What's the cost?

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Exit From EU Would Hit Poor U.K. Families Hard

Victoria Bateman is a fellow and lecturer in economics at Gonville and Caius College, Cambridge University.
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With the U.K. set to vote on European Union membership in less than a month, economists, politicians and pundits are endlessly debating how an EU exit would affect the country’s economy. However, for many families, the types of figures being thrown about -- which can run to the billions of pounds -- may seem abstract and remote from their everyday lives. A report released Thursday changes all of that.

In a study for the independent National Institute of Economic and Social Research, Angus Armstrong, Katerina Lisenkova and Simon Lloyd crunched the numbers to see how Brexit would affect the welfare payments upon which the poorest British households rely. The results were shocking, suggesting that many working families would be left noticeably worse off.

To begin their study, the authors quantified the impact that leaving the European Union would have on the UK fiscal position, factoring in the effects on national income and migration, and taking into account the savings that would be made from the net contributions currently made to the EU budget.

Using the effect on national income as estimated by a wide range of studies, the authors found that if the country left the EU, by 2020 the fiscal deficit would be between 0.78 percent and 6.14 percent of gross domestic product greater than it otherwise would have been. That would rise to 1.03 to 7.12 percent of GDP greater by 2030. Using the median impact on GDP, the study found that the fiscal shortfall would be some 2.3 percent of GDP in 2020 and 2.77 percent by 2030. That’s equivalent to just over 40 percent of the welfare budget. That’s far from being a small amount, and one which would necessitate fiscal cuts.

To model the impact of such cuts, the authors begin by calculating the average annual tax credit and benefits received by a variety of representative low-income households. They found that welfare comprises around 29 percent to 73 percent of such household income, providing a baseline against which the required fiscal cuts can be judged.

The impact would be sizable. If the predicted fiscal deficit were to be corrected through welfare cuts alone, it would result in low-income households receiving between 1,861 pounds and 5,542 pounds less a year (in 2014 equivalent figures) by 2020, depending upon their personal circumstances. Even if the welfare budget were to bear only a quarter of the fiscal adjustment needed, it would still amount to a loss of some 1,146 pounds a year for a single working parent with one child.

And the adverse effect on low-income households wouldn’t end there. What the study didn’t include was the effect on all households that’s predicted to arise from reduced trade and loss of earned income, whether those households are rich or poor. Taken together, the impact of an exit from the European Union on low-income households can be expected to be severe -- particularly if the government wishes to balance its books. And if that doesn’t swing the referendum vote, nothing will.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Victoria Bateman at vb295@cam.ac.uk

To contact the editor responsible for this story:
Tracy Walsh at twalsh67@bloomberg.net