The Treasury analysis of the cost of leaving the EU, on which the Prime Minister bases his claim that leaving will “trash the economy”, is “fatally flawed because it relies on indefensible assumptions and statistical manipulation” according to Peter Lilley MP. This reinforces the devastating critique of the Treasury’s abuse of economic models published by Professor Blake*1 and destroys the foundation on which George Osborne’s bogus budget is based.
“The effect of these indefensible errors is to exaggerate the impact of leaving on our trade with the EU by a factor of between 3 and 10 – even if their basic model is correct,” Peter Lilley said. “At the same time, as has already been pointed out by independent observers, the Treasury arbitrarily fed into their analysis the assumption that all the potential benefits of leaving are zero*2 . So they grossly overstated the costs and ignored the benefits. A more objective analysis – even based on the Treasury model which has been seriously criticised – would very probably show that the benefits of Brexit exceed any costs.”
The statistical flaws identified by Peter Lilley were embedded in statistical appendices to the 200-page document entitled HM Treasury Analysis: the Long Term Impact of EU Membership and the Alternatives which the Treasury published to give credence to claims that the economy would grow by 5% to 9% less by 2030 if the UK leaves the EU and trades on WTO terms.
Although the errors were well hidden in the document, once unearthed they are simple enough for anyone to understand. In brief:
- HMT claim to have calculated the “effect of EU membership” on the UK’s trade with other members which, they say, results in our trade with the rest of the EU being 76% higher than if we had not joined;
- in fact, their model calculates the average overall member states of the effect of membership of the EU on trade with other members. They nonetheless apply that average to the UK even though the impact of the UK joining was much less than for most other member states who removed more substantial tariffs and other barriers. (For instance the original six removed the very high post-war tariffs and controls, also the ex-Communist countries left Comecon and lost the USSR as their major market);
- the Treasury failed to examine (or, even worse, examined but failed to report on) Britain’s actual trading performance since entering the EU. This would have confirmed that our trade with other EU countries grew only 30% faster than our trade with similar non-EU countries and that was largely because of North Sea Oil coming on stream, not EU membership. There is no sign of the 76% increase predicted by their model!
- and, most egregious of all, the Treasury assumes that if we leave the EU without a free trade agreement it will have the same effect as re-imposing the average trade barriers prevailing in the past, not those which would now apply to the UK, which are far lower. The tariffs on trade between the UK and Common Market countries before we joined were several times higher than those that would apply currently*3 but we would not go back to pre-1973 tariffs.
For all those reasons the study seriously exaggerates the potential costs of leaving – probably three to ten-fold.
The errors exposed by Peter Lilley reinforce the devastating critique of the Treasury models published by Professor Blake.
“These errors fatally invalidate the government’s case that leaving the UK would lead to significantly slower growth. But, as a former Treasury Minister I am sad to say that they also undermine the reputation of the Treasury for impartiality and statistical competence.” Peter Lilley added. “After the referendum campaign it will be important for Parliament to investigate the role the Treasury was induced to play in the campaign, how these specific errors were overlooked. as well as a range of equally important errors in the second half of the Treasury calculation. I have written to Andrew Tyrie, the Chair of the Treasury Select Committee, asking him to instigate such an inquiry post referendum.”
HMT do not appear to have inspected the actual data for UK trade pre- and post- entering the Common Market. The charts below*4 show that Britain’s trade*5 with the other 10 EU members post 1973 did outstrip its trade with 8 similar developed countries for a while (though this coincided with rapid development of North Sea Oil most of which went to the EU), then grew in line. Even so, the cumulative extra growth with EU member states over 40 years was only 30%, not 76%.
1. Measurement without Theory: on the extraordinary abuse of economic models in the EU Referendum debate. Cass Business School, City university London 9th June 2016.
2. Postulated benefits include: the UK could negotiate Free Trade Agreements as Switzerland has done; that we could reduce or remove some or all of our external tariffs as New Zealand has done; we could reduce the burden of EU regulation (as the EU itself is always promising but failing to do); or we could make our regulation more flexible and easily amended if not bound by EU Directives; we could escape Eurozone bailouts; we could reduce the scale of immigration and be more selective on skills etc.; and we could spend the EU net contribution domestically reducing our current account deficit, boosting our GDP and improving public services. The HMT assumes none of those would occur! Andrew Lilico 18/04/2016 www.andrewlilico.com
3.The Treasury assumes that the UK would maintain the same level of tariffs as currently exist around the whole EU. Economists for Brexit and others have suggested the UK should at least remove those tariffs that apply to goods the UK does not produce and eventually move to completely free trade.
4.Charts taken from Myth and Paradox of the Single Market by Michael Burrage, Civitas 2016.
5. The charts, which were the only ones readily to hand, show UK exports whereas HMT is analysing trade i.e. the sum of exports plus imports.