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Monday, November 04, 2013

Is the CBI right to claim the net benefit of the EU to the UK is 4-5% of GDP?

Is the CBI right to claim
the EU benefits UK GDP by 4-5%?
As we discussed in our previous post, the CBI's report on Europe, published today, makes for interesting and thought-provoking reading. However, the CBI’s estimate of the net benefits of EU membership isn’t the strongest part of the report.

The CBI puts the net benefit at between £62bn and £78bn, or between 4% and 5% of UK GDP. This, it claims, is equivalent to £3,000 per household or £1,225 per individual. Credit to the CBI for trying to inject some hard numbers into the debate. However, putting a single figure on the costs and benefits of such a complex arrangement is notoriously difficult – as we ourselves know too well. The CBI does readily admit that in its report, and to be fair, very clearly qualifies its figure.
Still, there are at least three problems with this figure, which in combination means it should be taken with a huge pinch of salt.
Arbitrary extrapolation based on a highly limited literature review: Ultimately, the figure is taken from a literature review of previous estimates of the benefits. On average, the literature surveyed puts the net benefit of EU membership at between 2%  and 3% of GDP. The review covers only five pieces of literature with the most recent one being from 2008. This is a very small pool of literature to draw from. More critically, the CBI goes onto assert,
“Since these studies are not mutually exclusive…it is not unreasonable to infer that the net benefit arising from EU membership is somewhat higher than 2–3%, perhaps in the region of 4–5% as a conservative estimate.”
It’s widely accepted that EU membership comes with unquantifiable benefits, but the CBI takes a massive leap of faith here. It seems to suggest that the net benefits of different aspects can be tallied up given that they are not mutually exclusive – and it may well be that dynamic effects triggered by, say, EU market access mean net benefits are often underestimated. However, curiously, the CBI provides no proper explanation or evidence for why it settled on 4% to 5%, leaving us guessing where this extra net benefit actually comes from. Having discussed this with the CBI, it’s clear that they have aggregated the net benefits of various aspects of the EU from different studies.
While there is logic in this approach, given the diverse nature of the studies it is tricky to simply add parts of the up, assuming that they work the same together as they do in isolation. After all, there is a reason why these studies have struggled to produce a clear figure for all the areas themselves. Once this approach was chosen more detail should have been included in the CBI report, even if it meant adding a statistical or economic annex (given the hugely sensitive nature of the EU cost-benefit debate).
No proper counterfactual is given: What are these net benefits measured against? Does the CBI assume that the UK outside the EU would be left with no trade deal and no single market access? If not, then the net benefit is presumably lower than the 4% to 5% identified. This is the classical shortcoming of most EU cost-benefit studies. In the CBI study, the problem is exacerbated by the fact that the various pieces of literature that it draws from will themselves have diverse counterfactuals.

It’s all the more surprising given that the CBI rightly goes to great lengths to discuss the counterfactuals when it comes to the costs of EU membership, arguing for example that some EU regulations would remain even if the UK left the EU given that they would be domestically needed or pursued by international groups  (which we agree with).
Why the same rigour is not applied to its calculation of the net benefits of the EU is not clear. UKIP-types have mastered the art of measuring EU costs with no reference to a counterfactual (see here for a fine example). To a large extent, the CBI study falls into the same trap.
Benefits aren’t evenly distributed: Lastly, in an understandable attempt to present an easily digestible figure, the CBI converts its percentage number into pounds and presents it as an evenly distributed benefit over households and individuals. Of course, this is unlikely to be the real benefit felt by households or individuals, with any benefit distributed unevenly and in ways which are nearly impossible to measure.


Denis Cooper said...

Even if the CBI was correct in saying that EU membership benefits us by 4% - 5% of GDP, which it definitely is not, that would have to be put in the context of the natural growth of the UK economy by a long term trend rate of about 2.5% a year.

In other words, according to this claim made by the CBI the mess of pottage for which we have sold our birthright is equivalent to less than the natural growth of our economy over just two average years.

jon livesey said...

I have noticed a trend in obfuscation, which seems to track the increasing scepticism about the EU in the UK.

This obfuscation consists of talking about the undoubted benefits of free trade and the Single Market as if they are benefits due to membership of the EU.

But that is clearly not true. The EU has recently closed free trade agreements with Singapore and Canada, and may soon close one with the US, and these agreements will have benefits for all parties, but not due to EU membership.

In some mysterious way, Singapore, Canada and the US can all benefit form free trade, but in the case of the UK alone it is called a benefit of EU membership.

