah Wollaston, Chair of the House of Commons Health Committee, described the claim that leaving the EU would result in £350 million per week being made available to spend on the NHS as “absurd” and the emphasis Vote Leave have placed on the NHS in their campaign as “a cynical distortion which undermines the credibility of their other arguments”.

25.Matthew Elliott and Dominic Cummings were asked to justify Vote Leave’s use of this figure, given that it does not take any account of the rebate. In oral evidence, they said that their figure was based on an annual number of £19.1 billion used in the ONS’s Balance of Payments, where it is listed as a “debit”, with the rebate and other budget receipts identified as offsetting “credits”.20 The Deputy National Statistician has made clear that “The rebate is shown as a separate credit in the ONS’s Pink Book, but this does not follow how payments are made: HM Treasury pays over the UK’s contributions after deducting the value of the rebate”.21 Furthermore, in correspondence with Mr Cummings, Sir Andrew Dilnot, Chair of the UK Statistics Authority, has described the use of this number as “misleading”:

Without further explanation, I consider these statements [concerning the £350 million figure] to be potentially misleading and it is disappointing that this figure has been used without such explanation. Given the high level of public interest in this debate it is important that official statistics are used accurately, with important limitations or caveats clearly explained.22

26.In defending their use of the £350m figure, Mr Cummings and Mr Elliott also made reference to the Chancellor’s evidence to the Treasury Committee on 17 December 2014,23 in which he said that the rebate was subject to “negotiation” and (elsewhere) “discussion” with the European Commission.24

27.The Committee at the time concluded that the Chancellor had exaggerated25 the extent of ambiguity surrounding the rebate to support his claim that the Government had, through its negotiations at the Economic and Financial Affairs Council (known as ECOFIN and comprising the finance ministers of all EU Member States) “halved” a demand for a €2.1bn additional contribution to the EU budget arising from revisions to historic gross national income data (on which EU budget contributions are largely based). The Committee strongly criticised the Chancellor, concluding that his claim was “not supported by the facts”, and noting that:

The calculation of the rebate, and the circumstances in which it applies, are embedded in EU law. This is set out in detail in Council Decision 2007/436/EC and the supporting Council document on the UK correction. These documents establish the precise method for calculating the rebate. They also provide for past rebates to be adjusted in response to GNI data revisions, such as those which prompted the rebate’s revaluation in this case.26

28.It added that “the Commission did not at any stage suggest to HM Treasury that the rebate would not apply”. Nor could it have disapplied the rebate, which forms part of the Own Resources Decision that governs the financing of the EU Budget, and can only be altered with the unanimous agreement of Member States.27

29.As well as suggesting that the whole of the UK’s gross budget contribution before the rebate, could be spent on schools and hospitals, Vote Leave’s website states that “there will also be financial protection for all groups that now get money from Brussels”.28 Mr Cummings was asked whether such financial protection was consistent with its appeal to spend the UK’s gross budget contribution on schools and hospitals. He said that:

there is all of the other money that we have saved as well. There is not just the £350 million per week that we save from the budget; there is all of the other money.29

Mr Cummings was unclear from where this additional money would come, citing EU public procurement rules as evidence of unacceptable costs to the Exchequer.

30.Commitments have been made by other supporters of the leave campaign about the financial protections that certain groups would get on leaving the EU. For instance, the Farming Minister has said that “the UK government will continue to give farmers and the environment as much support–or perhaps even more–as they get now”.30 In evidence to the Committee, Boris Johnson said that “all farmers will continue to receive the current levels of subsidy [ … ] it would be at the level that they currently enjoy and that level of support would be perpetuated”.31 This is a promise called into question by the multiple purposes to which the budget savings from Brexit have been allocated.

31.In evidence to the Committee, Roger Bootle, Executive Chairman of Capital Economics and a eurosceptic economist, emphasised that claims made about the UK’s EU budget contribution, and waste and inefficiency in the EU’s spending, should be put in context:

It occupies a role in the popular debate about these questions out of proportion to the amounts in question. They sound like very large sums of money, but they are not really. One per cent of GDP is about £16 billion, so we are talking, depending on who is right about the figures, about 0.7 per cent of GDP or something like that. It is not enormous.32

32.At the heart of Vote Leave’s presentation of its case is the claim that, on leaving the EU, the UK Government would receive a windfall of £350m per week, available to be spent in other ways, “like the NHS and schools”. This, and the other figures used by Vote Leave for the UK’s EU budget contributions (£150bn ‘contributed’ in the past decade, and £511bn since joining) are highly misleading to the electorate for a number of reasons.

