Brexit could plunge Britain into an instant recession, the Prime Minister and the Chancellor have said in the starkest economic warning yet of the consequences of Britain leaving the European Union.
According to a new analysis by the Treasury the recession – defined as at least two consecutive quarters of negative growth – would last for a year and leave the level of UK GDP 3.6 per cent lower in two years' time than otherwise if Britons vote to leave the 28-member bloc on 23 June.
With exactly one month to go to the referendum, the British people must ask themselves this question: can we knowingly vote for a recession? Does Britain really want this DIY recession? Because that’s what the evidence shows we’ll get if we vote to leave the EU” said George Osborne.
The Treasury’s headline figures are based on the assumption the UK manages to negotiate a bilateral trade agreement with the EU in the wake of Brexit, described as a "shock scenario". But it said that if Britain could not do such a deal and was faced with tariffs for exporting to the bloc the consequences would be still more damaging. Under this "severe shock" GDP could be up to 6 per cent lower by 2018.
In addition the Treasury said unemployment would be 520,000 higher, wages 2.8 per cent lower and house prices 10 per cent down. In a severe shock joblessness would be 820,000 higher, wages down by 4 per cent and house prices 18 per cent lower.
The Leave campaign dismissed the warning as further scaremongering.
“This Treasury document is not an honest assessment but a deeply biased view of the future and it should not be believed by anyone” said the former Cabinet minister Iain Duncan Smith
The Treasury said its economic analysis had been reviewed by Professor Sir Charles Bean, a former Deputy Governor of the Bank of England, who was “acting in a personal capacity”.
“While there are inevitably many uncertainties – including the prospective trading regime with the EU – this comprehensive analysis by HM Treasury, which employs best-practice techniques, provides reasonable estimates of the likely size of the short-term impact of a vote to leave on the UK economy” said Sir Charles.
The Governor of the Bank of England, Mark Carney, said earlier this month that a “technical recession” for the UK was possible in the event of Brexit. The managing director of the International Monetary Fund, Christine Lagarde, concurred the following day. The IMF is expected to release its full evaluation of the likely economic impact of Brexit in the week before the referendum vote.
Last month the Treasury published a long-term analysis of the economic impact of Brexit. This said that GDP by 2030 was likely to be around 6 per cent smaller than otherwise, equivalent to around £4,300 per head of population.
There is a clear consensus among independent economists that Brexit would be harmful to the UK economy. 196 economists signed a letter to The Times earlier this month saying that leaving the UK “would entail significant long-term costs” and “a sizeable risk of a short-term shock to confidence”.
The Treasury's document today says: "A vote to leave would cause an immediate and profound economic shock creating instability and uncertainty which would be compounded by the complex and interdependent negotiations that would follow".
Professor Patrick Minford of the Economists for Brexit group said the Treasury analysis did not take into account the beneficial impact of policies that could follow leaving the EU such as unilaterally lifting all UK import tariffs.
“At the heart of the Treasury calculations lies a serious attempt to deceive the British people. It assumes that under Brexit we continue with the hated Common Agricultural Policy and the retention of EU trade barriers: between them these currently raise the UK cost of living by up to 16 per cent" he said.
But Professor Minford did concede that Brexit would create "volatility...in the very short term".
The Treasury's estimate of the short-term impact is slightly more severe than the calculation made by the National Institute for Economic and Social Research (Niesr) think tank earlier this month. The NIESR rough equivalent for the "shock" scenario produced a GDP decline of 2 per cent, versus the Treasury's 3.6 per cent fall. Niesr said that the difference was due to a stronger assumption from the Treasury about the increase in uncertainty that Brexit would create.
"Qualitatively it's the same story. The underlying narrative is the same" said Jack Meaning, research fellow at Niesr.
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