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UK Economy: Post-Referendum Assessment

Volume 611: debated on Monday 23 May 2016

(Urgent Question:) To ask the Chancellor of the Exchequer to set out his latest assessment of the UK economy following the result of the EU referendum, which he has published today; and if he will make a statement.

Last month, the Treasury published a detailed report on the long-term impact of EU membership on our economy. Today, the Treasury has published a full assessment of the immediate impact of leaving the EU. It provides yet further evidence to support the Government’s firm belief that it is in Britain’s best interest to remain in the European Union. The analysis makes it clear that a vote to leave would cause a profound economic shock, creating instability and uncertainty that would only be compounded by the complex and interdependent negotiations that would follow. The central conclusion of the analysis is that the effect of this profound shock would be to push the UK into recession and lead to a sharp rise in unemployment.

Two scenarios have been modelled to provide analysis of the adverse impact on the economy: a shock, and a severe shock. In the shock scenario, a vote to leave would result in a year-long recession, a spike in inflation and a rise in unemployment. After two years, our economy would be about 3.6% smaller than if we remain a member. The value of the pound would fall by about 12%, house prices would sink by about 10% and unemployment would rise by about half a million, affecting people in all regions of the United Kingdom.

Under the severe shock scenario, the effects would be even starker, with GDP 6% lower than it would otherwise be, a fall of 15% in the value of sterling and unemployment up by more than 800,000. If negotiations with the EU were to take longer than two years to conclude, or if the outcome were to be less favourable than expected, the UK economy could be subject to further instability, which would depress UK economic prospects further. That would undermine the hard work of the British people in forging an economic recovery since the crash of 2008.

As I set out at the start, today’s paper forms part of the case that the Government are making that Britain will be stronger, safer and better off if we stay in the European Union. It is based on serious, evidence-based analysis, and I commend it to the House.

Order. In fairness to the hon. Member for Harwich and North Essex (Mr Jenkin), he is at least here, which is more than can be said for the Chancellor of the Exchequer, to whom the question was directed. It appears that, as has happened on many occasions, the Chancellor has chosen to uncork the Gauke. We will now hear from Mr Bernard Jenkin.

I reflect on the fact that obesity was rather less of a crisis for the House this afternoon than I imagined it would be, Mr Speaker.

May I first say to the Minister that we all know that these forecasts are just rubbish being produced by a Government who are now obsessed with producing propaganda to try to get their way in the vote rather than enlightening the public? Has this report been signed off by the same Professor Sir Charles Bean who has previously said that models of economic shocks are based on “gross simplifications”? Will the Minister confirm that the so-called shock scenario suggests nothing more serious than that the economy will remain the same size as it was just last year? Does that not demonstrate how Ministers have become preoccupied with dishonestly talking down Britain’s economic prospects, which is highly irresponsible?

Why do the Government not agree with the chair of the remain campaign, Lord Rose? He has been reassuring in saying:

“Nothing is going to happen if we come out of Europe in the first five years…There will be absolutely no change.”

What about my right hon. Friend the Business Secretary? He said in February last year:

“As I’ve said before, a vote to leave the EU is not something I’m afraid of. I’d embrace the opportunities such a move would create and I have no doubt that, after leaving, Britain would be able to secure trade agreements not just with the EU, but with many others too”.

What does the Minister say in response to his Conservative predecessor, my noble Friend Lord Lamont? He said this morning:

“A lot of the Government’s so-called forecast depends on business confidence, which the Government is doing its best to undermine. Economists are no better than anyone else in predicting shifts in confidence…We have nothing to fear but fear itself—which the Government is doing its best to stir up.”

The Government say that wages will fall, so why did Lord Rose tell the Treasury Committee that wages would rise if we left the EU? Is this report produced by the same Treasury that failed to foresee the banking crisis and the great recession that followed?

Why do none of the Government’s post-referendum economic assessments look at the risks of remaining in the EU? Given that in 2014 the UK contributed £10 billion net to support other, failing EU economies rather than our voters’ own priorities, what effect will the continuing collapse of the eurozone economies have on the EU budget as a whole, and particularly on the UK’s net contribution?