33.First, Vote Leave’s £350m figure does not account for the budget rebate, which amounts to £85m per week. Leaving the EU could not make this money available to spend on schools and hospitals because it is not ‘sent’ to Brussels in the first place. The rebate does not leave the UK or cross the exchanges. This is repeated in other ways. A 'counter' is prominently displayed on Vote Leave’s website. This purports to show that the UK has historically contributed £511bn to the EU since joining in 1973 and excludes the rebate. The UK rebate is indeed controversial in other Member States. It may be raised in future negotiations over the EU’s financial framework. However, it can only be changed with the UK Government’s consent, as happened in the Government led by Tony Blair.

34.Secondly, the extent to which money that the UK receives from the EU budget (a further £88m per week to the public sector and £79m per week to the private sector and non-governmental organisations) would be available for spending on other priorities, would depend on the policy choices of the democratically-elected Government of the day. Vote Leave has stated that “There will [ … ] be financial protection for all groups that now get money from Brussels”. If that policy were implemented, the money available to fund other priorities after Brexit, such as schools and hospitals, would be much lower, and probably closer to the UK’s net contribution of £110 million per week than it is to £350 million. This would be true even if, as has been widely argued, efficiencies could be made in the way that money the UK currently receives from the EU budget is spent.

35.Finally, it is not impossible that the UK may continue to make contributions to the EU budget after Brexit, either on a transitional or permanent basis, in return for continued access to parts of the single market, or because it considers mutual co-operation in certain areas, such as science research, to be desirable. This too would reduce the supposed fiscal windfall arising from leaving the EU.

36.Vote Leave has said that £350m a week is “the core number”, and that it is using the number “again and again”. It is very unfortunate that they have chosen to place this figure at the heart of their campaign. This has been done in the face of overwhelming evidence, including that of the Chair of the UK Statistics Authority, demonstrating that it is misleading. Without qualification this is unavoidable. Brexit will not result in a £350m per week fiscal windfall to the Exchequer as a consequence of ending the UK’s contributions to the EU budget. Despite having been presented with the evidence contradicting this claim, Vote Leave has subsequently placed the £350m figure on its campaign bus, and on much of its recent campaign literature. The public should discount this claim. Vote Leave’s persistence with it is deeply problematic. It sits very awkwardly with its promises to the Electoral Commission to work in a spirit that reflects its “very significant responsibility” and the “gravity of the choice facing the British people”.

37. Claims about the UK’s contributions to the EU budget should be set in context; the UK’s gross contribution, after application of the rebate, accounts for less than 2 per cent of public sector spends each year, and is equivalent to less than 1 per cent of the UK’s economic output. If leaving the EU has a substantial positive or negative effect on the economy as a whole–as many advocates of leaving or staying believe it will–the consequent impact on the public finances is likely to be far more significant than the size of any saving from the EU’s budget contributions. Nonetheless, the net saving would be a significant reduction in public expenditure in the context of the current austerity programme.

Claims about the impact of EU membership on consumer prices

If we left, the cost of our imports could rise by at least £11 billion–leaving families out of pocket as prices rise. (Britain Stronger in Europe campaign literature)

the Common Agricultural Policy [ … ] effectively adds around £400 to each family’s living costs each year (Leave.eu website)

The demented CAP [ … ] adds about £400 to the cost of food for every household in this country (Boris Johnson, speech on 11 March 2016)

38.Claims about the impact of EU membership on prices are among the most complex to explain fully.

39.EU membership directly affects consumer prices in two ways. The price of goods imported from outside the EU is raised from their market levels by common external tariffs and, for agricultural goods imported from within the EU, price support is provided under the CAP. For instance, the EU applies a tariff of 17 per cent to footwear, 15 per cent to bicycles and 10 per cent to motor cars.33 These tariffs are not applied to all imports, however; in particular, the EU has preferential trade agreements covering 62 countries, and least developed countries benefit from tariff-free access to EU markets. EU membership may act to reduce prices for goods and services traded among its members, because it eliminates tariffs and significantly reduces non-tariff barriers to trade.

40.Outside the EU, the UK would be free to eliminate all tariffs on imports (both EU and non-EU). This would lead to lower prices for goods imported from outside the EU. However, in deciding on its tariff regime, the Government would have to balance the theoretical economic benefits of more free trade against likely political pressure to limit foreign competition in some sectors. An assessment of the leverage that existing tariffs command when negotiating trade agreements would also have to be made. Depending on the sort of trade agreement the UK reached with the EU (discussed in Chapter 5), a British Government may also introduce higher import prices, owing to an increase in non-tariff barriers to goods and services trade.

