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Independent Review of HM Treasury’s two EU referendum models finds grossly exaggerated impact

Professor David Blake has conducted an independent review of the Treasury’s two reports on the economic consequences of a vote to leave the European Union in the Referendum on 23rd June. He comments:

by City Press Office (General enquiries)

The Treasury’s reports1 predict that each household in the UK will be worse off (in terms of a lower gross domestic product) by £4,300 or more by 2030. My analysis, Measurement without Theory: On the extraordinary abuse of economic models in the EU Referendum debate, finds that this prediction is grossly exaggerated for two main reasons:

  • The Treasury assumes that the government will not respond to what it calls the extreme shock of leaving the EU and so will stand by while the economy dives into a recession with GDP falling by up to six per cent over the next two years – this is equivalent to losing 50 per cent of our trade with the EU, even though we will still be in the Single Market during this period. This is not credible, and had the government responded in the same way during the global financial crisis, the consequences for the economy would have been catastrophic.
  • It assumes that the World’s fifth largest economy – the UK – will be unable to negotiate more favourable trading arrangements than currently exist with either the EU or the rest of the World (which has three times the GDP of the EU, nine times its population and is growing much faster than the stagnant EU economy), and, as a result, GDP will be lower by up to 7.5 per cent p.a. by 2030.2 The specific economic models used by the Treasury are centred on the EU, but had the Treasury used a different model, centred on the rest of the World, it might well have found that the UK would be better off leaving the EU.3

Most of the other economic models that have examined the economic consequences of Brexit – and which have been entirely ignored by the Treasury – find that it will make little difference to the UK’s economy whether the UK stays in or leaves the EU. This is consistent both with Greenland’s experience of leaving the EU in 1985 and with Ireland’s experience of ending currency union with the UK in 1979 – neither of which is considered in the Treasury reports.

Voters should consider the non-economic factors – such as the democratic deficit and the inability of the EU to reform itself – as equally important as the economic issues that the Treasury reports discuss. By focussing only on economic issues, the Treasury’s two reports present a highly prejudiced case for remaining in the EU.

No economic model by itself can be used to determine whether a decision by the UK electorate to leave the EU will make people better off or worse off. This is because a whole range of factors in addition to economic ones – political, legal, financial, trading, diplomatic, security, military, social, environmental, demographic – will determine whether our individual welfare improves or reduces after leaving. This is because the EU is an institution that embraces all these factors. In addition, when looking across all the people living in the UK, there will be both gainers and losers. This is an inevitable consequence of any change.

Please note: The views expressed here are those of Professor Blake and do not represent those of City University.


[1] https://www.gov.uk/government/publications/hm-treasury-analysis-the-long-term-economic-impact-of-eu-membership-and-the-alternatives

https://www.gov.uk/government/publications/hm-treasury-analysis-the-immediate-economic-impact-of-leaving-the-eu

[2] This prediction comes from combining the outcome from a short-term model (called a vector autoregressive model) which is used for the first two years after leaving with a long-term model (called a gravity model) which is used to project GDP between 2018 and 2030 (see figure 1, p10 and figure 4, p55 of the report).

[3] These models predict that the UK would actually be better off, not only staying in the EU, but actually joining the Euro – although the Treasury does not acknowledge this. Similar models used at the time of the Scottish Referendum predicted that Scotland’s trade with the rest of the UK would fall by a highly implausible 80% if she left the UK.

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