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Even Brexit backers can’t make the sums work for UK to quit EU

Will the lights go out? Eric Fischer, CC BY

Even Brexit backers can’t make the sums work for UK to quit EU

The costs to Britain of a potential departure from the EU are much argued over, but when it comes to the crunch, even the most likely scenarios put forward by the pro-Brexit camp show the country could be worse off.

A recent example that has received an extraordinary amount of attention are the finalists for the London-based Institute of Economic Affairs’ €100,000 Brexit Prize. Despite all the coverage and praise received by the winning essay, one fundamental point remains: the winning essay does not support Brexit, it actually supports “Britin”.

I am not saying the essay makes a clumsy case or that it finds Brexit benefits to be small, ambiguous, or difficult to calculate; I am saying that the winning essay of the 2014 Brexit Prize, which is supposed to find the best way for the UK to leave the EU, actually makes the case for the UK to remain in the EU.

How can this be? The winning essay enumerates the steps Brexit would entail and assesses the value of choosing Brexit. Will the UK be richer post-EU? Brexit’s “most likely scenario” is to “boost the UK economy by £1.3 billion.” Unsurprisingly, the £1.3 billion figure has taken most of the limelight, but there are problems with how that figure is arrived at, through an estimated “total impact on GDP of +0.1%”.

The pound (or euro) in your pocket

But what about the impact of Brexit in terms of GDP per person? Will the average person be poorer or will she be richer if the UK leaves the EU? The answer requires (at least) the we understand population growth. The Office of National Statistics estimates population growth to be 0.8% per year (until 2027). The growth rate of GDP per person can be expressed as the growth rate of GDP minus the growth rate of population. The total impact of Brexit on GDP, according to the winning essay is +0.1% and the growth rate of population is +0.8%. Hence the total impact of Brexit on a per person basis according to the “most likely scenario” of the 2014 Brexit prize winner is -0.7%. In short, the impact of Brexit is to make the average person in the UK poorer (not richer).

Yet there are many more intriguing aspects of the Brexit arithmetic. If we want to make an informed decision, we need to know as precisely as possible the costs as well as the benefits from EU membership. The largest components on the cost side are likely to be losses from trade (of goods and services, including finance) and from foreign direct investment. Immigration and regulation are the smaller and more controversial issues respectively (if we can not agree on how many laws come from Brussels, should we really venture into saying how much they cost us?)

We still know too little about these key components of trade, finance and foreign investment, and dubious assumptions will surely not improve what we know. There is one example of such dubious assumptions from the winning essay. It asks: if the UK leaves the EU, what is the maximum percentage of foreign direct investment that currently goes to Britain that will go elsewhere? Answer: 35%. How was this calculated?

A recent survey by the Confederation of British Industry finds that 35% of the firms would decrease their own business investment in the case of an EU exit… It is therefore assumed that… (foreign direct investment) decreases by 35%.

So, the maximum percentage of such investment the UK is expected to lose if it leaves the EU is arbitrarily assumed to equal the share of British firms in a CBI survey that said they would decrease their own investment if the UK leaves the EU. Really?

Of estimates and sausages

But even if one uncritically accepts these estimates put forward by those promoting the benefits of Brexit, it is prudent to compare them to those cited by research which seems to come from the other camp. Previous research estimates that UK’s GDP would be 2.25% lower as a consequence of EU withdrawal. Recent research estimates the benefits from EU membership to be of the order of 12% in GDP per person terms. Such estimates suggest that the benefits from Brexit, once properly estimated, will likely have a hard time exceeding those from “Britin”.

The level of the debate about EU membership should strive to equal the importance of the issue. It should make full use of the available evidence, recognise gaps in knowledge and the limitations of existing estimates. An age-old joke says that there are two things you are better off not watching in the making: sausages and econometric estimates. Our challenge is to deliver econometric estimates about Britain’s membership of the EU that are not only palatable, but which are scientific, rigorous, replicable and transparent. Have we seen much of this in the debate so far? Not a sausage.