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BREXIT – The only game in town

Eu referendum: Yes or No

The pound is currently experiencing a wide range of volatility in advance of the UK referendum on EU membership. It is shaping up to be a very emotive issue with a lot of heat already being generated in the debate. The time between now and the 23rd June will almost certainly not see a reduction in the temperature of the debate. After all, this is one of the biggest political decisions for UK since WW2. With this in mind it is imperative to keep a cool head and, to borrow a phrase from sporting arena, “think clearly under pressure”.

A sense of déjà vu... but this time it’s different

We’ve been here before; those heady days of spring 1975, 10cc in the charts with ‘I’m not in love’, a very hot summer ahead and a long lead in to the first UK referendum on membership of the then named ‘EEC,’ scheduled for June 2nd of that year. But just how similar is the UK today to 1975?

A casual look at some basic indicators is revealing. In 1975, just 52% of households had a telephone installed, while two thirds had a washing machine but only 37% had central heating installed. Today, the household penetration levels for telephone, washing machines and central heating are all very close to 100%.

Roughly the same proportion of households had access to a car (44%), however, whereas the proportion of two car households had trebled by 2011 from 9% to 32%. The number of people taking a foreign holiday is also particularly interesting, with about 8 million a year in 1975 while the figure was at 66 million for the 12 months to January 2016. Life expectancy for a man born in 1970 was 68.7 years and by 2010 this had reached 77.8 years.

So, on balance, households are wealthier, people are living longer and are healthier and overseas travel has increased six-fold since 1975. Notwithstanding the increased female participation rate, higher total employment rate and penetration of PCs, streaming and hand held devices, we are, in material terms, much better off – all since 1975 and the year we joined the EEC. But can any of this be attributed to our EU membership or is it just spurious correlation? The pro-EU camp might argue yes, the EU has had something to do with it while those against would suggest there is no correlation and it’s just part of normal growth. But that’s the thing with statistics, they can be interpreted in different ways to support opposing sides. There is no doubt, however, that this decision is being made against the backdrop of a vastly different Britain compared to the one in 1975.

Picked your side or floating on a sea of indecision?

Already views are becoming polarised. The ‘NO’ campaign begins with the stark annual cost to the UK of EU membership and present this as a direct cash saving to the exchequer if we leave. The more strident estimates of the ‘Leave’ campaign cite the cost to the UK’s membership of the EU as £55 million per day1. A second estimate puts the cost at £350 million per week2.

The true or effective cost is slightly different, it would seem; the UK receives a ‘rebate’ to its annual contribution. For 2015, the UK contributes paid in about £18 billion but immediately received a rebate of about £5 billion. So overall membership costs the UK about £13 billion in gross terms3.

Why ‘gross terms’? We need to make a further adjustment; the EU spends money in the UK through various funds and this will amount to about £4.5 billion for 2015. So the net cost to the UK of EU membership is around £8.5 billion per annum.

The moral of the tale here is that we have to be very clear about the figures being used. There is no doubt that £8.5 billion is an huge sum of money; indeed, it is approximately 10% of the UK’s spending (in real terms) on education for 2014/15 and those on the exit side would suggest that money saved would provide a real boost to government spending4.

However, to balance the view, it could be pointed out the UK government is currently spending about £1 billion per week in interest on its outstanding debt (currently £1.46 trillion), and on that basis it doesn’t look like such an impressive saving after all.

So this is why costs benefits analysis for membership must be done very carefully. By using the same net cost figure for UK membership of the EU, but presenting it in terms of two differing reference points, the perception of the net cost is significantly altered.

What’s the impact if we go?

The ‘in’ crowd feel the economic loss to leaving the union are substantial, but estimates are subject to wild variation. The range of official estimates include:

Open Europe estimated the effect on UK GDP of leaving the EU could potentially be in the range from -2.2% to +1.55% of GDP by 2030, but a more realistic range was between -0.8% and +0.6% of GDP5.

While a study published by the London School of Economics estimated the trade-related costs to the UK of leaving the EU as being in the range 2.2% to 9.5% of GDP6.

The CBI meanwhile has reaffirmed its view, as published in its 2013 literature review, that the net benefit arising from EU membership is somewhere in the region of 4-5% of UK GDP7.

Again, there is wide variation.

So what now?

The scale of the implications of the decision are potentially huge; it is almost impossible to estimate precisely due to the complexity of the linkages and interrelationships which have developed since we agreed to join the EEC all those years ago in 1975. Indeed as the Government itself has noted:

“There is no definitive study of the economic impact of the UK’s EU membership or the costs and benefits of withdrawal.”8

So, there you have it, no definitive study as yet exists; it is subject to negotiation, assumption and debate.

Over forty years on from 1975 and the strains of “I’m not in love”, are we about to enter a messy divorce or witness a rekindling of our relationship with the EU? Of course, no one can accurately predict the outcome. But we can at least look at the available data, present an objective viewpoint and think clearly under pressure on the way to making our decision.

That is the analytical side, but what of the emotional and behavioural reactions of people and institutions to the referendum decision? Well, that’s for another time.

  1. UKIP 29 February 2016
  3. HM Treasury European Union Finances 2015: December 2015, table 3A, p18.
  4. Institute of Fiscal Studies, Education Spending, 29 September 2015, fig 1A
  5. Open Europe, ‘What if...? The consequences, challenges and opportunities facing Britain outside the EU’, March 2015
  6. Gianmarco Ottaviano et al (2014), “Brexit or Fixit?”
  7. CBI Literature review of the impact of EU membership on the UK economy (2015)
  8. Exiting the EU: UK reform proposals, legal impact and alternatives to membership, 12 February 2016

Roy Daintith, Senior Consultant of Macroeconomics, Leadership and Professional Development at Kaplan, believes that economics is fundamentally relevant to business performance and is passionate that decision makers should understand the bigger forces shaping and driving their industry.