If Britain crashes out of the European single market for goods and services in the wake of the Brexit vote the country could be permanently poorer by 4 per cent of GDP, according to estimates from the Institute for Fiscal Studies.
In today’s money that loss equates to roughly £75bn, or £2,900 for each of the country’s 26 million households.
The nature of Britain’s future trade relations with the rest of the EU remain deeply uncertain.
Before the referendum some leading Leave campaign figures suggested Britain could retain membership of the single market while being outside the EU in the manner of Norway.
But other senior European politicians and officials have made it clear they will not accept this arrangement unless Britain continues to make a sizeable contribution to the EU budget and also continues to allow the free movement of European workers into Britain (as Norway does).
The signals from Theresa May’s government in recent weeks suggest the “Norway” option is politically impossible and that ministers are preparing to leave the single market and attempt to generate some kind of free trade agreement with the rest of the bloc.
If a free trade agreement is not agreed the UK could default to trading goods with the rest of the EU on minimal World Trade Organisation (WTO) rules.
The 6 most important issues Theresa May needs to address
The 6 most important issues Theresa May needs to address
The big one. Theresa May has spoken publicly three times since declaring her intent to stand in the Tory Leadership race, and each time she has said, ‘Brexit means Brexit.’ It sounds resolute, but it is helpful to her that Brexit is a made up word with no real meaning. She has said there will be ‘no second referendum’ and no re-entry in to the EU via the back door. But she, like the Leave campaign of which she was not a member, has pointedly not said with any precision what she thinks Brexit means
2/6 General election
This is very much one to keep off the to do list. She said last week there would be ‘no general election’ at this time of great instability. But there have already been calls for one from opposition parties. The Fixed Term Parliaments Act of 2010 makes it far more difficult to call a snap general election, a difficulty she will be in no rush to overcome. In the event of a victory for Leadsom, who was not popular with her own parliamentary colleagues, an election might have been required, but May has the overwhelming backing of the parliamentary party
Macbeth has been quoted far too much in recent weeks, but it will be up to May to decide whether, with regard to the new high speed train link between London, Birmingham, the East Midlands and the north, ‘returning were as tedious as go o’er.’ Billions have already been spent. But the £55bn it will cost, at a bare minimum, must now be considered against the grim reality of significantly diminished public finances in the short to medium term at least. It is not scheduled to be completed until 2033, by which point it is not completely unreasonable to imagine a massive, driverless car-led transport revolution having rendered it redundant
4/6 Heathrow expansion
Or indeed Gatwick expansion. Or Boris Island, though that option is seems as finished as the man himself. The decision on where to expand aviation capacity in the south east has been delayed to the point of becoming a national embarrassment. A final decision was due in autumn. Whatever is decided, there will be vast opprobrium
5/6 Trident renewal
David Cameron indicated two days ago that there will be a Commons vote on renewing Britain’s nuclear deterrent on July 18th, by which point we now know, Ms May will be Prime Minister. The Labour Party is, to put it mildly, divided on the issue. This will be an early opportunity to maximise their embarrassment, and return to Tory business as usual
6/6 Scottish Independence
Nicola Sturgeon and the SNP are in no doubt that the Brexit vote provides the opportunity for a second independence referendum, in which they can emerge victorious. The Scottish Parliament at Holyrood has the authority to call a second referendum, but Ms May and the British Parliament are by no means automatically compelled to accept the result. She could argue it was settled in 2014
But the IFS estimates that retaining single market membership could be potentially worth 4 per cent of GDP permanently to the UK economy relative to WTO terms by 2030 - equal to two full years of trend growth.
They based this figure on long-term estimates from other forecasting organisations such as the London School of Economic's Centre for Economic Performance and the National Institute for Economic and Social Research (NIESR) of the long-term negative impact of Brexit on UK growth.
The research organisation also stresses that the cost of losing membership of the single market would far outweigh the economic benefits of the UK no longer paying in a net £9bn a year into the European Union budget.
“The macroeconomic impacts of membership and access are much larger than the importance of direct budgetary issues, even relative to the UK’s full EU contribution” it said.
A report from the IFS published before the referendum said lower growth and extra borrowing resulting from the shock of a Leave vote could knock a £20bn to £40bn hole in the Government’s finances by 2020, potentially extending government austerity policies into the next decade.
This modelling exercise was also based on the post-Brexit vote (short-term) economic forecasts from NIESR.
“From an economic point of view we still face some very big choices in terms of our future relationship with the EU” said Ian Mitchell, a research associate of the IFS in the new report.
“There is all the difference in the world between ‘access to’ and ‘membership of’ the single market” he added.
The IFS said free trade agreements are designed to tackle trade tariffs, whereas the EU single market also aims to dismantle all non-tariff barriers to trade such as licensing, and was, thus, much more valuable to the UK’s exporters.
Dismantling non-tariff barriers are especially important to services firms, which make up 80 per cent of the UK's output. In 2015 39 per cent of the UK's services exports - worth £89bn - went to the rest of the EU.
Almost all economic forecasters expect the UK leaving the EU to have a long-term negative impact on the economy, with their views of the size of the loss largely varying depending on what trade arrangement substitutes for full single market membership.
One economic model – from Patrick Minford of Cardiff University – forecasts a boost to UK GDP from leaving the single market and instantly abolishing all import tariffs – but other economists have strongly criticised his model’s underlying assumptions and Minford himself admits his recommended policy would wipe out much of the UK’s manufacturing industry.Reuse content