Thoughts on the EU Referendum

Referendums framed as binary choices can appear as if they offer us easy solutions to complex problem, and it's human nature to grasp for those. In an imperfect, uncertain and annoyingly complicated world, it’s tempting to take comfort in the apparent simplicity of these questions: Yes or No? Leave or Remain?

Those arguing in favour of change encourage us to invest our emotional energies behind the hope that one vote can transform our lives; those arguing for the status quo have to defend an imperfect reality and – at the risk of being accused of scaremongering - highlight the risks of change.

The choices are so stark that any debates quickly become polarised; nuance and reason are abandoned in favour of hyperbole and assertion. As a direct result, after each referendum just under half the electorate will be left nursing a grievance against the majority. The losers will sit in a funk, bitterly resenting the lost vote while taking comfort from the fact that whatever problems we now face, they didn’t vote for this.

If the status quo wins, the losers dream of a parallel universe in which their side won, a parallel universe where they’d be luxuriating in a land of milk and honey (presumably as opposed to a land of milk quotas¹ and honey directives).

We still have this EU referendum hangover to look forward to; first there’s the small matter of the vote itself to consider.

I haven't been able to invest anything like as much time as I did during the indyref into investigating, analysing and understanding the EUref arguments, but given the two campaigns have followed remarkably similar paths so far, it seems sensible to consider how some of those arguments compare and contrast. I'll start with the more easily quantified arguments.


Cost of Membership

The first obvious thing to look at is the direct cash transfers that come from being a member of each union. This is the simple arithmetical view, before taking account of the (inevitably harder to quantify) broader economic and social implications.

For Scotland in the UK, under the current fiscal framework we effectively pool and share – that is we assume a population share of the deficit (and hence the national debt) even if we’re responsible for a smaller or larger than our population share of that deficit. As a result, Scotland currently benefits from being in the UK by over £9bn pa. or an amount equivalent to more than £1,700 per person per year².

Of course there are other arguments to be made for independence, but on the narrow cash transfer question the arithmetic is clear and the Yes campaign were never able to find anything like enough credible "upsides of independence" to offset the prospect of losing this fiscal transfer.

We can similarly look at the net funds transferred to the EU by the UK. This is our membership fee less our rebate less EU spending on the UK (mainly in the form of payments to farmers and poorer regions). In 2014-15 this figure worked out at £8.5bn and it’s expected to average £9bn over the next 5 years (although it's forecast to spike up to £11.2bn next year)³.

The Leave campaign keeps being quite rightly chastised for using the misleading figure of £350m a week (the gross figure before our rebate and before EU payments made to the UK). The true net figure is in fact nearer £180m a week⁴.

[These figures have been extensively covered by Full Fact and the UK Statistics Authority]

To summarise: looking over a 10 year actual/forecast period it's reasonable to take a figure of £9bn or about £150 per person per year as the UK's net cost of EU membership.

So here’s the first big difference; Scotland leaving the UK would suffer a direct and immediate cash cost because we’d lose the fiscal transfer from the rest of the UK; the UK leaving the EU would see a direct and immediate cash benefit because we’d no longer be contributing to the EU.

The question can fairly be framed as follows: is a membership fee of £9bn or £150 per person per year worth it for the (net) benefits the UK gets from being in the EU?

Given that on the same basis Scots are currently paid over £1,700 per person per year to be members of the UK, it’s obvious that it should be relatively easier to make an economic argument for the UK to leave the EU than it was to make one for Scotland to leave the UK.

Logically, you vote Remain in the EUref if you believe the UK benefits from EU membership by more than this £150 per person per year membership cost; you'd have voted Yes in the indyref only if you believed that the hidden costs of Scotland's membership of the UK are greater than £1,700 per person per year. This is not to dismiss the intangible or hard to quantify factors (we'll come on to those), it's merely to explain what one logically needs to believe if you were to state the question in raw financial terms.

---

As an aside: Scotland receives a greater than our population share of EU spending, at least in part because the Highlands & Islands qualify as a “transition region”⁵. It’s hard to get robust figures for this but the most recent SPICe analysis I can find suggests the net cost to Scotland is in fact roughly half our per capita share of the UK’s cost, so nearer £75 per person pa. Of course were Scotland to succeed in becoming a stand-alone member of the EU our membership terms would likely be very different from those we enjoy as part of the UK – it’s hard to imagine we would retain our share of the £5.5bn rebate or be able to secure the same opt-outs that the UK enjoys - but what this analysis does show is that Scotland as a region of the EU benefits from proportionately more EU spending than the rest of the UK. It’s entirely logical (on this basis alone) that Scots should be more positively disposed toward the EU than the English.

