Photographer: Jason Alden/Bloomberg

Brexit Would Cause Yearlong Recession, U.K. Treasury Says

  • Government aims to persuade undecided voters risk is too high
  • Cameron says referendum matters more than a general election

The U.K. faces a yearlong recession if it leaves the European Union, according to a Treasury forecast issued as the government tries to persuade undecided voters that the risks of a so-called Brexit are too great.

QuickTake Will Britain Leave the EU?

The Treasury’s assessment of the short-term impacts of a vote to quit the bloc, to be published Monday morning, offers two possibilities. Under its “shock scenario,” which it describes as “cautious,” Britain’s gross domestic product in 2018 would be 3.6 percentage points lower than the current forecast, which is for a 4.3 percent increase. Inflation would accelerate sharply and house prices would stall. Under the “severe shock” scenario, GDP would be 6 percentage points lower than otherwise, and house prices would fall about 10 percent from current levels.

“With exactly one month to go to the referendum, the British people must ask themselves this question: Can we knowingly vote for a recession?” Chancellor of the Exchequer George Osborne will say in a speech in southern England today, according to his office. “Does Britain really want this DIY recession?”

The chancellor will be flanked by Prime Minister David Cameron. With the Conservative Party split down the middle and both men’s careers on the line, they are determined to emphasize the dangers of a vote to leave in the June 23 referendum. In an illustration of the party divisions, Cameron’s former strategist, Steve Hilton, publicly supported the “Leave” campaign for the first time, calling the EU “arrogant” and “unaccountable.”

“A decision to leave the EU is not without risk, but I believe it is the ideal and idealistic choice for our times,” Hilton wrote in the Daily Mail newspaper. “Taking back power from arrogant, unaccountable, hubristic elites and putting it where it belongs. In people’s hands.”

‘Hit Jobs’

Cameron said on Sunday the referendum matters more than a general election.

“The Europe vote is more important, because if you don’t like the government, you can always get rid of them in five years’ time,” Cameron told ITV. “If we make this decision to leave the EU, to get out of the single market and hit our economy and hit jobs, it would be very, very difficult, if not impossible, to reverse that decision.”

Extracts of the Treasury analysis already published suggest the pound would fall 12 percent after a vote to leave, pushing up annual household shopping bills by 220 pounds ($320) over the same period. In a BBC Radio 4 interview on Monday, Business Secretary Sajid Javid said the analysis also shows more than 500,000 jobs would be lost.

“It will make our country poorer, and we have to understand that if that’s how the country is going to vote,” Javid said. “It’s up to the ‘Leave’ campaign to show what that positive scenario is.”

Those comments ignited the ire of former Work and Pensions Secretary Iain Duncan Smith, who resigned from the government after a disagreement with Osborne over the annual budget. He told BBC Radio he was “deeply disappointed” in Javid because he previously “privately said how much he wanted the U.K. to leave the European Union.”

‘Unfair and Biased’

“They have today chosen only to produce the downside,” Duncan Smith said. “That makes this report categorically unfair and biased."

The warning of recession echoes that given by Bank of England Governor Mark Carney earlier this month. Carney will testify to Parliament’s Treasury Committee on the central bank’s inflation report on Tuesday. The Treasury said its latest analysis was reviewed by former BOE Deputy Governor Charlie Bean.

The emphasis on risk is aimed at pushing undecided voters -- who polls indicate make up as much as a quarter of the electorate -- into the “Remain” camp. Recent polling has suggested that the “Leave” side is losing ground. An Opinium poll published May 21 found “Remain” on 44 percent and “Leave”’ on 40 percent. The poll was conducted online, something that has tended to produce better results for “Leave.” Gambling website Betfair put the chance of Brexit at 22 percent. The Number Cruncher Politics site has the probability at about 18 percent, the lowest it’s been.

Retailers’ Warnings

The Treasury’s short-term forecast follows a long-term one last month which warned of decades of pain in the event of a Brexit.

“Prices would be higher, unemployment would be higher, growth would be affected, we would be less well off,” Cameron said on Sunday. “You really have to ask yourself, is it worth taking this risk?”

The prime minister’s comments add to a plethora of personal economic arguments presented by the pro-EU camp in recent days. Former chief executive officers of retailers Tesco Plc, J Sainsbury Plc, Marks & Spencer Group Plc and B&Q Plc said in the Mail on Sunday newspaper that Brexit would cause a spike in prices and job losses, while Osborne said Saturday that a vote to leave the EU could also lead to higher mortgage rates.

While the warnings appear to be having an effect, they are angering lawmakers and ministers in Cameron’s Conservative Party who support “Leave.” They complain he is campaigning too aggressively and using the machinery of government to do so.

Armed Forces Minister Penny Mordaunt said on the BBC’s “Andrew Marr Show” on Sunday that the public is “annoyed” at “scaremongering and all the false reports that have been coming from the Remain side.”

Turkey Debate

Mordaunt’s appearance also illustrated the risks for Tories as they take a different side in the debate than their prime minister. Explaining the “Leave” side’s argument that EU membership carries a danger of increased immigration because the bloc is likely to expand to include Turkey, she denied that Britain had the power to veto such a move.

Less than an hour later, she was bluntly contradicted by the prime minister.

“Let me be clear,” Cameron said. “Britain and every other country in the European Union has a veto on another country joining. That is a fact. The fact that the Leave campaign are getting things as straightforward as this wrong, I think, should call into question their whole judgment in making the bigger argument about leaving the EU.”

Michael Bloomberg, the founder and majority owner of Bloomberg LP, the parent of Bloomberg News, has publicly supported the campaign to keep the U.K. in the EU.

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