Does not the Government’s entire campaign reinforce the unfortunate impression that today’s political leaders will say anything they think will help them get what they want, whether it is true or not? Does the Minister not realise that my right hon. Friends the Chancellor and the Prime Minister are contributing to cynicism about politics and a sense that voters should not trust their rulers but should make their own choice and judgment, which is why they will vote leave on 23 June?

The economy is a key issue in the debate and in the choice that the British people will make on 23 June. Today’s analysis is an attempt to assist the British people in making an informed decision, based on the likely consequences of the United Kingdom leaving the European Union. Indeed, many supporters of the leave campaign have been prepared to acknowledge that leaving the EU would at the very least have a short-term impact on our economy and create a shock.

As my hon. Friend said, the analysis produced by the Treasury has been signed off by Sir Charles Bean, the former Deputy Governor of the Bank of England and a distinguished macroeconomist. He said that

“this comprehensive analysis by HM Treasury, which employs best-practice techniques, provides reasonable estimates of the likely size of the short-term impact of a vote to leave on the UK economy.”

It is not only the UK Government who are highlighting the risks of leaving the European Union; the International Monetary Fund, the OECD, the leadership of pretty much every ally we have, business groups, and many respected independent economists have all made it clear that this country would lose out from leaving the EU. However one looks at this debate, we cannot get away from that central fact.

Unusually, perhaps, I find myself agreeing with a great deal of what the Minister has said. The hon. Member for Harwich and North Essex (Mr Jenkin) tried to rubbish the report and referred to trade agreements. If we were to leave the European Union, we would have to negotiate in very short order trade relationships with the rest of the world, including more than 50 other countries. Rome was not built in a day, and there would be huge uncertainty. As he will know—and as I know from having been in business—one key concern of business is always uncertainty.

At the moment, our economy is in great shape in terms of jobs, but on almost any other indicator—productivity, balance of payments, the housing crisis, investment in infrastructure, and the national debt, which has risen by two-thirds in the past six years—the economy already has red lights flashing, as almost every economist has said. Were we to leave the European Union, that would become considerably worse. I welcome the fact that the Prime Minister and the Chancellor of the Exchequer now recognise that the large majority of the problems we faced in 2008 and onwards were caused not by a Labour Government, but by a world recession. We now need not a Tory Brexit, but an economy that is strong and will remain stronger if we stay in the European Union, but that still needs considerable changes, particularly in investment in infrastructure and skills. Our security, both economic and military, will be strengthened if we remain within the European Union. We should build on a strong economy by investing, not by leaving the European Union.

The hon. Gentleman’s point about uncertainty is right, and there is clearly uncertainty in the economy at the moment as a consequence of the referendum on Brexit. It is absolutely right that we have that referendum, but such uncertainty can resolve itself quickly on 23 June if there is a remain vote. If there is a leave vote, we clearly face at least two years of uncertainty, and quite possibly longer.

On the state of the economy—this is perhaps where the hon. Gentleman and I may differ—we have taken steps to address the long-term challenges faced by the economy, but there is no doubt that the past few years have been difficult for the British economy. We are now one of the fastest-growing major economies in the world, and our progress over the past six years would be put at risk were we to vote to leave the European Union.

I am sorry that my hon. Friend has had to come to the House to defend this disreputable, shabby and misleading report. The last Treasury report set out three scenarios, including membership of the European economic area. Why was that left out of this report, and was the permanent secretary in agreement with that major departure from normal procedure?

As I understand it, the leave campaign have made it clear that they would not want to go down the Norway route and be members of the EEA, because that would require continued contributions to the EU budget, continued compliance with EU regulations, and continuing to be signed up to free movement of labour. Given that the leave campaign is now focused almost exclusively on immigration, it would be strange to suggest that one option to take would be one that has been dismissed by the campaign to leave the European Union.

Here we go again. The Government seem determined to recycle “Project Fear”, based on Treasury projections invented on the back of its now famous neo-classical fag packet. If all the Government have to offer is fear, they do the cause of the EU no favours. There are many positive reasons for staying in the EU. Why is there no analysis of the emerging trading opportunities for business; why is there no analysis of the value of appropriate immigration to the labour market; and why is there not more respect for those of us who want to make a positive case for the EU?

