#StrongerIn: 'Brexit tax' would be a pure deadweight loss says OECD

The OECD estimates that in a Brexit scenario, UK GDP per household in 2030 would be lower than the baseline by at least £3,200. Angel Gurría, Secretary-General, speaking at an event about Brexit at the London School of Economics, outlined the OECD’s  (Organisation for Economic Co-operation and Development) views on the possible economic repercussions of Brexit.

Gurría said that there was a need for objective and dispassionate information and analysis in the EU Referendum debate. He concentrated on the economic arguments in favour of remaining in the EU and said that the OECD was duty-bound to assess the possible consequences and flag the risks associated with this decision. Gurría said that an event of the scale of Brexit would have implications not only for the well-being of every British citizen, but for the people across the EU, the OECD and beyond.

We have selected excerpts from the Secretary General’s speech highlighting the near and longer-term impact of a leave vote:

The Brexit Referendum: A Taxing Question

The question posed in the referendum, “Should the United Kingdom remain a member of the European Union or leave the European Union?” is a taxing one. Taxing in the sense that its consequences are complex and permanent, not only for the UK but also for the rest of the EU and even beyond. So the responsibility borne by British voters on June 23rd is very serious indeed. It will be an act of intergenerational responsibility.

But also taxing because Brexit would, rather like a tax, hit the wellbeing and the pockets of UK citizens. Unlike most taxes, however, this one will not finance the provision of public services or close the fiscal gap. The “Brexit tax” would be a pure deadweight loss, a cost incurred with no economic benefit. And this tax would not be a one-off levy. Britons would be paying it for many years.

Near-term effects

Our analysis looks at the effects of a decision to leave the EU over two horizons. From the moment of a Brexit vote until the arrangements for “divorce” are definitively settled -- years later -- there would be heightened economic uncertainty, with damaging consequences. Brexit would lead to a sell-off of assets and a sharp rise in risk premia. Consumer confidence would fall, as would business confidence and investment, thus holding back growth.

Were the United Kingdom to leave the EU, it would have to negotiate new trading relationships. Brexit would mean that the UK would not only give up full and automatic access to the Single Market, but would also lose the benefit of trade agreements covering  53 markets that it currently enjoys and which it helped shape.

Taking into account the effects of heightened uncertainty and the less favourable trading environment while new arrangements are negotiated, we put the “Brexit tax” at some 2200 pounds per household by 2020.

Longer-term effects

Over the longer term, the supply side of the British economy would also be negatively affected by Brexit. Without full access to the Single Market, the lure of the UK, which currently receives the largest inflows of foreign direct investment in Europe, would wane. Some foreign businesses that set up here to access the European market could even decide to relocate. The same would apply to many British multinationals. The negative impact on net FDI would hit total investment, innovation and productivity and would also aggravate the adverse trade effects

Less investment, reduced flows of goods and people, costlier credit and lower exposure to ideas and skills across borders would ultimately undermine productivity and the long-run economic capacity of the UK economy. We estimate that in a Brexit scenario, GDP per household in 2030 would be lower than the baseline by at least 3200 pounds and up to 5000 pounds in the most pessimistic case.

While no one knows precisely what the costs would be, what is striking about our estimates and those produced by most others is that all the numbers under a Brexit case are negative. The best outcome under Brexit is still worse than remaining an EU member, while the worst outcomes are very bad indeed. The Brexit tax just gets bigger. We see no economic upside for the UK whatsoever.

Our conclusion is unequivocal. The UK is much stronger as a part of Europe, and Europe is much stronger with the UK as a driving force. There is no upside for the UK in Brexit. Only costs that can be avoided and advantages to be seized by remaining in Europe. No one should have to pay the Brexit tax.

For more information on the OECD report click here.

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