Project Fear's got their numbers wrong

The cost of leaving the Single Market has been overstated by the Remain campaign, argues Dr Andrew Lilico. 

The Treasury has forecast that leaving the EU would cost the UK six per cent of GDP growth in a scenario where that meant leaving the Single Market. The impression given in the media is that that six per cent lost growth is a consequence of leaving the Single Market, though I've repeatedly attempted to point out that even in the Treasury's model Single Market departure is only a small portion of that cost. The OECD has similarly forecast that the UK would lose growth in GDP of five per cent.

Many in the media have noted the range of "acronym organisations" (IMF, OECD, HMT, NIESR) that have said leaving the Single Market would create a large cost to GDP. But acronym organisations produce estimates of the impact of the Single Market on GDP even when there isn't a referendum on. And the message of those studies has been quite different.

Here's one organisation that ought to know a bit about the Single Market: the European Commission. A couple of years back, to celebrate 20 years of the Single Market, the European Commission published a review. As one might expect, that review included an estimate of how much the Single Market has added to EU GDP. We can see it there, on page 13. What's the answer? 2.13 per cent of GDP. Not six per cent of GDP. 2.13 per cent.

There are a few things to say about that 2.13 per cent number. You may notice that it refers to 2008, not 2012 (the 20th anniversary). Why's that? Because the 2012 number would have been lower, given the way the Great Recession and Eurozone crisis damaged trade and capital flows between EU Member States. Let's not worry about that for now though – let's give them the two per cent number.

Next, you'll notice that that is an EU average, not the number for the UK. The number for the UK would almost certainly have been lower, for two key reasons. First, the UK trades less with other EU member states than the EU average. Second, for the period up to 2008, Single Market regulations tended to change UK regulations less than they changed regulations elsewhere in the EU, because the UK was very influential upon how regulations were designed and implemented. So the UK experienced less deregulation, market liberalisation and so on than the EU average, and hence is likely to have gained less. Again, let's ignore this and take the two per cent figure as a decent estimate of the UK's gains.

Third, that is the figure for what the EU/UK gained through the Single Market programme. That is not the same as what the UK would lose by leaving the Single Market. We would be very unlikely to lose all that we have gained, because many of the gains were one-off, involving things like improving the way our markets functioned or increasing productivity.

Let's set all that aside, though, and grant for now that the Single Market has added 2 per cent to UK GDP, using that as our rough estimate for what leaving it might cost us.

Another thing the various acronym studies of HMT, OECD, etc. assumed is that leaving the EU would create no additional scope for new trade deals. Many commentators have scoffed at the idea that trade deals with the rest of the world could remotely compensate for the losses of being outside the Single Market.

Once again, conveniently enough, the European Commission had, before the Brexit referendum dominated everything, produced estimates of the potential value of new trade deals. It estimated the value of the top seven trade deals the EU would like to do – none of which currently seems likely to happen with the EU. What was that value? 2 per cent of GDP.

The UK probably wouldn't do all those deals by 2030. Just the ones with the US, Japan, and Canada, which sum to about 1 per cent of GDP. But we would do other deals not on that list, with countries such as Australia. Remain campaigners talk about the trade deals with "53 countries" the EU has, whilst conveniently forgetting to mention that most of those 53 countries are places such as Jersey, Guernsey, the Faroe Islands, Andorra, San Marino and the like. The EU really has just three extant trade deals of any significance: those with Mexico, South Africa and Korea. There is enormous scope for the UK to do additional trade deals with the rest of the world, and the European Commission's own analysis suggests such deals could comfortably compensate for the 2 per cent or so GDP losses associated with not being in the Single Market.

To summarise: the European Commission says being in the Single Market adds 2 per cent to GDP. If we were outside, we could do additional trade deals with the rest of the world, beyond the three significant countries with which the EU currently has deals: Mexico, South Africa and Korea. The European Commission's own analysis suggests that just seven of those deals would be worth 2 per cent of GDP, and the three the UK would be most likely to get that the EU would not would be worth 1 per cent of GDP. And all of that is before one even touches upon other gains from being outside the EU, such as allowing the EU to work better and grow faster, improving UK regulation and repatriating the UK's net contribution.

Since the Single Market adds 2 per cent to GDP and leaving it would allow us to pursue trade deals worth more than one per cent of GDP and perhaps much more, how can the Treasury seriously expect anyone to believe leaving the Single Market will cost six per cent of GDP?

This article was first published on Dr Andrew Lilico's blog and can be read here.