In Defence of Liberty

Driven by data; ridden with liberty.

The Treasury Select Committee Report on EU Membership

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This Report goes through the claims made by campaign groups with precision. (Source: Treasury Select Committee)

Chaired by Andrew Tyrie MP (Conservative, Chichester), the Treasury Select Committee conducted an inquiry into the economic and financial costs of British membership of the European Union [1]. In a debate dearth of facts, the Report reminds us:

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.

This article will summarise the discussion of various claims made in the referendum campaign, elucidating what those figures really mean.

UK contributions to the EU budget

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

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

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This is the central figure in the Vote Leave campaign. It is also wrong.

The European Union collects money from the member states, broadly in relation to their economic size. It then spends that money within member states, such as payments to farmers and on rural development.

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The UK’s contribution has an amount called the rebate deducted (alternately called the “abatement” or “correction”). The Treasury has previously highlighted that: “it does not involve any transfer of money from the Commission or other member states to the Exchequer”.

The Vote Leave figure represents the gross contribution, without the rebate taken off. It is misleading to suggest that this money can be wholly re-attributed to health spending for three reasons: it ignores the rebate; it ignores the other payments being made the UK, which a post-EU British government may wish to replicate; and it ignores that other non-EU nations actively contribute towards its budget [2].

Whilst Lord Rose’s figure is broadly in line with the 2014 net contribution (without also considering payments to private entities) for each household, his speech did not highlight that it was, indeed, the net contribution.

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The Report is scathing. (Source: Treasury Select Committee)

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

EU membership directly affects consumer prices in two ways: the price of imports from outside the EU are raised by common external tariffs, and price support is given for agricultural goods from within the EU, through the Common Agricultural Policy (CAP).
Outside of the EU, Britain would be able to set its own independent tariff policies and agricultural subsidies.

The claim that imports could rise by “at least £11 billion” is underpinned by the assumption that Britain will reflect the common external tariffs onto the European Union: a mirror wall of tariffs. This presumes that Britain will fail to reach any trade agreement with the European Union, and will not pursue any unilateral tariff reductions. The cost of imports could also be influenced by productivity growth and the exchange rate. The Report labels this figure as “unhelpful and tendentious”.

The claim that the CAP raises consumer prices by £400 was calculated by the Taxpayers’ Alliance in 2009, which found the total cost of the CAP per household was £398 [3]. This is based upon the sum of UK public expenditure on the CAP and price support paid by customers (a 2006 figure was used). Updating those two components through figures published by the HM Treasury and the OECD, respectively, yields a cost of £263 per household.

The £400 figure is based upon out-of-date research. To suggest that this amount could be “saved” by Brexit means assuming two policies: the complete elimination of all tariffs on agricultural products, and the total annihilation of all agricultural subsidies. Given the Vote Leave campaign has suggested that farmers will be “paid at least as much as they get now”, this is inconsistent.

The effect of EU membership on employment

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

As the Report states:

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”, 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”. A 2014 update by the Government put the figure at 3.3 million.

Underlying these figures is 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 through exports to the EU. A PwC study also sought to estimate the number of jobs that would be lost if Britain left the European Union: 950,000 (2.9%) if Britain fails to reach a trade agreement; and 550,000 (a fall of 1.7%) if Britain did reach such an agreement. These figures represent job losses by 2020, from lower trade with the EU and lower investment.

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Trade will not reduce to zero upon exiting the European Union, so the effect on jobs will be much smaller. (Source: Full Fact)

The 3 million figure should be made clear that this is the assumed link to trade with the EU, and not on membership of the EU. It is misleading to suggest the latter. A reduction in trade may be felt through reduced hours or lower wages, rather than through job losses, as the UK has a relatively flexible labour market. It may also be compensated by faster growth in non-EU trade.

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

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This figure has also been expressed in weekly terms. (Source: BBC)

The £33.3bn figure is the most widely used estimate of the “cost” of EU regulation, and is based on Open Europe’s analysis of the ‘top 100’ most burdensome EU rules [4]. The costs are calculated by referring to the Government impact assessments, which must be produced in response to EU Directives. The potential costs arise from administrative burdens, and from practical obligations of putting the regulation into practice. The Open Europe analysis goes not seek to take account into possible benefits from regulations, such as higher product standards.

Indeed, for some forms of regulation, no money may be ‘saved’ from exiting the EU, as these policies are internationally agreed, like the Basel III Accords.

As the Report states:

Open Europe itself considers that the maximum feasible regulatory savings from Brexit are £12.8bn per ear, 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.

This figure is not the net economic cost of regulation, nor does it measure savings that could accrue to businesses as a result of Britain leaving the European Union. It is misleading to suggest this, as Vote Leave and Leave.EU have done.

The effect 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% lower [and] families would be £4,300 worse off. (George Osborne, Chancellor of the Exchequer)

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This figure represents the modeled loss to GDP per household, rather than the implied reduction in household income. (Source: BBC)

The claim that EU membership is “worth £3,000 to each UK household” is from a CBI report compiling seven “credible” studies on the impact of EU membership, with figures ranging from a cost of 2.5% in GDP to a benefit of 9.5% in GDP, suggesting a range from minus £1,700 to plus £6,500 per household. Each study varied in its counterfactual assumptions.

This range is then narrowed down, with no detail about how this narrowing was conducted, to a range of 4-5% benefit to GDP, or £2,700 to £3,300 per household. The Stronger In campaign then uses the centre of this range to suggest EU membership benefits each household by £3,000. This figure does not relate to any specific counterfactual.

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The IFS have summarised the estimated effects of leaving the European Union on British GDP by 2030. (Source: Institute for Fiscal Studies)

The Treasury’s £4,300 figure was based on three assumptions: the UK reaches a bilateral trade agreement with the EU, similar to Canada; the current trade access to non-EU countries is unchanged from its present status by 2030; and migration and regulatory policy are unchanged. The modeled loss to British GDP by 2030 is then estimated relative to a set number of households. It is a mistaken misrepresentation to say this figure is a loss of household disposable income, when it is the estimated loss of GDP per household.

As the Report says:

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.

The Treasury’s analysis also does not seek to model supposed upsides to British secession from the European Union: changes to regulatory, migration and trade policy.

With polling day less than four weeks away, this referendum has offered a salvo of figures, often with little explanation to what those figures precisely represent. Whilst the future is inherently uncertain, much more precision would be welcome in this referendum debate.

This debate represents our politics, and the ongoing choice between fantasy and reality.

References

[1] Treasury Select Committee, 2016. The economic and financial costs and benefits of the UK’s EU membership. House of Commons. Available from: http://www.publications.parliament.uk/pa/cm201617/cmselect/cmtreasy/122/122.pdf [Accessed: 31st May 2016]

[2] Masters, A., 2016. EU Membership Fees. In Defence of Liberty. Available from: https://anthonymasters.wordpress.com/2016/05/31/eu-membership-fees/ [Accessed: 31st May 2016]

[3] Taxpayers’ Alliance, 2009. How the CAP costs families nearly £400 a year. Available from: http://www.taxpayersalliance.com/how_the_cap_costs_families_nearly_400_a_year [Accessed: 31st May 2016]

[4] Open Europe, 2015. Top 100 EU rules cost Britain £33.3bn. Available from: http://openeurope.org.uk/intelligence/britain-and-the-eu/top-100-eu-rules-cost-britain-33-3bn/ [Accessed: 31st May 2016]

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This entry was posted on June 3, 2016 by in European Politics and tagged , , .
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