The Government’s economic analysis flatters Theresa May’s Brexit deal

The Government’s analysis of four Brexit options – Chequers, membership of the European Economic Area (EEA), no deal and no Brexit – passed our transparency tests. Because the document is transparent, it is clear that the assumptions chosen present the Prime Minister’s Chequers proposal as the best available Brexit.

Chequers looks better economically than EEA membership

Chequers envisaged leaving the EU Single Market and Customs Union but establishing a ‘facilitated customs arrangement’ to eliminate customs barriers and agreeing a ‘common rule book’ for goods to allow frictionless trade. Services access would be negotiated – but with greater barriers than now. 

EEA membership would mean both goods and services were inside the Single Market – but leave the UK outside the Customs Union, meaning additional costs for goods trade. 

The Government estimates that, compared to remaining in the EU, the Chequers proposal would only reduce GDP by 0.6% in the long run, while there would be a 1.4% hit from moving to EEA membership.

The Government’s analysis assumes that low barriers to goods trade under the Chequers proposal have a knock-on benefit for UK service providers because manufacturers purchase services. They predict that these benefits would more than outweigh the costs of reduced access to EU markets that service providers would face by being outside the Single Market.

As a result, services output is projected to be 1% lower if the UK were a member of the EEA rather than the EU, but only 0.9% lower under the Chequers proposals, despite greater non-tariff barriers to services trade in the latter case.

But the Government acknowledges that the EU has not fully bought its Chequers proposal. The report provides a sensitivity analysis, which shows what would happen if non-tariff barriers were closer to those faced under a standard free trade agreement. In that case, the report suggests that there would be a larger reduction in GDP than if the UK were an EEA member.

Loosening ties with Europe offers only limited opportunities for closer trade links with non-EU countries

One of the possible benefits of loosening ties with the EU is that it might open new opportunities for trade deals with other countries. If UK regulations are no longer tied to those in the EU, the UK may be able to strike new agreements with countries like the USA, which take a different approach to regulation. Those who favour loosening ties with the EU argue that this benefit could help to offset any additional costs that would be imposed on trade with Europe.

But the Government analysis assumes that future benefits from new free trade agreements with the rest of the world would be the same under the Chequers proposal as under a looser free trade agreement or under no deal. This means that – according to the Government’s modelling – opting for a free trade agreement offers no additional benefits that would help offset the costs of looser EU ties compared to Theresa May’s Chequers proposal.

The assumptions magnify the gap between Chequers and no deal

The Government’s analysis assumes that additional trade barriers will have a dynamic impact on the UK economy, permanently hampering productivity growth. There are good theoretical reasons for this, though empirical evidence on the exact size of this effect is imprecise. 

This has the effect of making all the impacts of moving away from EU membership bigger and magnifies the impact of the assumed additional trade barriers. That increases the gap between Chequers and the other scenarios – particularly no deal.

The Government has produced its analysis and been clear about the assumptions it makes. Not surprisingly, it has put the best possible gloss on Theresa May’s deal – the option it wants to promote. It is now up to MPs to scrutinise the analysis carefully in the run-up to the ‘meaningful vote’, when they must decide whether or not to back the Prime Minister’s deal.