41. The claim that the cost of imports would rise by £11bn as a result of Brexit–and associated claims that leaving the EU would raise the cost of consumer goods–rely on the assumption that the Government would fail to reach any trade agreement with the EU, and would also retain the same tariff regime as is presently set by the EU. Were an agreement to be reached, or were the Government to apply a more liberal tariff regime, this figure could be lower. The cost of imports would also, in practice, be influenced by the effects of leaving the EU on productivity growth and the exchange rate.

42.The claim that the CAP raises consumer prices by £400 per year is based on research by the Taxpayers’ Alliance from 2009,34 which found that the total cost of the CAP was equivalent to £398 per household. Of this, nearly half (46 per cent, or £184 per household per year) is made up of public expenditure on the CAP through the UK’s contributions to the EU budget, measured on a gross basis (i.e. not taking into account what the UK gets back under the CAP). The remainder comprises price support paid by consumers, the estimate of which is based on a 2006 figure of £34bn; applying this to the UK on a population share basis gives a cost of £5.3bn, or £204 per household). The OECD has published more up-to-date estimates, which put the extent of consumer price support under the CAP at £10bn in 2014 (£1.3bn, or £48 per household).35 Meanwhile, the UK’s implied gross contribution to the CAP through the EU budget in 2014 was £5.8bn, or £215 per household.36

43.Boris Johnson was asked in evidence about his claim that the CAP “adds about £400 to the cost of food for every household in this country”. He clarified that, on leaving the EU, “we would not save all that £400. We would save some”, noting that these would be “made possible by getting rid of some bureaucracy and provisions in the current CAP system”. 37 He added that “we will certainly continue support for agriculture, and all farmers will continue to receive the current levels of subsidy”. 38 Lord Rose, Chairman of the Britain Stronger in Europe Campaign, acknowledged that the CAP was “flawed” and indicated that savings could be made were the UK not part of it:

Is it an inefficiency? Yes. Is it something I would rather not have to the degree that we have now? Yes, but I am hopeful that it will be sorted.39

44.The Stronger In campaign’s claim that the cost of imports could rise by “at least” £11bn as a result of Brexit–and associated claims that leaving the EU would raise household bills–assumes that the UK will place the same tariffs on imports as does the EU currently. Given that the pursuit of an independent trade policy is at the heart of the case for leaving, this seems to be an implausible assumption. The figure of £11bn is therefore unhelpful and tendentious and should not be used without extensive explanation.

45.The figures used by some leave campaigners that the CAP costs £400 per household per year is based on out-of-date research. Using more up-to-date sources gives a figure that is much less than £300.40 In any case, to suggest that this money would be “saved by Brexit” requires two assumptions to be made: that the Government would unilaterally eliminate all tariffs on agricultural goods on leaving the EU; and that it would not replace any of the subsidies and price support currently provided to UK farmers under the CAP. This is inconsistent with Vote Leave’s stated position that farmers will be paid “at least as much as they get now” and Leave.EU’s position that farmers will not lose the money they currently receive from the EU. It is true that the UK is effectively a net contributor to the CAP. It is widely acknowledged, even by Lord Rose, that the money currently distributed to UK farmers through the CAP could be spent more efficiently. Nonetheless, the overall saving would fall short–perhaps well short–of £300 per household.

Claims about the impact of EU membership on employment

3 million UK jobs are linked to our trade with the EU. (Britain Stronger in Europe; Government leaflet)

1 in 10 British jobs depend on UK membership of the EU (Labour in Europe)41

46.These figures originate from two papers published in 2000: a South Bank University paper that found 3.5 million jobs to “depend on exports to the EU”,42 and a National Institute of Economic and Social Research (NIESR) paper that found that 3.2 million jobs are “associated directly with exports of goods and services to other EU countries”.43 A 2014 update by the Government put the figure at 3.3 million.44

47.All these figures are based on the assumption that the share of UK employment linked to trade with the EU is equal to the share of total UK value added generated in the production of goods and services exported to the EU. Although the 3 million figure is the most widely quoted in campaign literature (usually as a measure of jobs linked to EU trade, rather than dependent on membership), other analyses have sought to estimate the number of jobs vulnerable to Brexit. These include a PwC study commissioned by the CBI, which found that, were the UK to leave and fail to reach a trade agreement with the EU, employment would be 950,000 (2.9 per cent) lower than otherwise by 2020; and if it did reach an agreement, the impact would be 550,000 (a fall of 1.7 per cent). These results arise both from lower trade with the EU after Brexit and from lower investment; although it does not attempt to identify the impact of leaving on foreign investment specifically, the report states that “it is very likely that some of this decline in investment would be caused by a reduction in foreign direct investment”. The effects of leaving the EU on foreign direct investment to the UK are considered further in Chapter 5.

