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Brexit’ Could Spell More Austerity for Britain, Study Warns

By STEPHEN CASTLEMAY www.nytimes.com May 25, 2016

Thursday 26 May 2016, by Carlos San Juan

Prime Minister David Cameron’s campaign to keep Britain in the European Union was bolstered on Wednesday by a report from one of the country’s most authoritative economic research bodies, which concluded that a withdrawal from the bloc would lead to up to two more years of public spending cuts or tax increases.

A frequent critic of government economic plans, the research body, the Institute for Fiscal Studies, this time delivered some welcome news for Mr. Cameron. The think tank echoed the conclusions of several leading international organizations that the shock and uncertainty produced by a British exit — a so-called Brexit — would shrink the economy.

Voters in Britain are to decide in a referendum on June 23 whether to remain in the 28-nation European Union. The economic risks of a departure have been highlighted repeatedly by those who want to remain, while supporters of a withdrawal have focused increasingly on issues such as the need to curtail immigration and regain national sovereignty.

The verdict of the Institute for Fiscal Studies is significant because the body has a track record of contradicting government claims on the economy, and its intervention provoked an angry response from campaigners for an exit, who sought to question the institute’s independence on the issue.

The report joins a chorus of analysis that has warned of the economic risks of leaving the bloc, including from the International Monetary Fund; from the Organization for Economic Cooperation and Development; and from the Bank of England, Britain’s central bank.

In its report, the Institute for Fiscal Studies said that a British departure would have a negative impact on public finances worth 20 billion pounds to 40 billion pounds, or $29 billion to $58 billion, in 2019–20, more than enough to wipe out the government’s plans to create a surplus.

“Dealing with the public finance effect would require at least an additional one or two years of ‘austerity’ — spending cuts or tax rises — at the same rate as we have experienced recently to get the public finances back to balance (should that remain the government’s priority),” the institute said.

The study dealt another blow to the campaign to leave the European Union. Supporters of the push have claimed that a withdrawal would benefit Britain by £350 million a week, through the cancellation of its financial contribution to the bloc.

But the institute’s report pointed out that this figure excluded money sent back to London under a rebate plan, and that it was also based on Britain’s gross contribution and did not take account of European Union spending in Britain, for example to support farmers.

If both of those factors were accounted for, the institute said, Britain would gain around £8 billion a year — or about £150 million a week — from quitting, less than half the sum claimed by campaigners for a withdrawal. Such a figure would be easily outweighed by the negative impact on the economy, the report concluded.

“If leaving the E.U. were to reduce national income by just 0.6 percent, that would be enough to outweigh the positive effect on the public finances,” the document said.

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