EU Referendum

Brexit: adding it up


What should have been one of last week's biggest stories was the attempt by senior figures in our hugely successful car industry to explain to the Commons business committee the consequences of Theresa May's decision that we will leave the EU's Single Market to become what the EU classifies as a "third country".

So writes Booker in his truncated column. He notes that, last year our car industry, on which 770,000 jobs directly and indirectly depend, exported a record 1.6 million cars, representing 12 percent of our total exports. Of those 57 percent go to the EU, worth £40 billion.

What the MPs were told was that every single one of those cars can only be built and exported under an EU "type approval" which, when we become a "third country", will automatically lapse.

Replacing those necessary "type approvals" with a UK equivalent that would be recognised world-wide would be a very long and complex process: meaning that much of our car industry will grind to a halt. Even though this was first explained to MPs back in March, yet again its astonishing significance seemed wholly to pass them by.

But then the car industry is only one of several major industries which are going to be affected by Mrs May's unthinking decision to take the UK out of the Single Market. But it is not only the Prime Minister who seems oblivious to the consequences of this decision.

Most of our politicians seem equally oblivious, even when not dissimilar problems will face our chemicals and pharmaceuticals industries, with exports to the EU currently totalling £45 billion a year. And then there is civil aviation, with exports worth £28 billion, and food worth £12 billion.

All this, says Booker, is what we are putting at risk, with or without a trade deal, by Mrs May's decision that we will shut ourselves out not just from the EU's single market but also from the wider European Economic Area.

What is really terrifying is that it has hardly yet begun to sink in that, entirely by our own choice, we could be sleepwalking towards the greatest disaster to hit our economy since World War Two.

Adding up the value of these industries, in terms of export to EU, the potential losses to the economy could be as much as £125 billion. These five sectors, therefore, amount to more than 50 percent of our EU exports.

Then, there are other potential losses. There is little dispute that UK airlines will be badly affected and we have identified the specific problem of Third Country Operator approvals which will prevent British-registered airlines flying into Europe. Exact losses are difficult to quantify but it has been estimated that spending by foreign tourists who arrived by air supported a £19.6 billion gross value added contribution to UK GDP.

Other enterprises that may be damaged include Formula 1 racing, horseracing and bloodstock exports, and a wide range of manufacturing operation covering such things as ATEX equipment (equipment and protective systems intended for use in potentially explosive atmospheres), passenger lifts and cosmetics.

There is also the financial services sector to take into account. An estimate referred to in a recent House of Lords select committee report suggests that £40–50 billion of UK financial services revenues relate to the EU, with the trade surplus for financial services for 2014 at £19 billion. As to the proportionate impact, it is difficult to estimate, but it would be fair to assert that £40-50 billion is at risk, potentially costing the UK government £20 billion in lost revenue.

The crucial point, common to all these enterprises, is that the impacts will arises irrespective of whether we have a deal or not. It cannot be emphasised enough that the damage arises from leaving the Single Market – something that seems to escape even the high and the mighty.

For instance, in the Observer today, we see the views of Sir Martin Donnelly, the chief civil servant in Liam Fox's Department for International Trade until earlier this year.

He states that leaving the Single Market in favour of negotiating a long-winded, Canada-style trade deal will "damage UK competitiveness and leave us with less investment, lower living standards and long queues at the border". He thus warns merely that leaving the EU's legal structures will leave Britain "more protected, more regulated and poorer".

Nevertheless, Donnelly helpfully spells out that the benefits Britain enjoys from its single market membership cannot be replicated in a trade deal and argues that Britain could buy time through temporary membership of the EEA. Doing so, he says, will allow more time to "see if we can find a realistic alternative that meets our economic needs".

This is very much in line with Sir Ivan Rogers, who warns that there is a "radical difference" between the free trade arrangement that Britain would be offered and membership of the customs union and the single market that it was giving up.

David Davis is also getting some hammer, this time from another of those anonymous "senior EU officials". He dismisses the Brexit Secretary's assertion during his speech in Berlin that the UK should enjoy a better deal than Norway, due to its comparative size.

This official also notes that suggestions from British politicians that the UK could remodel its economy to be more like Singapore "had cut through to EU leaders". They are saying: "But we are a big country so we can get something better than Norway".

His answer is that it is the other way round. Norway is a fisheries and oil economy. They are not a competitor. The UK is a competitor. Particularly when it comes to safeguards against various types of dumping. Threats have been made and safeguards will have to be introduced.

And, it seems, business is beginning to wake up, although the lobbying is over the effects of leaving the EU with no deal. The tourism industry has privately warned that 25,000 jobs held by Britons working in the industry in Europe, as well as £1 billion in tax revenue, are at risk.

However, if we look in crude GDP terms, things begin to look extremely bleak. Our calculations suggest that the possible effect of leaving the Single Market is a hit to the GDP in the order of £140 billion - or £190 billion if financial services are included. This is the cumulative effect of the export losses.

But, through direct and indirect taxation, the government takes 40 percent of GDP which suggests that a fall of that magnitude in export earnings translates into a loss of government revenue of nearly £80 billion a year. That figure would probably not stand up, but it does point up that damage to the UK economy has a direct impact on tax income. And to that, one must add, potentially, an increase of between £15-20 billion in welfare payments to cover an estimated 2.5 million unemployed.

On the basis of these rough and ready figures, there is a case to make that leaving the Single Market could cost us far more that the supposed savings from cutting EU contributions. It certainly outstrips the so-called "divorce bill" payments that are in dispute, and which are deemed to be the price of market access. Here, any gains from holding back payments could turn out to illusory.

Quite evidently, though, none of this has been thought through, with the Brexit debate focused almost entirely on the costs of payments to the EU. There has been nothing like the same emphasis on the potential costs of various policy options.  Adding up, it seems, is so very hard to do.