---

I’ve often heard this £9bn / £150 per head figure dismissed (mainly by wealthy business people it has to be said) as not material in the context of the UK economy - "it's little more than a rounding error". I don't think it can be dismissed quite as easily as that.

To help understand the significance of £9bn, it's equivalent to

• 0.5% of our total GDP
• 1.2% of our total public expenditure
• 7.0 % of the total value of our exports to the EU (i.e. equivalent to a pretty high average import tariff being applied by the EU) 

So even if you strip out the misleading Leave campaign’s hyperbole, the direct net cost of EU membership is undeniably a material figure.

Currency

This one’s quick and easy - there’s no currency problem for the UK leaving the EU because we have our own currency, whereas one of the big problems for Scotland leaving the UK was of course working out what currency we’d be using and under what conditions.

There are different arguments about what might happen to the relative strength of Sterling because of the wider economic impacts of Brexit (which we will come to) but there is no equivalent of the indyref currency problem.

So based on just the “membership cost” and "what currency we'd use" issues it’s going to be objectively far easier to argue for Leave in the EUref than it was to argue for a Yes vote in the Indyref. The fact that the SNP are against Leave but were Yes for Independence suggests they are managing to handle some pretty impressive levels of cognitive dissonance.


Trade & The Economy

In both referendums a lot was said about the risks to an economy of breaking from an existing union.

The obvious difference between the Leave and Yes economic cases is that the Yes campaign had to persuade us of an enormous upside from breaking out of the UK; the Leave campaign (in terms of the narrow economic case) only has to argue that there isn't much downside compared to the £9bn pa annual net membership cost we'd save.

Let's look at what Nicola Sturgeon said during the ITV Referendum Debate (see from 1:30:00):

"ask yourselves the question: is it better for jobs and the economy if we're trading in a market of 500 million people rather than 65 million people?"

She makes a reasonable point. Of course during the indyref we were asking whether it would be better for jobs and the economy if we were trading in a market of 65 million people rather than 5 million people - and she argued it wouldn't be!

But we know not to expect consistency from our First Minister. She was after all standing alongside Tory Amber Rudd as she said this and - lest we forget - this is the same Nicola Sturgeon who suggested during the recent Scottish election leaders' debate that Scottish Labour leader Kezia Dugdale should “apologise” for “standing arm-in-arm with the Tories” during the independence referendum. Still, at least she was doing the right thing now and I for one applaud her for it.

She was wrong to dismiss the downsides of creating trade borders during the indyref; she's right to recognise them now. The sixty-four thousand dollar question (well, OK, the £9bn question) is this: how much is being in that single market worth?

Spoiler alert: I'm not even going to attempt to answer that question myself. Instead I'll refer here to the work done by the highly respected Institute for Fiscal Studies in their report Brexit and the UK's finances. I choose this report partly because I've come to trust the IFS and partly because it summarises the work of others as well as their own analysis. The IFS say;

"there is an overwhelming consensus among those who have made estimates of the consequences of Brexit for national income that it would reduce national income in both the short and long runs. The economic reasons for this – increased uncertainty, higher costs of trade and reduced FDI (Foreign Direct Investment) – are clear. The only significant exception to this consensus is ‘Economists for Brexit’".

The "Cost of Membership" we've looked at above is referred to by the IFS as the "mechanical effect" of leaving the EU. They use a figure of £8bn pa rather than the £9bn we've shown. I think this is as a result of using a different period for the average and/or possibly that their figures were before the £11.1bn spike next year had been forecast - this difference doesn't materially affect the conclusion as we'll see.

The IFS's conclusion is strikingly clear and easy to understand in the context of the numbers we've already seen:

"It would not, however, take a substantial effect on future national income to offset this immediate £8 billion gain to the public finances. A fall in national income of just 0.6% relative to what it would otherwise have been would be enough. There is a wide range of estimates of both the short- and long-run effects of a Brexit on national income. The vast majority suggest a negative effect substantially in excess of 0.6% of national income."

Now. The future is uncertain and economists are fallible and often contradict each other, but that doesn't mean we should ignore what economists say. When the weather forecast says it's going to rain, it's sensible to take a jacket even though weather forecasters are often wrong. Knowing the future is uncertain doesn't absolve us from the responsibility to not act recklessly. The fact that there's such an overwhelming consensus that the net economic effect of leaving the EU would be negative is highly significant - only a fool would dismiss it.