I think we should let the CBI have their numbers, exaggerated or not, but make it clear what is membership of the EU and what is free trade.

Rollo said...

The CBI is largely made up from people from large companies, many of them multinational. They are distorting the facts to suit their own purposes. Tim Congdon has a more compelling analysis which proves exactly the opposite: The EU costs us 4% of GDP, about £1000 per person per year.

Anonymous said...

As long as we are in the eussr our taxes will be to high and we will be inundted by foreigners pushing up the unemployment in the nation we are better off out

clinihyp said...

"A study for the CBI inevitably concludes that EU membership is net positive for the UK economy, worth between 4pc and 5pc of GDP a year – in round numbers, £62bn to £78bn, or about £3,000 per household. Hmmm"


Average Englishman said...

The previous posters of comments are quite right.
The benefits of free trade would be available to the UK outside of the EU and the pro EU lobby should not claim otherwise;
the CBI represent the wishes of multi-nationals who care only for their directors' pay packets and their shsreholders' returns not the wellbeing of the UK population;
the completely out of control immigration to the UK is not to the overall benefit of the UK people and is taking place without popular consent and;
even if the CBI figures were correct, I would gladly pay far more to be free of the EUSSR and its dictats.

Anonymous said...

The CBI should be thoroughly ashamed of itself.

Producing this skewed and inaccurate report at a time when the CBI itself recognises that there is a "crisis of trust" between the UK population and big business is going to make the mistrust greater.

I appreciate the fact that business does not like uncertainity - but EEA and EFTA membership can still continue without full EU membership.

Besides, someone please explain how EU membership has been of benefit to our Financial Services industry since 2008? Wave upon wave of poor, politically-motivated regulation is about to cost us hundreds of thousands of well-paid jobs and impact UK and EU growth! How have the CBI missed this?!

Note to CBI : The population of the UK are the electorate and they alone get to decide whether or not continued membership of the EU is in their interest.

Free trade = Yes
Sovereignty = No



Mike Spilligan said...

The SMEs are the real engine room of the UK's commerce and industry and at the Small end (many employing a handful of people) they can't grow as they would like to, or have the capacity to do so, without hitting the "red tape" barrier.


please refer to my comments on the CBI's long and shameful track record of being wrong about almost anything - http://www.openeuropeblog.blogspot.co.uk/2013/11/cbi-concludes-uk-should-stay-in.html - in effect ShirleY Williams in Corporate form. but worse. My rule of thumb since 1980 has been "find out what the CBI think, base my views and actions on the opposite."

Never forget their economiclly illiterate support for euro membership, or that as others here confirm, they lobby for big business interests only.

From the 2000 Britain in Europe launch and its "3m jobs" lie to the CBI today, its scare stories and nonsense - leaving the EU would have no significant effect on trade beyond the period of re-adjustment, and then, free to trade with the world on our own terms, we will thrive.

Rik said...

1. 'Independent agencies should be very careful about political comments. And even more so when they do not clearly have the full picture (friendly, more British way of saying that they donot have a clue about the issue and/or are playing political games).

2. 3000 Euro seems reasonable btw.
In other words if the free market stays in place for whatever reason the advantage would very likely be very similar.
It could even be defended that it would be larger as a lot of red tape could be cut in that proces and a lot of unnecessary costs (to keep a huge burocracy in place for instance) would not have to be made.
The Dutch did a similar exercise btw (if I am not mistaken short before the Euro-mess and came to the above conclusions).

3. As said numerous times before Cameron and Co's communication strategy simply sucks on this issue. It should be made clear asap that it is not intended to leave the free market. Now even an independent UK government agency basically assumes a complete exit (including the common market).

4. Spin on this is beyond moronic tbo.
3000 Euro benefit for the UK basically from the Common market also means seen the fact that trade flows are bigger to the UK than to the EU (plus as well the latter are concerning more products that are easily obtainable from the worldmarket) that at least there is a similar disadvantage for the other player. I total amount, but less of course as it has to be spread a larger population.
Meaning a 500-750 Euro annually for each and every non-UK EU citizen. And probably considerably more in the payer nations up North as these have higher GDPs; relatively more international trade and relatively more trade with the UK.
Again referring to that Dutch thing. This is about the advantage for EuroZone countries from the Euro (when it was working at least, now it is a negative of course).
This roughly means a 2% drop in GDP and permanently. Hard to see how any Finn or Hol government is going to sell that at home in a zero growth climate.