UK economy takes center stage in Brexit debate

By Michael Sercan Daventry

LONDON

The effects of Brexit on the U.K. economy have emerged as a key battleground as the EU membership referendum campaign enters its final week.

Remain supporters say Britain’s economy will suffer heavily if voters choose on June 23 to end the country’s 43-year-old membership of the European Union.

The Leave camp dismisses this, arguing the U.K. pays hundreds of millions of pounds in EU membership fees that could be reinvested in the domestic economy after Brexit.

Both sides accuse the other of fabricating facts and attempting to frighten voters.

Chorus of caution

To underline their argument, Remain campaigners, including U.K. Prime Minister David Cameron, point to a roll call of economists and financial leaders who have warned of the risks of Brexit.

The list includes Mark Carney, governor of the Bank of England – in effect, the U.K.’s central bank – who said it was “without question” that some global conglomerates would relocate their headquarters away from London if the referendum produces a vote to leave.

Economic growth would fall and unemployment would rise as the pound sterling depreciates further against major currencies, the Bank’s Monetary Policy Committee added.

Carney and the committee were backed by the International Monetary Fund, whose managing director Christine Lagarde warned in May that Brexit would “precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output”.

Think-tanks including the Organisation for Economic Co-operation and Development (OECD), firms like PricewaterhouseCoopers and bodies connected to Oxford University and the London School of Economics are also among those cautioning against Brexit in recent weeks.

‘Talking Britain down’

But for supporters of Vote Leave, the official body supporting Britain’s exit, the Remain camp is talking Britain down by issuing threats.

Vote Leave chief executive Matthew Elliott said last month: “These threats lack credibility - the pound has actually been stable in recent months as the possibility of Brexit has increased.

“The truth is that leaving the EU will liberate the U.K. and allow us to do trade deals with countries like India and China – helping our economy to grow.”

Elliott’s campaign argues there is no evidence to show sterling would depreciate. It said a vote to leave would allow Britain to reduce its current account deficit by £12.3 billion ($17.4 billion) and reclaim more than £350 million (nearly $500 million) paid every week in EU membership fees.

The disputed millions

That £350 million figure appears prominently on Vote Leave campaign posters and leaflets. Campaign personalities including Boris Johnson, the former Mayor of London, and Justice Secretary Michael Gove have used it in recent television appearances.

But the figure itself is controversial. The Remain campaign argues it does not account for the money that comes back to the U.K. as European Union investments in local projects.

The figure also ignores the substantial rebate Britain receives on its membership fees, leading Vote Leave’s economic predictions to be described by the Institute for Fiscal Studies (IFS), a tax and public spending think-tank, as “clearly absurd”.

“Ignoring the rebate is clearly inappropriate. It is equivalent to suggesting that were the U.K. to leave the EU and not make any financial contribution to the EU’s budget then remaining EU members would continue to pay the rebate to the U.K.,” the IFS said last month.

“That is clearly absurd.”

Turbulent economy

The IFS accepted leaving the EU could free up about £8 billion ($11.3 billion) a year in public funds, but that the shock of a Brexit could mean Britain would not feel the benefit.

IFS director Paul Johnson said: “Leaving the EU would most likely increase borrowing by between £20 and £40 billion in 2019–20.

“Getting to budget balance from there, as the government desires, would require an additional year or two of austerity at current rates of spending cuts. Or we could live with higher borrowing and debt.

“These are real costs, but they are costs we could choose to bear if it was felt that they – and other costs – were outweighed by advantages from Brexit in other realms”.

With a little over a week remaining until voting day, investors have been shaken by opinion polls showing a clear lead for Vote Leave.

On Tuesday afternoon, the pound sterling had reached a two-month low against the U.S. dollar, while the FTSE 100 share index had dropped below 6,000 points by Thursday afternoon. It was the lowest level of trading seen since the referendum was announced four months ago.