But how significant? Again, here's what the IFS have to say:

Looking at the short term, and in particular out to 2019–20, which is the year in which we are supposed to reach budget surplus, forecasts for the effect of Brexit range from a reduction in GDP of 6% to an estimate from ‘Economists for Brexit’ of an increase in GDP of 1.6% – though the latter is an outlier in having a positive effect. The estimates of NIESR for a GDP hit of between 2.1% and 3.5% probably provide a good central range for the likely impact on GDP in 2019. Including the direct benefits of reduced budget contributions, these would lead to the public finances being between about £20 billion and £40 billion less healthy than in a scenario in which we did not leave the EU. Of course, the effects could be different from that and NIESR is explicit that most risk is on the downside – i.e. the hit to GDP is more likely to be bigger than in the pessimistic scenario than it is to be smaller than in the optimistic scenario

So there's considerable consensus that the short-term economic impact of a Leave vote would be negative, and if we want to scale that a figure of £20 - 40bn a year is realistic. To save my typing too many numbers let's take £30bn as the figure to try and get our heads around. If the cost of a Leave vote is £30bn a year, that's equivalent to;

• 1.6% of GDP
• 4.0% of total public spending
• £460 a year for every man woman and child in the UK
• £577m a week

So if you're influenced by the Leave camp's "the EU costs us £350m a week" you might want to contemplate the counter argument that - even after saving that figure (or at least the true figure of £180m a week) - leaving the EU is expected to net cost us over £500m per week.

The case isn't as bad as that for Scotland leaving the UK (because there is a definite "membership fee" saving before the broader economic considerations are taken into account), but there is a strong consensus that we would be materially worse off out than in.

*****

This is a good point to take pause. If one accepts the analysis above, we can assume there will be a significant (short-term at least) economic downside of a Leave vote. If you consider all the other arguments are net neutral or positive in favour of being in the EU then of course you vote Remain; if you're voting Leave it's because you feel able to dismiss the economic analysis or you believe these other factors outweigh the narrowly defined economic downside. I'm too tired to try and be comprehensive so forgive me if what follows is little more than a stream of consciousness

***

Immigration

The idea that EU immigrants come here to milk our benefits system is simply not supported by the facts. Again to quote the IFS:

The OECD notes that EU migrants in the UK have relatively high employment rates and make a positive net contribution to the public finances 

The economic effect of likely changes in migration as a result of leaving the EU is already factored in to the IFS (et al) calculations above - it's "in the numbers" already.

If your concern is that immigrants drive down wages, I encourage you to read the work of Jonathon Portes of the NIESR who concluded here;

Immigration may have some, small, negative impact on wages for some low-paid workers.  But  the idea that immigration is the main or even a moderately important driver of low pay is simply not supported by the available evidence

The sad truth is that we seek bogey-men to blame in times of austerity and rational economic assessments don't make headlines. Overall immigration may be required to fuel our economic growth, immigrants may on average be net contributors to our economy - but a Daily Express headline like bid to stop £55m benefits for migrants' children living abroad is what cuts through (despite it being a trivial sum in comparison to the other benefits of migration)

**** UPDATE ****

I've now developed a far more detailed view on the immigration questions
> Immigration & the EU Referendum

******************

"Taking Control of Our Country"

This is an argument those of us who lived through the indyref are very familiar with. It's a good sound-bite, but when you look a little deeper it's often little more than ill-informed scapegoating or simply a failure to understand how the political institutions actually work.

This piece addresses the parallels between "unelected bureaucrats in the EU" and civil servants. We have the House of Lords for heaven's sake. The fundamental questions for me here is this: do you believe in the value of political co-ordination at an EU scale?

I think realising cross-border economic benefits, co-ordinating environmental protection, workers' rights, human rights, maintaining peace, etc. are all areas which benefit from being co-ordinated at an EU scale. No political systems are perfect, but we seem to have managed our way around this one pretty well so far (look at the opt-outs we have).

**** UPDATE ****

I received an excellent comment in response to this blog which I repeat below in full;

Power in the EU starts and ends with the Council of Ministers. That is the elected heads of government of the 28 member nations. They meet in grand session twice a year to thrash out the forthcoming legislative programme.

Votes in the Council are of two forms:

1. Unanimous votes 

2. Votes by qualified majority

Qualified majority votes require 60% to pass. Votes are allocated on the basis of population (so the UK has more votes than Cyprus).

