The public finances and the Brexit vote

The moment is almost upon us. 23 June is a very important date for Britain’s future, and for those at the top of politics. If the bookmakers are wrong and the vote is in favour of Brexit, we will soon have to get used to a new prime minister and chancellor. I can think of one obvious candidate for 10 Downing Street, though it is rather harder to come up with a clear successor to George Osborne.

 

The big names in the tax business have been treading carefully during the referendum campaign, keen not to be nabbed by the Electoral Commission for openly campaigning, and keen not to upset clients who favour Brexit. None of the ‘big four’ signed round-robin letters supporting continued EU membership. They have not ducked out of the referendum completely, however. When the CBI started the ball rolling with its analysis of the adverse economic consequences of leaving the EU, the work was done for it by PwC, which was happy to say so.

 

EY’s annual ‘attractiveness’ survey, which looks at inward investment, was carefully scrutinised by the firm’s lawyers to make sure it did not take sides. The underlying message, however, was pretty clear. Nearly four in five foreign investors (79%) said that being inside the single market was an important driver of Britain’s attractiveness as a location. Meanwhile, probably because of Brexit worries, only 23% of investors said they intended to invest in the UK over the next year, the lowest figure since 2010.

 

Anyway, let me shift this final pre-referendum piece on to the more familiar territory of the public finances. Tax Journal readers are better equipped than most to detect when a line is being spun, but even some of the most astute will have felt their heads spinning as a result of some of the numbers being batted across the Leave/Remain net. Let me try to help out.

 

One of Vote Leave’s central claims, emblazoned all over their campaign bus, is that Britain ‘sends’ £350m a week to Brussels, and that we could spend that money better ourselves if we choose to exit the EU, particularly on the National Health Service. The figure of £350m a week is, I hope people are aware, inaccurate. It has provoked the angriest response I can remember so far on any issue from Sir Andrew Dilnot, chair of the UK Statistics Authority, who described its use as ‘misleading’, saying that it ‘undermines trust in official statistics’. 

 

Before any money is ‘sent’ to Brussels, the rebate negotiated by Margaret Thatcher more than 30 years ago is deducted, knocking the payment down to around £275m a week. Around £115m a week of that comes back to the UK, mainly in farm support and regional structural assistance, reducing the net payment to £160m a week. A further sum in the region of £50m comes back to the UK private sector, reducing it to £110m.

 

The payment is therefore not £350m. However, the gross bill for EU membership, £14.3bn a year, sounds like a decent amount of money; and so does the net amount, after taking into account farm and regional support, of nearly £8.5bn annually. Could that money be used for other purposes? The answer, according to the Institute for Fiscal Studies (IFS) (and, it should be said, pretty much every other assessment), is a fairly definite no.

 

The reason for this is straightforward. There is more than one moving part at work in this analysis. Yes, there would be a saving on Britain’s EU budget contribution, but Brexit would damage the public finances by reducing economic growth. The Treasury, in its short term assessment, said that public borrowing in 2017/18 would be between £25bn and £39bn higher under a Brexit scenario, not least because unemployment would be between 500,000 and 820,000 higher. 

 

The IFS took a middle line on the economic damage from Brexit, taking an average of all the predictions. It concluded that, even without the EU budget contribution, the budget deficit at the end of the decade would be between £20bn and £40bn higher than under a Remain scenario. There is no pot of gold to spend on the National Health Service or anything else. In fact, the pressure would be to cut spending further and raise taxes.

 

The response of the official Vote Leave campaign to all of this says much about how they have approached the debate. They claim that the IFS is a propaganda arm of the European Commission, which is about as mad as it gets. They would have been better off saying that an overshoot of between £20bn and £40bn is nothing compared with the overshoots regularly chalked up by George Osborne since 2010. Or, that it is roughly on a par with the amount of extra borrowing Ed Miliband and Ed Balls aimed for when presenting their plans for balancing the current budget, but not achieving an overall surplus, at the May 2015 general election. Anyway, we will soon know whether all this analysis was for a purpose, or merely a tool to warn voters against a leap in the dark.

 

We will also soon know whether the public finances are doing as well as they should be. On 24 May, the Office for National Statistics released the first numbers for public borrowing for the new fiscal year. They showed a disappointingly small fall in borrowing in April compared with a year earlier, £7.2bn against £7.5bn. They also showed that borrowing in 2015/16 was £76bn, a £3.8bn overshoot compared with the Office for Budget Responsibility (OBR) March forecast.

 

The OBR, in response, pointed to the tendency for these figures to be revised lower over time. The slightly disappointing figures for April may fit in with other evidence that referendum uncertainty has hit revenues because of its wider impact on the economy. As I say, we will soon know. Either the world will be very different on 24 June or it will be more or less business as usual.