I must admit that I am slightly confused by that contribution—my understanding was that the position of the Scottish National party was to favour remaining part of the European Union.

If the hon. Gentleman wants a positive case, let us put it this way: according to the shock scenario we have set out, in two years’ time, the UK economy will be 3.6% bigger if we stay in the EU than it will be if we leave. He criticises and wants to re-fight the Scottish independence referendum. May I just remind him—I suspect it will not be for the last time—that the Unionists won that referendum?

Why does the forecast leave out the very beneficial impact of spending another £10 billion, which we would get back in contributions, on our own priorities, jobs and services, which would boost the economy by 0.6%? Why does it leave out the impact of the lower interest rates and the big injection of liquidity that the Bank of England says it will grant the economy around the time of the vote?

First, the report is for the next two years. As my right hon. Friend will be aware, even if we vote to the leave the European Union, we will continue to be members of it for those two years as we negotiate our departure. During that two-year period, we would continue to make contributions to the EU budget. May I also point out what the International Monetary Fund has said? It said that, essentially, if the economy shrinks by 1% or more, any fiscal gain from ceasing to make contributions to the EU will be wiped out by lower tax receipts and greater costs. Indeed, under the central scenario set out in the report, the public finances will be £24 billion worse off as a consequence of our leaving the EU.

On interest rates, the assumption in the report is for no changes to fiscal or monetary policy. I point out to my right hon. Friend that one of the predictions in the report is that we would see the pound falling in value and inflation increasing. The Monetary Policy Committee has made it clear that it would have a difficult trade-off to try to get the economy going at a time when there would clearly be a slowdown. At the same time, the pound would be falling and inflation would be rising. In those circumstances, the safest thing to do is to make no assumptions on what monetary policy would be.

Has any assessment been made of the impact if we leave the EU on 23 June on companies such as Siemens, which invest in new industries in this country such as renewables?

The hon. Lady’s point is particularly significant because of the long-term impacts. It is very clear to any of us who engage with those who invest in the UK—businesses that make decisions on where to locate investment—that access to the single market is an important attribute for the UK. It is clear within the report that business investment would fall significantly in both the short and long term as a consequence of leaving the EU.

Leaving aside the Treasury’s notorious incompetence at forecasting, does my hon. Friend—for whom I have a lot of time, normally—not agree that this document really does plumb new depths in “Project Fear”? The Government are trying to scare the public witless. If the consequences are so dire, why on earth did the Prime Minister say on record that Britain could prosper perfectly well outside the EU? Why do the Government, through this report, say:

“as our economy transitions to a worse trading arrangement with the EU.”?

Does my hon. Friend not accept that that is utterly dishonest? The Europeans export £72 billion more to us than we export to them, so it will be in their interests to do a deal with us. And we will have a Government far more capable of negotiating than the present Government have been able to do.

First of all, may I say that I have an awful lot of time for my hon. Friend normally, but that I disagree with the points he makes? On trading arrangements, it is impossible to see how we could negotiate a trading arrangement as strong as the one we have at the moment. Access to the single market and its benefits, particularly in the context of non-tariff barriers, is very important. We would undoubtedly be a less open economy as a consequence of leaving the EU.

On the report and trying to scare people, it is worth pointing out the Treasury’s assumptions and what the Treasury is not suggesting is underlying what will happen. We are not putting forward a view that there will be an immediate financial crisis—for example, a current account crisis. We are saying that we can reach a deal within two years, which, I have to say, is ambitious. We are not saying, under the shock scenario, that there would be any economic contagion as a consequence of the UK leaving the European Union. If we wanted to put a much more dramatic, scary report together, there are a number of things we could have included in the report, but simply did not. This was a cautious, careful, small “c” conservative report, which, as I say, has been signed off by perhaps the leading authority in this area in this country.