48.It is important to note that these estimates should be interpreted as the number of jobs related to trade with other EU Member States. This is not the same as saying that over 3 million jobs are dependent on the UK’s EU membership, since some trade with EU countries would certainly take place if the UK withdrew from the EU. In response to Parliamentary Questions, the Treasury has made this clear, stating that it is “not an estimate of the impact of EU membership on employment”.45 Simon Tilford, Deputy Director of the Centre for European Reform, said in evidence that it was “clearly [ … ] fanciful” to suggest that 3 million jobs were at risk from leaving the EU.46 Martin Weale, Director of NIESR at the time their paper was published, described this interpretation of its results as “pure Goebbels” and “a wilful distortion of the facts”.

49.Will Straw, Executive Director of Britain Stronger in Europe, made clear in evidence that “we have not said that 3 million jobs are at risk. We have said that 3 million jobs are linked to our trade”.47 Philippe Legrain, Visiting Senior Fellow at the European Institute of the London School of Economics, argued that, to the extent that there were labour market effects from leaving the EU, they would be more likely to be felt through wages than employment:

It is not the impact on jobs per se. In a flexible labour market, wages adjust, so it is the impact on pay. If you have lower productivity, you are likely to have lower pay.48

The TUC has also made the point that, although the number of jobs lost may be uncertain, good jobs would be lost and that “those good jobs are likely to be replaced by worse ones”.49

50.It is misleading to claim, as some campaign groups continue to do, that 3 million jobs are dependent on EU membership. Britain Stronger in Europe, the lead remain campaign group, has at least made clear in evidence to this Committee, if not in some of its literature, that its use of the 3 million figure should not be taken to represent the number of jobs dependent on EU membership, but the number associated with trade with the EU. Without an estimate of how much trade would be lost as a result of Brexit, the impact on job losses cannot readily be estimated. The wider public might form the mistaken impression that all these jobs would be lost or at risk if the UK left the EU. Campaigners should be clear that 3 million jobs may be associated with, but would not necessarily be dependent on, our membership of the EU.

51.A reduction in exports to the EU following Brexit would lead to a loss of jobs unless there were compensating effects from faster growth in trade with non-EU countries or to the extent that the UK’s relatively flexible labour markets meant that any impact from lower trade may be felt through lower wages than otherwise and a reduction in hours worked, rather than through the unemployment rate.

Claims about the costs and benefits of EU regulation

£33.3bn per year–current annual cost of EU regulation to the UK economy (Vote Leave brochure)

EU regulation costs UK small businesses over £600 million every week. (Vote Leave campaign literature)

EU regulations are estimated to cost UK businesses at least £33.3bn a year (Leave.eu website)

52.The £33.3bn figure (and the £600m per week figure derived from it) is the most widely used estimate of the ‘cost’ of EU regulation used by the campaign groups, and is based on Open Europe’s analysis of the ‘top 100’ most burdensome EU rules.50 Boris Johnson in fact claimed that “the actual cost of EU regulation may be even higher”.51 The costs are calculated with reference to Government impact assessments (IAs), which must be produced in response to EU Directives (where the Government will have some discretion over how EU requirements will be transposed into national law), but not Regulations or Decisions, which do not trigger a new piece of domestic legislation.

53.The potential costs in question arise from administrative burdens on companies and the public sector (e.g. notifying the authorities about the possible presence of asbestos dust before commencing work), and from the additional practical obligations of putting the policy of the regulation into practice (e.g. providing employees who may come into contact with asbestos with relevant training). There may also be wider consequences arising from regulation (e.g. the demise of industries allied to asbestos manufacture) though these are rarely quantified in IAs.

