Prime minister Theresa May’s Brexit plan will make people worse off than if the UK remained in the EU, the government’s own assessment of the agreement concluded on Wednesday.
Officials did not model an exact representation of the deal agreed with Brussels, but the published variant closest to the deal, including restrictions on migration and some new trade frictions, suggests a 3.9 per cent hit to national income in the long term compared with staying in the EU.
In a move that will raise sharp criticism of the assessment, the government did not model the backstop, which will leave Great Britain in a bare bones customs arrangement and Northern Ireland in a much closer arrangement, if the UK and EU do not strike a separate deal in the years to come.
The 3.9 per cent hit to the economy would represent a roughly £100bn annual blow in 15 years’ time in today’s prices, equivalent to about an annual £1,100 per person reduction in living standards compared with an assumption that the UK stayed in the bloc.
The assessment, produced by a cross Whitehall team of economists, is not an economic forecast but an attempt to examine the effects of increased frictions to trade and regulatory changes after Brexit.
It suggested that a Canada-style free trade deal would be significantly more costly, producing a 6.7 per cent hit to the economy, and leaving the EU with no deal would be the worst scenario, with a 9.7 per cent hit to the economy.
Philip Hammond, UK chancellor, put a brave face on the figures on Wednesday, but he accepted that the results suggested Brexit would make people poorer.
“If you look at this purely from the economic point of view, there will be a cost to leaving the EU because there will be impediments to trade,” Mr Hammond told the BBC’s Today programme.
The pound reached a session high as investors absorbed the report, although it remained within its established trading range between $1.27 and just over $1.28, rising 0.4 per cent to $1.2795.
The government produced multiple estimates, mostly based on the Chequers White Paper, which, the analysis accepted, was not necessarily likely to be achieved. If the UK secured frictionless trade at borders and kept free movement, the economic hit would only be 0.6 per cent of gross domestic product, it concluded, and a 2.5 per cent hit if it was able to retain frictionless trade and net restrict migration of European citizens to zero.
Seeking to minimise the impact of the government’s own assessment of the deal, Mr Hammond said “the economy will continue to grow so this is a very modest impact on the overall size of the economy”.
In what officials termed a “sensitivity scenario”, which included frictions at borders, the projected 3.9 per cent hit to the economy would be caused by trade barriers hitting goods and services, with a large component coming from the reduction in migration.
The paper was dismissive of the value of free trade deals to be struck with other countries outside the EU. There would be a long term gain of less than 0.1 per cent of GDP if deals were struck with the US, China, Australia, New Zealand, the Gulf countries and most of East Asia.