Isn’t the premise that the Treasury spokesman is trying to convince people of the one that the economy under this Government is doing exceptionally well? In reality, of the many people who have a job, several million are on zero-hours contracts and do not know which way to turn. A hell of a lot of people are now borrowing money on loans they cannot afford and many people are going to food banks to make ends meet each week. The whole idea the Treasury announcement is trying to convey is that everything in the garden is lovely but that that will all be thrown away if we do something else. The truth is that it is based on a phony premise.

The hon. Gentleman and I differ in our assessment of the state of the UK economy, but whether he takes his view or I take mine, in neither case would our economy and our constituents benefit from pursuing a policy that would increase unemployment by 500,000 and see average wages fall by nearly £800. I hope he considers the impact that leaving the European Union would have on his constituents.

A 3.6% higher GDP, lower unemployment, lower inflation and a better exchange rate—surely these are things to celebrate? May we have the argument made that these are good things that will happen if we remain in the EU, rather than the other way around?

My hon. Friend makes a good point. Let me put it this way: the UK benefits from being an open trading nation. Membership of the single market helps us to pursue the approach of having an open trading economy. That is a very positive thing, one I hope the British people will ensure we continue to have.

Is the Minister as concerned as I am that the leave campaign dismisses as a conspiracy the views of the Treasury, the International Monetary Fund, the World Bank, the OECD, the CBI, the Bank of England, the Office for Budget Responsibility and the London School of Economics? Does he hope that in June people will vote with their hearts and their heads to stay in the EU, which, with NATO, has provided peace and prosperity for the longest period since antiquity, according to the outgoing London Mayor?

Actually, I think I have seen it—the right hon. Gentleman reminds me.

There is an overwhelming consensus on the economic benefits of membership of the EU, and I hope that the British people, when they make their assessment, be it with their hearts or their heads, carefully consider the economic consequences of their decision. It is a very important decision that will have an impact not just for a year or two—the focus of this report—but for many years ahead.

Is not the simple fact that countries trade with one another to increase their mutual prosperity and that trade with our principal trading partners is easier as a member of the EU?

Yes, that is absolutely right. Access to the single market reduces trade barriers to a level simply impossible to find outside the single market.

The institutions and individuals forecasting economic doom if we leave the EU have got it wrong time and again in the past and seem likely to do so again. The exchange rate mechanism debacle, driven by the whole Europhile spectrum; the prediction that the skies would fall in if we did not join the euro; and the complete failure to foresee the 2008 crisis coming down the road—all this shows just how hopeless they are. Does the Minister accept that a plausible opposite case—that we would be better off outside the EU—can easily be made? If not, I will happily provide him with one.

I look forward to hearing that plausible case when it is made. I look forward to an analysis, supported by leading economists, making that case, but we have not heard it yet. The hon. Gentleman and I agree about our membership of the euro—we always have done—but if we were to single out two politicians in this country perhaps more responsible than anyone else for keeping us outside the euro, I would highlight, from my party, William Hague and, from his party, Gordon Brown, both of whom believe we should remain in the EU.

“Project Fear” has reached new lows. Following the predictions of world war, we now have a forecast of recession equal to that of the great depression should we leave. Does the Minister accept that the Treasury got it absolutely wrong when it forecast an economic shock if we left the ERM and that the Treasury, the OECD, the IMF and even the Bank of England did not see the last recession coming?

The Treasury—indeed, some of the same civil servants—was involved in making the assessment of the five economic tests that kept us out of the euro. I suggest that my hon. Friend looks carefully at the report. We do not make any claims of the sort he suggests—about it being the greatest depression since the great depression of 1929—but suggest that the “shock” scenario involves the economy shrinking by 3.6% compared with the base, which is the forecast for the next few years. This is actually a very measured, conservative assessment of the impact, but none the less there would be an impact and it would result in 500,000 more people being unemployed than need be the case.

When does the Minister think that those advocating leaving the EU will level with the British public and provide their own economic assessment? Half of them think we can leave the EU and stay in the single market and the other half say, “Oh no, we won’t be part of the single market at all.” Is it not useful, therefore, that today’s analysis gives a snapshot of what a “severe shock” would look like if we were still in the single market? Will he also say a bit more about the “severe shock” analysis—falling back on the WTO membership rules—and how it could lead to 800,000 more people becoming unemployed?

