Government and Institutions

EU policies threaten to cost Britain £9,265 per household


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Economic Theory

Gustav Blix appointed as new director of EPICENTER

An economic analysis of a troubled relationship

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With the EU referendum set to take place before the end of 2017, the UK electorate arguably faces one of the most important decisions in a generation. In a new book launched yesterday by the Institute of Economic Affairs, Professor Patrick Minford finds that continued EU membership may cost us at least 13 per cent of GDP each year; in today’s terms, £9,265 per household.

The ever-continuing politicisation of the project and increasing influence of vested interests has led to a ratchet effect with Britain’s position ever deteriorating. With a surge in new controls coming out of Brussels, economic policy has moved further towards protectionism and intervention leading to taxpayers and businesses across the country losing out. In the book, Professor Minford explains this cost of membership will be so high because of:

  • The introduction of extensive social regulation

  • The integration of legal processes across borders in line with the ‘ever-closer union’ principle

  • Intervention in fiscal decisions of eurozone governments

  • The pursuance of aggressive policies on climate change without consideration of cost-effectiveness

More worrying than this ideological shift and undoubtedly a symptom of it, is what EU economic policy is costing the UK. Together with our net contribution to the EU of 0.5% of GDP, the following policy areas are examples of how our current relationship with the EU is directly costing the UK economy:

1. EU trade policy

The UK’s interest is in free trade with the rest of the world as well as the EU, yet the EU protects agriculture and manufacturing through commercial policies (including tariffs and the Common Agricultural Policy) at a cost to the UK economy of roughly 4 per cent of GDP – the equivalent to £2,850 per household.

Following the removal of tariff and non-tariff barriers erected by the EU, the UK would benefit from a large fall in import prices, estimated at around 10 per cent, and consumer living standards would consequently benefit.

2. EU regulations

  • Regulation coordinated by a central EU authority encourages intense lobbying. It favours dominant producers and business beneficiaries of EU protectionism who are vocal in support of the EU – particularly from sectors such as manufacturing and agriculture – which is both anti-competitive and distortionary.

  • The sheer volume of regulation coming out of the EU is an obvious source of intrusion and unnecessary cost to the UK economy – 6 per cent of GDP at the conservative end and the equivalent of £4,275 per household.

  • Regulation will also slow the rate of GDP growth by 0.5 percentage points per annum.

  • Two major areas have been identified by the author in which the impact of incessant regulation threatens to be massive: energy and finance.

3. The single market

The principle of ‘ever-closer union’ is now entrenched and this can only mean that if the UK remains within the EU, we will eventually be coerced into joining the euro – a move that would pose serious threat to the stability of the UK economy. Even now, a conservative estimate of bail-out transfers amounts to 2 per cent of GDP.

If the UK were to join the eurozone:

  • The economy would become unstable given the loss of independent monetary policy.

  • It could inflict damage on employment and output, reducing labour competitiveness.

  • Our current economic volatility would increase.

  • We could even end up contributing to bail-out funds and to other countries pensions’ deficits.

This report suggests a new UK-EU treaty is needed to preserve the existing relationships that achieve virtuous integration; but that also allow the UK to form its own regulatory structure which will make the UK economy huge savings and will best serve the City and other service sectors’ ability to compete in world financial markets.

Separating ourselves from the EU’s protectionist system, being freed from unnecessary regulations and avoiding any chance of being sucked into the single market, would increase economic welfare in the UK.

Commenting on the report Philip Booth, Academic and Research Director at the Institute of Economic Affairs, said:

 “Currently, the EU has poor and inflexible institutions for dealing with competing economic demands and the changing economic environment. It is a highly interventionist organisation, with a strong bias for ‘top-down’ regulation and a ‘socialist’ mind-set that is economically damaging.”

Notes to editors:

Media enquiries: The author has limited availability for pre-records and live interviews; other IEA spokespeople are available. For any media requests please contact Nerissa Chesterfield, Communications Officer: [email protected] or 020 7799 8920 or 07791 390 268

In March 2014 the IEA announced its Brexit prize winner – a competition which invited an individual or team who could develop the best blueprint for Britain’s future in the event of an EU referendum resulting in an ‘Out’ vote.

The IEA does not take a position or corporate view on whether or not Britain should leave the European Union.

The figures of cost per household have been calculated according to Nominal GDP of £1903 billion for 2015/16. There are 26.7 million UK households.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.