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Will Brexit really cost ‘£4,300 per household’?

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The UK Treasury (HMT) published a report on 18th April 2016 entitled ‘the long-term economic impact of EU membership and the alternatives’. Since then the headline figure that Brexit would cost each household £4,300 has been widely publicised by those campaigning to remain.

The claim is based on an overly simple calculation that uses the Treasury’s predicted impact of Brexit on UK GDP for 2030 and divides it by the number of UK households in 2016. Yet this methodology is highly questionable for several reasons, casting serious doubt on the plausibility of such a figure:

Presenting an increase as a loss

The central problem with the £4300 figure is that it is being presented as a drop in current household income, instead of a slightly lower level of growth by 2030. As George Osborne claimed recently:

“Britain would be permanently poorer if we left the European Union, to the tune of £4,300 for every household in the county. That’s a fact everyone should think about as they consider how to vote.”

Yet, HMT’s report acknowledges that regardless of the exit arrangement there will be growth in GDP by 2030 – ranging from 29% to 37%. It calculated the difference between these increases in GDP and came up with the claim that the UK is 7.8% of GDP better off inside the EU than with a negotiated bilateral agreement, before dividing this figure per household. A smaller increase in growth than there otherwise might have been, is hardly the same as a ‘permanent’ loss.

Problems with the ‘per household’ calculation

Another issue is that GDP per household is not in any way representative of the impact on actual household income.

The two measures are entirely unrelated. In 2015 GDP per household was around £66,000.[1] In contrast 2015 household disposable income was, on average, £25,700[2], less than half of GDP per household that year. That means, assuming GDP and household income grows at a similar rate, the cost of leaving to the average household would be around £1500 a year. About a third of the amount the treasury report claims.

Having taken such a dubious measure, the Treasury fails even to use it consistently, taking their growth figure for 2030 but dividing it by the number of households in 2016. The report models no change in the current level of migration and assumes the population will continue to grow, so one should assume that the number of households will also continue to grow significantly in the 15 years (from 27.7 million to 31.2 million). A review in the Spectator found that, by using government projections on household numbers, the figure would be a reduction in GDP of £3,700 per household.

This same review points out that ‘if disposable grows in line with GDP then [the report would] be arguing that there would be a £5,400 rise outside the EU by 2030 instead of £6,880 inside the EU’ a reduction of £1,480, which could be alleviated by a simple tax cut.

Indeed the figure would be lower still if one used the more balanced estimates of economic growth following a Brexit from reports by PWC and Open Europe, as we discuss here.

Conclusion: While there may be some merit in attempting to give tangible figures in the debate, the £4300 figure is fundamentally misleading and cannot be taken as a credible assessment of the economic impact of Brexit.

  •  Justin Protts and Tom Adamson-Green – EU Research Fellows

 


Notes 

[1]GDP from https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/abmi

Number of Households from http://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/families/bulletins/familiesandhouseholds/2015-11-05

[2] https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2015

 

Photo: Crown Copyright Credit: Georgina Coupe