The hon. Gentleman is right that under the more severe shock scenario, unemployment would increase by 800,000 and GDP would be 6% lower than it would otherwise have been. These are significant numbers. They are not equivalent to the great depression, but they are still significant numbers that would have a significant effect on his and my constituents. The hon. Gentleman raises an important point, and I hope we will get greater clarity about exactly what leaving the EU would involve. It seems to me that there is a clear trade-off: the closer a country is to membership of the EU, as for example with the European economic area model, the more it will continue to have the attributes of EU membership; the further away it is, it may have that greater freedom and flexibility, but it will clearly face a much bigger economic shock.

Inward investment is crucial to this analysis, and my constituency attracts it from China, Australia and the United States as well as from Japan. One crucial factor that has led me to believe that we are stronger in is the fact that all those countries and their businesses want to see us as part of Europe. Indeed, some of those inward investments are European headquarters. What estimate has the Treasury made of the potential relief rally in investment in this country, as and when we choose to stay in?

That is an important point. Anyone who has met international investors who are considering where to locate their European headquarters, for example, will be aware that they value and support membership of the European Union. Without that, it would clearly be harder to attract some of that inward investment. My hon. Friend also raises an important point about whether we would see a recovery. Evidence suggests that there has been a slowing down of investment due to the uncertainty about our relationship with the EU, but that—the Bank of England has supported this view, if not the IMF—there is likely to be a reasonably quick recovery if we vote to remain on 23 June, and we would see the investment coming back without a long-term detrimental impact.

The north-east is a manufacturing region, and recent analysis suggests that manufacturing is already in recession. Does the Treasury analysis go into the detail of distinctive regional impacts on areas such as the north-east of the shock or severe shock scenarios if we leave the EU? It used to be said that if America sneezes, Britain catches cold, but when Britain catches cold, regions such as the north-east get pneumonia.

The hon. Gentleman raises an important point. The increase in unemployment would affect every region of the UK, and the north-east of England would not be immune to that. Indeed, as an important exporting region, it might be particularly vulnerable. The Treasury assessment suggests that there would be something like 20,000 more unemployed people in the north-east of England as a consequence of leaving the EU.

When the Chancellor set up the Office for Budget Responsibility, he said that

“the public and the markets have completely lost confidence in government economic forecasts.”

He went on to say:

“Again and again, the temptation to fiddle the figures, to nudge up a growth forecast here or reduce a borrowing number there to make the numbers add up has proved too great… But I am the first Chancellor to remove the temptation to fiddle the figures by giving up control over the economic and fiscal forecast.”

Why does the Minister now disagree with the Chancellor, and why does the Chancellor now disagree with himself?

The remit of the Office for Budget Responsibility is set out in legislation, and it can set out forecasts only in accordance with Government policy. Today’s report, however, as I said earlier, has been signed off by Sir Charles Bean, who said that

“this comprehensive analysis by HM Treasury, which employs best-practice techniques, provides reasonable estimates of the likely size of the short-term impact of a vote to leave on the UK economy.”

We have third parties endorsing the analysis, having worked through the details.

Is it not the truth that this report simply echoes the concerns about the adverse impact of Brexit that have already been expressed by businesses in all our constituencies up and down the land? They include the ceramics industry in my area, representing manufacturing, and in recent days our biggest local private sector employer, Bet365, representing international services. Yesterday, The Sunday Times set out in detail the fundamental concerns of London’s vitally important financial and professional services industries. Does the Minister agree, therefore, that all the evidence not only suggests, but shows, that there is absolutely no economic rationale for the United Kingdom’s leaving the European Union?

The hon. Gentleman has made a good point. The analysis that we have set out in our document is consistent with what businesses up and down the country are telling us: every business survey has indicated that they are in favour of our remaining part of the European Union. It is also consistent, as we have heard, with the view of the likes of the International Monetary Fund, the OECD and the Bank of England, all of which have highlighted the risks of our leaving the EU.