Once the legislative programme is agreed, the Commission draws up detailed legislation. This involves a lengthy consultation period with domestic governments and expert bodies such as the Food Standards authorities of nation states.

The detailed legislation is then proposed to the Council where it is voted on.

Note that many in the Brexit camp see the word 'proposed' as indicating the Commission is in charge of the process and is acting in isolation. This is a wilful misrepresentation.

Commissioners are appointed by the heads of government of the member states.

Once the Council has approved legislation it must be ratified by elected MEPs in parliament votes.

Most EU regulation comes as directives. These directives must be ratified by domestic parliaments. Most EU directives are put into UK law through statutory instruments. The UK could decide to put them I Acts debated in both the Commons and the Lords. As they did with the Consumer Rights Act.

The EU officials such as the President of the Commission are appointed through a vote in the Council of Ministers. Their appointment must also be ratified by the EU parliament.

There is significant democracy within the EU. Every bit as much as the UK which has an unelected senior civil service, an unelected upper house and a prime minister who appoints a cabinet. The UK prime minister is not directly elected by the people but as leader of his party.

******************

"Stifled by Red Tape"

There's a common misconception (generally from people who aren't in business) that there's "EU red tape" that hinders small and medium businesses in the UK. I'm involved in several businesses and have never spent a minute of my time on anything I'd consider to be "EU red-tape". So I've challenged people to give me examples of what this received wisdom about red-tape actually means.

The responses were interesting and fell into two categories;

1. Workers Rights:
   The fact that rapacious capitalists like me have to take care of employees affected when we buy and sell businesses (TUPE regulations) is apparently an example of EU red tape. Well if it is, I'm all for it.  Apparently the fact that I'm legally bound to offer my employees maternity rights and parental leave is an example of "EU red tape". Likewise.
   
   The idea that we might want to leave the EU so that we can relax these sorts of regulations chills me - "let's compete with the EU by being  a cheaper place to do business because workers rights aren't as well protected in the UK"?
2. Standardisation: one of the benefits of the single market is single standards. It makes it simpler to manufacture and export to EU countries if you only have to worry about conforming with one set - so standardisation reduces red-tape if you're interested in selling to international markets.
   
   Things like the Clinical Trials Directive may make it harder and more expensive to carry out clinical trials - but if they're safer and more valuable as a result (by being more comparable across countries) it's not obvious to me that's a bad thing.
   
   If you're only interested in selling to the domestic market you might resent standards that were set by the EU rather than the UK - but we would (potentially) only replace one set of standards with another if we were outside the EU and surely any manufacturer of ambition wants to be able to export and so will need to comply with EU standards anyway. EU standards won't go away because we're not in the EU - we'll just lose our ability to influence them.
   
   The most compelling example of "unfair" EU legislation I've found is that cited by James Dyson who claims German manufacturers have biased EU regulations to favour the machines they make (because the power ratings are measured without dust in the bag). He seems right in this case - the problem is (assuming Dyson still wants to sell devices into the EU markets) that's not a situation that's going to be improved by no longer having a seat at the table.

***

I'm sure there's plenty I've missed and these latter points are not well developed - but in the spirit of this blog I'm putting this out there and - as ever - all comments welcome

I see net economic benefits for the UK from being in the EU, I see net positive impacts of wider EU co-ordination around the harder to quantify stuff, and I emotionally feel that being part of the European family is a better place to be than being outside it.

So that's why - on balance and after significant consideration - I'll be voting Remain.

---

Notes

1. Poetic licence - I know milk quotas have ended

2. This is covered in painful by the objective analysis in The Price of Independence (a report I authored). To summarise: Since 1980 (an arbitrary starting date that favours the Scottish perspective) it can be argued that, because of North Sea Oil, Scotland has cumulatively been a significant net contributor to the UK. Having said that, the Scottish Government’s own GERS figures show us that in 14 of the last 17 years we have been net beneficiaries, in the most recent year by about £8bn. Because of the loss of oil tax revenues, Scotland is actually likely to benefit from being in the Union by more than £9bn a year for the foreseeable future (and the recently negotiated fiscal framework guarantees us this).

3. I've not tracked down why our Gross Contribution is forecast to leap by so much next year and then decline. comment/link on forecast accuracy

4. Whilst they can make an argument about the extent to which we control the EU payments made to the UK, the rebate is netted off before any money leaves the treasury, so it really is unnecessarily disingenuous of the Leave campaign to keep quoting the gross £350m figure

5. Transition regions are those whose GDP per capita is between 75% and 90% of the average GDP of the EU-27