The economic cost of Brexit was laid bare on Wednesday by Britain’s official budget watchdog, which warned that leaving the EU would hit growth, exports and the public finances at a time of rising uncertainty.
Against a backdrop of coronavirus and slowing global growth, the Office for Budget Responsibility modelled for a 5.2 per cent loss of potential GDP over 15 years if a “typical” free trade agreement was struck.
The watchdog said that Britain had already lost 2 per cent of potential output since the 2016 Leave vote with a further 3.2 per cent to come, blaming rising trade friction, restrictions on migration and red tape.
The warning came as Michael Gove, cabinet office minister, revealed that the government would not publish its own economic impact assessment of the Canada-style trade deal that Britain hopes to strike with the EU.
The report also warned that Prime Minister Boris Johnson’s new migration regime, which aims to halt the inflow of low-skilled EU labour, would force up Britain’s borrowing costs by £1bn a year in 2024.
It assumed that by that year tax receipts to the exchequer from EU workers would fall by £1.5bn, while welfare spending would decline by only £500m; immigrant workers tend to be younger and make fewer demands on the state.
Meanwhile the OBR, the independent forecaster for the Treasury, said higher trade barriers would cause imports and exports to be about 15 per cent lower after 10 years. Overall productivity, a big problem in the UK, would also be lower.
The UK Treasury pointed out that the OBR had not modelled for the possible economic gains of Britain using its new-found regulatory autonomy to create a more dynamic economy. “You have to look at both sides of the equation,” a spokesman said.
Mr Gove told MPs he was “sceptical” about economic impact assessments, even though the government has just published a detailed 60-page document setting out the possible economic advantages of a trade deal with the US.
“We are taking a different approach with the EU,” Mr Gove told a House of Commons committee examining the Johnson government’s handling of post-Brexit trade negotiations.
Mr Gove confirmed that a Canada-style deal would create new friction to trade, adding there would be “economic opportunities” for people wishing to work as customs agents filling in forms to allow trade with the EU.
It was estimated by industry groups that 50,000 such staff would have to be recruited by the private sector, a figure not disputed by Mr Gove in the Commons last month.
While the government this month claimed a good US trade deal would boost gross domestic product by between 0.07 per cent and 0.16 per cent, Mr Gove said it would not be doing similar calculations with regard to a trade deal with the EU.
He said of economic impact assessments: “People assume they are predictions when they are simply forecasts and they need to be seen in the round.”
Pascal Lamy, former head of the World Trade Organization, has noted that the UK-EU trade negotiations are the first in history to start from the basis of free trade with a debate focused on which barriers to erect.
But Mr Gove insisted that regaining “sovereignty” was the pre-eminent focus of the negotiations with the EU, notably restoring the right for Britain to set its own laws.
The minister insisted that Britain would not seek to extend the transition period beyond December 2020, but revealed that there were now questions about whether the coronavirus could disrupt scheduled talks with the EU.
He said that on Wednesday he had received “indications from Belgium that there may be specific public health concerns” over the next round of talks, due to take place in London next week.
A European Commission spokesman said: “As far as I am aware the talks are still scheduled to go on.”
However, people close to the negotiations said a final decision on whether or not next week’s talks would go ahead would be taken jointly by the UK and EU teams.
Meanwhile, Mr Gove admitted there was a possibility that negotiations over a security deal “may not be concluded” by the end of the transition period and that ECJ oversight of security databases could become a “sticking point” during the talks.
