The pound would plunge 20% immediately after a Brexit vote in June, according to a leading economic thinktank.
The National Institute of Economic and Social Research (NIESR) has also forecast that prices will soar and Britain’s growth rate will be 1% lower next year if there is a vote to leave the EU.
The loss to average UK households could be as much as £2,000 over the longer term in the institute’s worst-case scenario, which involves a loss of preferential trade links with the EU and a fall in productivity linked to declines in business investment.
“The longer term impact of leaving the EU could reduce GDP by anything between 1.5% and 3.7% by 2030 depending on the subsequent relationship between the UK and the EU, as well as the rest of the world.
“But in all possible scenarios, our simulation exercises show a substantial loss of export trade.”
Under the worst outcome, the fall in demand for UK goods and services leads to an almost 10% decline in wages by 2030 relative to remaining in the EU.
NIESR, which is widely seen as Britain’s longest-established independent research institute, also argued it would be “extremely difficult” to cut immigration sharply should the UK leave the EU.
However, in a separate report, a group of leading economists took an opposing view to NIESR on trade, arguing that free trade with the rest of the world would flourish should the UK leave the EU.
The Economists for Brexit argued that outside the EU, the UK would no longer be tied into the protectionist trade agreement that EU membership amounts to. Growth and productivity would rise, and consumers would benefit from a fall in prices.
One of the reports’ authors, Prof Patrick Minford, a former economics adviser to Lady Thatcher and professor of economics at Cardiff University, dismissed George Osborne’s claim that Brexit would damage trade and the UK economy as “a load of complete nonsense”.
In a scathing review of the Treasury’s Brexit analysis, he added: “Mr Osborne is very proud of it. It’s dishonest and condescending. It treats us like fools and aims to terrify us. There’s absolutely no reason to believe any of the stuff in the Treasury report. It’s completely riddled and raddled with basic problems of economic logic.”
Minford said key figures including President Barack Obama and the Bank of England governor, Mark Carney, were part of the “establishment view” that remaining in the EU would be better for the UK. He said the view was partly driven by a fear of change.
“There is a tendency to favour the status quo. This is a disruptive change, free trade is disruptive. I think there is a natural bias among government bodies and international bodies to favour the status quo over disruption. Disruption means change and it could mean change to their own positions. It’s what you’d expect.”
Minford said the US was opposed to Brexit because “they like to have their UK dog in the fight”.
The chancellor claims the government would lose £36bn in net tax receipts in the event of Brexit, equivalent to 8p on the basic rate of income tax or 7p on VAT. He said each UK household would be poorer to the tune of £4,300 a year.
The Treasury also estimated that under a World Trade Organisation model, Britain’s GDP would decline by 7.5%. The Economists for Brexit reject this, arguing that leaving the EU would improve GDP by 4%.
The group of eight economists have also calculated that consumers would benefit from an 8% fall in prices.
They estimate that over the longer term, the pound would fall in value by about 8%, which they describe as a positive change. A weaker pound makes UK goods cheaper abroad but imports more expensive.
Minford conceded that market volatility would likely follow a vote to leave the EU, but said: “This economy can take it. It has a lot of resilience.”
He added that the UK economy would look different following a possible Brexit, with a quickening decline in manufacturing and an even greater reliance on the services sector, which already accounts for about three-quarters of the UK economy.
“Manufacturing has contracted from 30% of GDP in 1970 to 10% or so today. That’s the long-run trend, it’s contracting anyway. Hi-tech manufacturing, which is really like services, will not disappear.
“That is the future of manufacturing in the UK. What’s going on in this model is that the unskilled labour-intensive manufacturing is going to contract. That’s a long-run trend and [Brexit] will hasten it.”
This article was written by Phillip Inman and Angela Monaghan, for theguardian.com on Tuesday 10th May 2016 16.15 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010