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Lessons of 1776

Lessons of 1776

Flawed reliance on Treasury's so-called facts

by Brian Reading in London

Fri 13 May 2016

George Osborne, the UK chancellor of the exchequer, has claimed as a 'fact' that British departure from the European Union would cost British families precisely £4,300 each by 2030. Osborne is wrong. There are no facts about the future, just good or bad forecasts. His are based on extremely debatable methodology. Anyone relying on the Treasury's so-called facts to guide them in their voting on 23 June will go astray. The prediction by Mark Carney, the Bank of England governor, of a possible recession if the UK quits is similarly faulty.

Osborne's claim to have presented 'rigorous and objective' analysis to reach 'robust' conclusions is exaggerated. The Treasury, in its 200-page analysis of Britain's EU membership published on 18 April, cherry-picked its arguments against Brexit. It ignored reasonable contrary opinions, without demolishing unreasonable ones. It claimed needles in haystacks cannot be there because they have not been found. Even single paragraphs contain contradictions (for example: EU regulations are beneficial and the UK has succeeded in reducing EU regulations.) The Treasury study is demonstrably biased to support government policy.

One big problem is that the analysis explores no more than the consequences of Brexit on British exports and inward foreign direct investment. Properly defined terms of reference would have stated that the report excludes the impact on British imports and outward FDI, as well as the impact on the rest of the EU.

There are several other defects. The report asserts, 'There is no precedent for the UK leaving the EU.' Yet it cites alternative precedents. It says, 'No other country has been able to negotiate any other sort of deal and it would not be in the EU's interests to agree one.' No evidence is produced to support where EU interests in negotiating a deal might lie.

The UK is the world's fifth largest economy, the fifth largest importer and the largest destination for EU exports, well ahead of the US, Japan and China. The Treasury claims that the EU, because of its size, has a stronger hand in trade negotiations than the UK acting alone. By the same token the UK has a strong hand in its EU exit.

Brexit opponents frequently argue that UK exports to the EU are a larger share of UK GDP than imports from the UK are as a share of EU GDP. That is always true when comparing any country's export/GDP share to a region or the rest of the world's import share from it. British EU exports must exactly equal EU imports from Britain. Those affected by trade gains and losses do not dismiss them on account of such regional GDP share differences.

The EU is negotiating the Transatlantic Trade and Investment Partnership with the US. The Treasury claims it is a done deal that brings the EU considerable advantages; following Brexit, the UK would be excluded and this would be a cost. None of this is proven. For example, the majority of German multinational companies, but only a minority of German consumers, are in favour. It will be difficult, if not impossible, for Germany to ratify such a deal.

The Treasury argues, correctly, that 'openness' to trade promotes productivity, GDP and income growth. These are the advantages Adam Smith first described in 1776, the year of the American declaration of independence. The 13 states were fully aware of the consequences for trade and capital flows from Britain. They preferred making their own laws rather than obeying those made in London. This decision did not impair their long-term prosperity. The colonies rejected British appeasement offers. They faced severe short-term costs, including the Revolutionary war that they won.

No one today would argue that the American states would have been better off remaining UK colonies. In a few years, long after the flawed Treasury report has faded from memory, no one will claim that the UK would have been more prosperous by staying in the EU.

Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a member of OMFIF's Advisory Board. This is No.56 in the series – the 100th article will appear on 23 June.

OMFIF's series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We are assuring a balance between many different points of view, in line with OMFIF's overall neutral stance on the issue.

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