Given that the independent think-tank Open Europe, which is not taking sides in the referendum debate, has said that it is a mistake to think that short-term forecasts are inevitably more accurate than long-term forecasts, can the Minister tell us, in percentage terms, what the chances are of these forecasts actually being true?

Of course I hope that none of them turns out to be true, because I hope that the hypothesis of our leaving the European Union is not realised.

It is not just the Government who are warning of the economic risks of Brexit, along with the OECD, the IMF, the World Bank, and every other mainstream economic voice in this debate. The former Mayor of London’s former economic adviser himself warned of an economic shock in the wake of Brexit. Does the Minister agree, however, that it is not Project Fear that the other side are complaining about, but Project Fact? Does he agree that the leave campaign argument would be a great deal stronger if those campaigners had produced a single shred of credible evidence to demonstrate that Britain would be better off out, when the mainstream economic opinion in this country and around the world is that our economy is stronger through our remaining in the European Union?

The hon. Gentleman is absolutely right: mainstream opinion does support the United Kingdom’s being part of the European Union. I should be fascinated to read a report similar to ours arguing the other case. We produced our long-term report last month, and I look forward to receiving a proper, detailed response to it. I think that the reason no analysis of that kind has yet been produced is that there is insufficient support for such a view, and I hope that that will become more and more apparent over the next month.

Each year we have a Budget statement and an autumn statement in which the Chancellor corrects the forecasts in the previous statement. Will the Minister assure us that, after we vote for Brexit, the Chancellor will come to the House regularly to correct the forecasts contained in this document?

This scenario has been set out by means of perfectly normal, widely used techniques, and signed off by the leading economist in the field. We have made a number of assumptions that have been cautious, and have in no way sought to exaggerate the risks. I have to say to my hon. Friend that there is a real risk to the UK economy. This is not fearmongering, or scaremongering; it is simply setting out what the risks are to the British people—matters of which the British people should be aware when they vote on 23 June.

Much as I am enjoying the Punch and Judy show in the Conservative party, may I remind the Minister that if both leave and remain continue to run negative campaigns, the most negative campaign will win? At a time when we should be engaging with the electorate of the United Kingdom, they will be turning off in their droves, and that does not serve democracy well.

What we are doing is making clear what the risks to the British people would be were we to leave the European Union. All I would say to SNP Members is that if they have a positive contribution to help the remain case, let them make it, rather than lecturing others on how to put across important factors that will, I hope, sway the British people. The British public are seeking information on the consequences of leaving the European Union, and the Government have a duty to provide that information.

It is right that we should deal with scare stories as quickly as possible, and I think that the Minister has done a very good job in that regard. Will he comment on the remarks made by the Minister for Employment in Leicester last Thursday, when she parked a very big red bus in front of the biggest temple in my constituency and announced that if we stayed in the European Union all the curry houses in Leicester would have to close down because the EU was responsible for a crisis in chefs? Will he confirm that the issuing of visas is actually a matter for the UK Government and has nothing to do with the EU? Will he also confirm that if the British people vote to stay in the EU, we will still be able to eat curry in Leicester, but if they vote to go out, Leicester City will still play in the European Champions League?

I shall try not to be drawn too much on the subjects of curry or Leicester City, although I of course congratulate Leicester City and look forward to their season, and possibly more, in the Champions League. Immigration policy for those outside the European Union is clearly a matter for this Government and for this House, and that will continue to be the case, whatever the result on 23 June.

Airbus, which employs 7,000 people across north Wales and north-west England and many thousands more elsewhere in the United Kingdom, has, with the full support of the trade unions, written to every employee of Airbus to explain to them why they should vote yes in the forthcoming referendum. Will the Minister confirm that the short-term and long-term risks outlined in today’s report are the very reason that companies such as Airbus have come off the fence to strongly support a yes vote on 23 June?

The right hon. Gentleman makes a good point. Businesses are perfectly entitled to write to their employees when they see a risk to the business that they undertake, and those consequences should be made very clear. It is striking how the concerns of individual businesses, big and small, about the consequences of leaving the European Union are consistent with some of the concerns that we have set out in the Treasury document—namely, that the UK would be poorer outside the European Union and that we are stronger, safer and better off within it.