54.Regulations are imposed with the intention of capturing benefits, and on the assumption that these outweigh the costs. Open Europe’s analysis does not take into account the benefit arising from regulations (e.g. to consumers from higher product standards, or employees from labour market protections), but it has previously acknowledged that “the whole point of regulation is for it to produce a total benefit [ … ] which outweighs the total cost”.52 When asked in evidence about the benefits, Boris Johnson53 and Dominic Cummings54 argued that Open Europe had assessed that 95 per cent of the benefits envisaged in IAs did not materialise. This prompted a clarification from Open Europe, stating that “the 95 per cent figure refers only to the forecast benefits of the Energy and Climate Change package”.55 Oliver Lewis, Director of Research at Vote Leave, subsequently conceded that the use of that figure in evidence had been an “honest mistake”.56

55.Simon Tilford explained that, in order to estimate the economic cost of EU regulation, “one would have to go through very carefully and look at each individual regulation and then estimate whether we would put in national regulations to replace the EU regulation”.57 For instance, outside the EU, the UK would still be bound to honour international commitments to regulate certain markets and products. Such commitments are particularly relevant for financial services; Philippe Legrain noted that the second most costly regulation in the Open Europe study “is the CRD IV package, which is largely transposing Basel III, which Britain would most likely continue to abide by even if it left the EU. Therefore, that is not an additional cost of being in the EU; it is a regulation that we will be bearing the cost of in any event”.58 Similarly, much EU regulation on product standards and safety reflects rules and guidance issued by global standard-setting bodies.

56.To take one example, 93 leaders in life sciences, which employs 222,000 people, say “Continued membership of the EU will also benefit scientific activity and R&D jobs. UK researchers and small businesses will continue to benefit from access to EU funding and from collaborations with cutting-edge science across the continent”59 and Sir Andrew Witty, CEO of GlaxoSmithKline, says that harmonised regulatory standards for pharmaceuticals across the EU reduce costs.

57.In evidence, Matthew Elliott of Vote Leave conceded that “some of that [£33bn] is costs [ … ] incurred for a good cause”,60 reflecting the language recently used in a speech by Michael Gove.61 Oliver Lewis said that the Open Europe analysis had been used because “it was transparent and accessible”. He added that the underlying point that Vote Leave was trying to make was about “control” and “allowing parliamentarians [ … ]to engage far more directly with regulation and how it should be amended or even repealed–far greater control than you have now”.62

58.It is generally accepted that any future Government would want to retain the substance of some EU regulation after leaving, either because it is desirable on economic or welfare grounds, or in order to comply with international commitments, or to retain access to EU markets. A future government would undoubtedly judge that the compliance costs of some, perhaps many, EU regulations are more than offset by benefits.

59.Withdrawing from the EU would give the UK an opportunity to alter the way its economy is regulated in some areas (subject to other international obligations and negotiated conditions attaching to any single market access), and in a way that better reflects its own domestic priorities. It may save firms and consumers some money in the process. Open Europe itself considers that the maximum feasible regulatory savings from Brexit are £12.8bn per year, although achieving even these might involve political controversy. Examples that Open Europe have counted under this category to reach this figure include: relaxing rules protecting workers’ entitlement to time off; holidays and redundancy protection; abandoning the current target for increasing the share of energy generated from renewable sources; and abandoning financial regulations such as emergency bans on “short-selling”, reporting and disclosure requirements and a cap on bankers’ bonuses. In some cases, such as maternity rights and bank capital requirements, the UK currently regulates beyond the minimum EU standards. Realising gains from deregulation in such areas would require the Government of the day to muster support for a new domestic approach. However, as already noted, a future government would undoubtedly judge that the compliance costs of some, perhaps many, EU regulations are more than offset by the benefits.

60.In evidence to the Committee, Vote Leave pointed out that what counts is not so much the cost, but the importance in principle of having control over such regulations. This is reasonable. It may be a compelling political argument. But if they wish to make a case on economic grounds, and use as they have done figures purporting to measure the economic cost of EU regulation, it is incumbent on the leave campaigns to give at least some indication of which parts of the regulatory framework they would alter or scrap, while recognising that the practical limitations would put a comprehensive exercise beyond any referendum campaign group.

61.£33.3bn, or £600m per week, is an estimate of the total cost to firms of complying with the top 100 most ‘burdensome’ EU regulations. It is not the net economic cost of regulation, nor is it a measure of the savings that would accrue to businesses as a result of Brexit. To assert this is misleading. To persist with such a claim, as both Vote Leave and Leave.eu have done, is a tendentious representation of the research on which it is based.

Claims about the impact of EU membership on GDP and household incomes

EU membership is worth £3,000 to each UK household (Britain Stronger in Europe campaign literature)

If we take as a central assumption that the UK would seek a negotiated bilateral agreement, like Canada has, the costs to Britain are clear. Based on the Treasury’s estimates, our GDP would be 6.2 per cent lower [and] families would be £4,300 worse off (Chancellor of the Exchequer)

62.Figures on the cost or benefit to households of leaving the EU are generally derived from analyses that estimate the impact on UK output (gross domestic product). The per household figure is derived by dividing impact on total output by the number of UK households (27 million).

