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Proposed EU deal will leave UK poorer

Theresa May's proposed deal will make the country but it's not as damaging as other alternatives. Photo: PA

Trying to work out what impact Theresa May’s Brexit deal will mean for our future prosperity is extremely tricky because it will depend to a great extent on the nature of our future trading relationship with the EU, which remains extremely vague.

The prime minister’s vision, her Chequers plan, speaks of frictionless trade but the political declaration she agreed with the EU doesn’t mention frictionless trade at all.

The document is bristling with ambition but short on detail and ultimately ambiguous and incomplete.

Beyond 2020, the trading relationship could be quite close, it may end up being quite distant.

Undaunted and armed with a set of assumptions, the civil servants across Whitehall - Treasury, DEXEU, DEFRA and BEIS - have calculated that if the prime minister were to secure precisely the trading relationship she is shooting for (as set out in her July 2018 White Paper) then the UK economy will be between 0.1 and 1.3% smaller 15 years after we leave the EU than if we remained.

Credit: EU Exit: Long-term economic analysis

As Brexit “hits” go, this one is pretty negligible.

The problem is this is a best-case scenario. It assumes Theresa May gets everything she wants in trade negotiations with the EU (which she won’t) and that there will be no change to migration arrangements (which, given that freedom of movement is set to end, is almost unthinkable).

Put more robustly, the document insists on modelling a trading relationship that the EU has made abundantly clear - it simply won’t happen.

As a flight of fancy, it has merit, but it’s of little real value and can arguably be ignored.

The document implicitly acknowledges as much, stating that Theresa May’s vision of frictionless trade is “not shared by everyone in the EU” (which seems like a powerful under-statement) so it also models a sort of “Chequers Minus” outcome (a mid-point between Chequers and a Free Trade Agreement) which includes the impact of some non-tariff barriers - like customs checks at the border, testing to ensure goods and services are compliant with rules and standards.

Such an outcome leaves UK output up to 3.9% lower by 2035. Given what we know, this feels more realistic.

The basic takeaway point is this: the government’s own analysis, unsurprisingly, shows that the deal it has struck with the EU - the withdrawal agreement and the political declaration - will leave the UK as a whole, every region of it and almost every sector of the economy, worse off.

Credit: EU Exit: Long-term economic analysis

The point the prime minister will make is that the analysis shows her Brexit deal will not leave the UK as badly off as the alternative scenarios.

The document calculates that if the UK were to join the EEA, strike a Canada-style FTA or simply leave without a deal at all (on World Trade Organisation terms) then the economic impact would graver.

No deal - it concludes - would be particularly devastating.

The analysis suggests that UK GDP would be up to 10.7% lower by 2035 compared to remaining in the EU.

Such an outcome would have rather catastrophic consequences for the public finances, leaving the chancellor needing to borrow an extra £95 billion a year.

Philip Hammond's job might be a lot harder if the UK leaves without a deal. Credit: PA

How accurate is all this? Economists are hopeless at forecasting the future in any detail.

Numbers should come with a health warning, but the basic conclusions - that each Brexit scenario leaves the UK worse off - chimes with the economic consensus.

This week alone, economists at the NIESR and The UK in a Changing Europe have attempted to model the proposed deal and come to broadly the same conclusions.

So, Project Fear? Not really, if only because the message isn’t very scary. The Whitehall analysis doesn’t predict that Brexit will bring about the end of the world, merely that our economic prospects will dim.

Outside the EU, the UK will still be a rich, developed, market economy. In future we will be richer than we are now but significantly poorer than if we stay in the EU because the economy will grow more slowly.

This shouldn’t be terribly controversial.

Theresa May will use the research to show alternatives to her deal will leave the country in a worse situation. Credit: PA

And although the prime minister is bound to use this long-term economic analysis as marketing tool to persuade MPs to back her proposed deal, some of it is not terribly helpful to her cause.

Even her version of Brexit will impact negatively on every region of the UK, just more evenly than no deal - which treats the North East, the West Midlands and Northern Ireland particularly brutally.

One of the arguments for leaving the EU is the prospect of forging new, independent trading relationships with other countries.

The analysis (ambitiously) assumes the UK strikes successful trade deals with the US, Australia, New Zealand, Brazil, Paraguay China, India and the Gulf states.

The net benefit to GDP is 0.2%. That is pretty modest to put it mildly. And controversially, the document doesn’t attempt to model the Irish backstop, one of the most divisive aspects of the Withdrawal Agreement. The idea is that such as arrangement would be temporary, if it happens at all, but there is, rather obviously, a possibility, however remote, that the UK finds itself stuck in a “single customs territory” for many years.

Where would that leave us in 2035? The civil servants decided not to guess as it’s not government policy.

That’s a cop out.

  • The Bank of England also published analysis on Wednesday when it warned that the pound would crash, inflation soar, interest rates would have to rise and Britain's growth would plummet in the event of a no deal disorderly Brexit.