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Treasury warns of Brexit hit to economy

BBC News BBC News 18/04/2016 By Kamal Ahmed
Vote Leave badges © Getty Images Vote Leave badges

Britain's national income could be 6% smaller by 2030 if the UK leaves the European Union, a major report by the Treasury will say.

The 200-page report says the size of the cut in gross domestic product would be the equivalent of about £4,300 a year for every household.

Trade barriers will be higher - hitting exports - and investment will be lower both within the UK and from abroad after an EU exit, the report argues.

Vote Leave dismissed it as "erroneous".

Many believe that businesses will move at least part of their operations to the continent of Europe to be within the EU single market.

Borrowing costs for the government could also rise as investors demand higher repayments for supporting the UK's debts as the economy weakens.

Three scenarios

The report, being published by Chancellor George Osborne later, is likely to spark controversy.

I am told it has taken months to prepare and those that support Britain leaving the EU are likely to attack it as being government-sponsored "propaganda".

Vote Leave immediately dismissed the report as "just the latest erroneous pro-EU economic assessment published by the government over the last 40 years".

But Treasury sources insisted the report was a "sober assessment".

EU referendum: In depth

The UK's EU vote: All you need to know

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UK and the EU: Better off out or in?

I am told the analysis, written by government economists, looks at three scenarios in the event of a vote to leave the EU in the 23 June referendum:

First, the UK gains a "Norway-style" deal and joins the European Economic Area (EEA).

Second, the UK executes a bilateral deal with the EU similar to the one being agreed with Canada - a trade deal that has taken seven years to negotiate.

Third, the UK has a trade relationship with the EU under World Trade Organization (WTO) rules, similar to the relationship between the EU and countries like Russia and Brazil.

Sources have told me that each scenario had a strong negative impact on the economy, according to the report.

The 6% fall in GDP is described as the "middle option", not the most damaging (a WTO-style deal) and not the least damaging (an EEA deal).

Under the middle option, the UK strikes a Canada-style bilateral deal with EU partners.

Writing in The Times on Monday, the chancellor says: "Put simply‎: over many years, are you better off or worse off if we leave the EU?

"The answer is: Britain would be worse off, permanently so, and to the tune of £4,300 a year for every household.

"It is a well-established doctrine of economic thought that greater openness and interconnectedness boosts the productive potential of our economy.

"That's because being an open economy increases competition between our companies, making them more efficient in the face of consumer choice, and creates incentives for business to innovate and to adopt new technologies."

'Wrong then, wrong now'

As with all economic forecasts, there will be an element of judgement used in the report which is sure to be hotly disputed when the full contents are published later.

The MP, John Redwood, of Vote Leave, said that when it comes to European projects being promoted to the British people, the government has a poor track record.

He raised the spectre of Britain's membership of the Exchange Rate Mechanism (ERM), which pegged the value of sterling to other currencies in the EU in the 1990s.

Many argued the ERM - the forerunner of the euro - would be positive for the UK economy.

But Britain was forced out after investors correctly judged that sterling was over-valued, causing economic turmoil.

"The prime minister was one of the senior advisers working in the Treasury while John Major's government tried to keep this country in the EU's disastrous Exchange Rate Mechanism," Mr Redwood said.

"The ERM destroyed jobs and caused misery for families across the country.

"The 'remainers' were wrong then, and they are wrong now - people should not trust their judgement on the EU."

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