63.Framing the impact of Brexit in these terms requires a host of assumptions to be made. Roger Bootle described the figures that emerge from such analyses as:

plausible on the basis of certain assumptions, but there are three key imponderables. The first one is what sort of trade relationship we are going to have. We simply do not know. The second is what the effect would be on investment, including foreign direct investment. We do not know. The third is the cost of current regulations imposed by the EU and the extent to which we would rescind them were we not in the EU. We do not know the answer to those twin questions either.63

He added that any results should be presented as a range, and that “to come out with a hard and fast number is verging on the intellectually dishonest”.

64.In the run-up to the referendum, a number of studies have attempted to estimate the overall effect of Brexit on UK output. These produce different results principally because they model the effects of leaving on trade and investment in different ways. They make different assumptions about the UK’s future economic relationship with the EU and the rest of the world, and about the extent to which the Government would choose to alter the regulatory framework presently set by the EU.

Figure 1: recent estimates of the long-term impact of leaving the EU on UK GDP

65.The Committee took evidence on two figures in particular. The first was a figure of £3,000, used by the Stronger In campaign, and purporting to measure the benefit of EU membership to each household. This figure is based on a CBI report, which combines the results of several cost-benefit studies of membership, from which Stronger In takes the midpoint. The second figure the Committee considered was a £4,300 cost of Brexit used by the Chancellor and others in Government. This is based on a Treasury study, published on 18 April, which models the effect of the UK’s membership of the EU on trade and foreign investment, compared to three alternative arrangements, and from this draws conclusions about the impact of Brexit on UK GDP.64

66.The CBI study, on which the £3,000 figure is based, was originally published in 201365 and updated in February 2016.66 It considers seven studies of the impact of EU membership on GDP (economic output) that the CBI deems to be ‘credible’ (only one of which, the Open Europe study, is shown in the chart above). The estimates of the impact of EU membership in these studies range from a cost of 2.5 per cent GDP to a benefit of 9.5 per cent GDP, implying a range of minus £1,700 to plus £6,500 per household. In explaining this variation, the CBI notes that “much depends on how a study specifies its counterfactual–the trading, investment and regulatory climate that would prevail after the UK exited the EU”. From these studies, the CBI derives a range for the benefits of EU membership of 4-5 per cent of GDP, or £2,700 to £3,300 per household, but no detail is provided on how the wider range identified in the underlying studies has been narrowed down. The Stronger In campaign uses the middle of this range to conclude that EU membership confers a benefit of £3,000.

67.The £4,300 figure is based on the Treasury’s assessment of the long-term economic impact of EU membership. It is underpinned by a number of assumptions, including that:

68.Mark Bowman, HM Treasury Director General, International and EU, said that the assumptions the Treasury had made were “cautious” and “neutral” but acknowledged that no sensitivity analysis had been done to determine how far the results were affected by altering these assumptions.67

69.The Treasury’s analysis uses a three-stage process to derive its results. A gravity model is used to estimate the effect of different trade relationships (including EU membership) on trade and foreign investment flows.68 The effects on trade and investment of those different relationships are then assumed to have consequences for productivity; the magnitude of that impact is estimated using the “most relevant external evidence”. Both the trade and productivity ‘shocks’ of moving to a different relationship are fed into a global economic model maintained by the NIESR to estimate their combined impact on UK GDP. The Treasury document makes clear that “as there is no precedent for an economy like the UK leaving the EU, any quantitative analysis is subject to uncertainty.” It is also worth noting that some gravity models predicted a 300% increase in UK trade if we joined the euro so they are not always reliable.

70.Some of the detailed results of the Treasury’s analysis are at odds with what might be expected. For instance, the analysis did not find that EU membership had a statistically significant effect on foreign direct investment (FDI) from countries outside the EU. Mark Bowman said that “the reasons for this is limitations with the data and a very short series of available data”, adding that “all intuition suggests that you would [expect to see an effect]”.69Both the £4,300 and £3,000 figures refer to the impact of EU membership on GDP per household. For a number of reasons, average disposable household incomes are lower than GDP per household, 70 meaning a given reduction in GDP will generally produce a smaller effect on household disposable incomes. For instance, the £4,300 (6.3 per cent) loss to GDP per household would, in proportional terms, result in a £1,600 loss in median household disposable income. However, as the Chancellor pointed out to the Committee in evidence, the GDP impact has an effect, “both on the income that the household has, but also on the public services that they consume”71.

71.Figures purporting to measure the overall impact of EU membership or Brexit on GDP and household incomes are only meaningful if the counterfactual–the assumed alternative to EU membership–is clearly spelled out (although it was based on different studies that individually had counterfactuals, the £3,000 figure used by the Stronger In campaign does not have any specific counterfactual). This is not the case for the £3,000 figure used by the Stronger In campaign, or indeed any number that combines the findings of different studies with different counterfactuals.

72.Most recent studies support remaining in the EU and find that Brexit decreases the UK’s openness to trade with the EU, which, other things being equal, causes a decline in investment and productivity. The key question is how far these negative effects are offset by: the scope for increased openness to trade with the rest of the world; productivity gains from deregulation; and lower contributions to the EU budget. The balance of recent submissions seen by the Committee is that Brexit is likely to have a net negative impact in the long term because the costs of a fall in trade exceed the gains in other areas, although the size of that impact varies considerably between different studies. Those who favour leaving the EU would argue that these studies are insufficiently optimistic or imaginative about how the UK would fare outside the EU. They could be right. In particular, the approach taken by the Treasury in its analysis appears not adequately to have considered various upsides to leaving the EU, but has modelled many of the downsides, though it is not out of line with many other independent expert analyses and it is ultimately up to those arguing to leave the EU to explain and model any possible upsides.

73.Even if the assumptions underpinning it are considered to be reasonable, the Treasury’s £4,300 figure is the result of two economic modelling exercises and a further assumption about the relationship between trade and economic productivity. Each of these three stages introduces uncertainty. Any specific numbers emerging from such an analysis should be subject to caveats and seen within the context of the forecast range presented by the Treasury. Indeed, the limitations of the Treasury’s approach are exposed by some counter-intuitive results from their analysis, buried in the appendices, such as the finding that EU membership does not act as a significant draw for inward investment from outside the EU. The Treasury is, however, clear about how the £4,300 figure is derived.

74.Presenting the figures on the impact of Brexit on a per household basis, as the Stronger In campaign has done, is likely to be misconstrued by readers, especially in the heat of a campaign, and probably has confused them. It may have left many readers thinking that the figures refer to the effect of leaving the EU on household disposable income, which they do not. The Remain campaign should have been alert to this risk, although this is a well understood hazard, and it is a generally accepted way that economists convert complex numbers into something more comprehensible. The Treasury’s analysis contains a foreword from the Chancellor suggesting that “families would be £4,300 worse off” as a result of Brexit. But this is not what the main Treasury analysis found; the average impact on household disposable incomes would be considerably smaller than this number, which refers to the impact on GDP per household. Neither Government Departments nor other spokespeople for the remain side should repeat the mistaken assertion that household disposable income would be £4,300 lower than if we were to remain in the EU; the £4,300 figure refers to GDP per household. To persist with this claim would be to misrepresent the Treasury’s own work. However, it is clear that household disposable income is not the only important measure from a household perspective–public services that are consumed are also of benefit, which would give greater justification for the GDP per household figure.

75.It is disappointing that the Treasury and the Chancellor place so much emphasis on a single figure (£4,300). Any single number that purports to encapsulate the effects of Brexit can be misunderstood, all the more so if it is used–as this number has been on occasion–unqualified by detailed explanation. Using the range around this estimate—£3,200 to £5,400— as well as a central forecast, and looking at average household income would both be useful ways of presenting the Treasury’s results.

76.What is clear from all serious studies of the economic impact of Brexit is that the UK’s future trade relationship with the rest of the EU, and with non-EU countries, matters a great deal. Chapter 5 of this Report considers this in more detail.

10 Unsurprisingly, the claims made by the leave and remain groups are inconsistent, and are often in direct contradiction. For instance, depending on whose ‘facts’ one takes to be correct, Brexit will result either in higher or lower prices, lead to either a rise or a fall in household incomes, either increase or diminish Britain’s influence on the world stage, and cause trade to either rise or fall.

11 ‘Permitted participants’ are individuals and organisations who intend to spend more than £10,000 on campaigning. Under the Political Parties, Elections and Referendums Act 2000, they must register with the Electoral Commission. The referendum period lasts from 15 April to 23 June.

12 HM Treasury, European Union finances (various edns.)

13 The rebate is calculated directly and solely by the Commission and deducted from the UK’s GNI-based contribution a year in arrears, e.g. the rebate in 2015 relates to UK payments and receipts in 2014. It is applied before the UK pays its budget contribution. To suggest the gross budget contribution is “sent”, thus implying the rebate is returned, is an over-simplification of this accounting. For reference see paragraph A10 of European Union Finances 2015 (Cm 9167).

14 HM Treasury: European Union Finances 2015: statement on the 2015 EU Budget and measures to counter fraud and financial mismanagement, December 2015

15 See, for instance, HC Deb 11 December 1985 c652-3W; HC Deb 22 February 1099 c17W; HC Deb 3 November 1989 c394W; HC Deb 23 October 2002 c352W

16 Institute for Fiscal Studies, The budget of the European Union – a guide, April 2016

17 Q1715

18 Q1748

19 http://www.voteleavetakecontrol.org/michael_gove_s_oped_for_bbc_radio_4_today_programme

20 See, for instance, QQ1158–62

21 Letter from Jonathan Athnow to Sir Andrew Dilnot CBE, 21 April 2016

22 Letter from Sir Andrew Dilnot CBE to Dominic Cummings, 10 May 2016

23 Oral evidence from Rt Hon George Osborne MP to the Treasury Committee, 17 December 2014

24 Q1157, Q1716

25 The Committee concluded in its report on the UK’s EU Budget Contributions that “On the basis of the evidence the Committee has seen, it should have been unambiguously clear to the Treasury, well in advance of ECOFIN on 7 November 2014, that the UK was entitled to a rebate on any additional budget contributions that could arise from the GNI revisions.” (Para 24)

26 Treasury Committee, The UK’s EU budget contributions, Tenth Report of Session 2014–15, 24 February 2015, Para 20

27 On the basis of the agreed Own Resources Decision, the European Commission details the method used to calculate and finance the UK correction in a working document, with a view to reflecting and implementing the decision made at European Council level. The Member States unanimously endorse the method set out in that working document, alongside the formal adoption of the Own Resources Decision.

28 Vote Leave website, ‘Leave looks like…’ [accessed 20 May 2016]

29 Q1176

30 George Eustice, speech at launch of Farmers for Britain, 23 March 2016

31 Q1325

32 Q88

33 WTO tariff database

34 Taxpayers’ Alliance, How the CAP costs families nearly £400 a year, January 2009

35 OECD, Producer and Consumer support estimates database

36 HM Treasury, European Union Finances 2015. Figures calculated by applying proportion of CAP spending in EU budget to UK’s gross budget contribution, accounting for the rebate.

37 Q1324

38 Q1325

39 Q955

40 Based on the most recent OECD estimates for price support (£48 per household) and the UK’s implied net contribution to the CAP (£100 per household) the total saving is likely to be nearer to £150 per household per year.

41 Leaflet printed in Autumn 2015 by European Parliamentary Labour Party

42 Ardy et al (2000), UK jobs dependent on the EU

43 Pain and Young (2000), Continent cut off? The macroeconomic impact of British withdrawal from the EU

44 HL Deb 28 July 2014 c273WA

45 HL1091

46 Q4

47 Q989

48 Q5

49 http://www.hertford.ox.ac.uk/frances-ogrady-brexit-the-tuc-view

50 Open Europe, Top 100 EU rules cost Britain £33.3 billion, March 2015

51 Q1137.

52 Open Europe, Still out of control? Measuring eleven years of EU regulation, June 2010, p9

53 Q1144

54 Q1137

55 Open Europe blog, Clearing up confusion over Open Europe’s view of the benefits and costs of EU regulation, 21 March 2016

56 Q1870

57 Q9

58 Q8

59 The Association of the British Pharmaceutical Industry letter to The Observer, 8 May 2016

60 Q1740

61 Mr Gove said on 19 April that “The cost of EU regulation on British companies has been estimated by the independent think tank Open Europe at about £600 million every week. Now some of those costs are incurred in a good cause”.

62 Q1754

63 Q3

64 HM Treasury analysis: the long-term economic impact of EU membership, April 2016

65 CBI, Our global future, November 2013

66 CBI, Two futures, February 2016

67 Q1921

68 Gravity modelling seeks, through econometric analysis, to isolate the specific influence of trade relationships from other factors that might affect the extent of trade and investment, such as geographical proximity, historical ties, GDP and population.

69 Q1958

70 These reasons include the fact that income is not distributed equally across households, meaning mean incomes are higher than median incomes (GDP per household is effectively a ‘mean’ figure); not all income is distributed to households (e.g. some corporate income is retained, rather than paid out in wages or distributed to shareholders); and tax and social contributions result mean that the income available for households to spend (“disposable income”) is less than their gross income. The ONS’s provisional estimate for median household disposable income in 2014/15 is £25,600; GDP per household in the same period was £67,900.

71 Q1914



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27 May 2016