UK Treasury expected to reignite 'Project Fear' row with EU study

Andy Burnham prepares to set out 'options' for Britain's longer-term ties to the bloc

The Treasury is expected by government figures to launch a study into the potential economic benefits of Britain moving closer to the EU in a move likely to reignite the "Project Fear" row seen during Brexit.

Senior people in Labour and Whitehall say it is likely the Treasury will be asked to carry out an impact assessment later this year to support Andy Burnham as he sets out "options" for Britain's longer-term ties to the bloc.

But Andrew Griffith, shadow chancellor, told the FT that he feared that any analysis of the future benefits of closer EU relations could be a mirror image of contentious Treasury warnings in 2016 about the immediate impact of Brexit.

"At a time when credibility with the gilt market is vital, the Treasury must be wary of giving us 'Project Fear' in reverse," Griffith said.

"Cheaper energy would do far more for the UK economy than another decade of debating closer links to the low-growth EU."

The Treasury has not yet been commissioned by Burnham to run an analysis of the options he will set out before the end of the year, which are expected to include a customs union, a return to the single market or full EU membership.

But one government official said: "This is exactly what the Treasury is supposed to do."

A senior Labour figure said: "More work will definitely be needed." They added that the Treasury's post-Brexit modelling has recently focused on narrower economic gains arising from a UK and EU summit next month.

The Treasury said: "We do not comment on hypothetical future scenarios." Number 10 said Burnham would set out the options "around" the time of the summit in Brussels on November 20.

Estimates of the economic damage caused by Brexit have been strongly contested and it is certain that estimates of any gains to be derived from Britain removing trade barriers with the EU in future will be equally disputed.

The Treasury was accused by the Leave campaign of orchestrating "Project Fear" ahead of the 2016 Brexit referendum, with warnings of a recession, cuts to the NHS and big income tax increases if the country voted to leave the EU.

"Neither of the Treasury's short-term 'shock' or 'severe shock' scenarios proved totally accurate, and some of the forecasts turned out to be flat-out wrong," said Russ Mould, investment director of AJ Bell, in a paper assessing the warnings earlier this year.

"But a few of the concerns raised by May 2016's so-called 'Project Fear' document did play out as expected, notably with regard to sterling."

Since the Brexit vote, the Office for Budget Responsibility has judged that a worsened trading relationship has reduced the UK's long-run productivity by 4 per cent relative to staying in the EU.

Meanwhile, former chancellor Rachel Reeves in March, in her Mais lecture in the City, cited claims that the hit to Britain's GDP could be as high as 8 per cent.

A paper by the National Bureau of Economic Research estimated Brexit had reduced Britain's GDP by 6-8 per cent by the end of 2025.

The Treasury has long pushed for a removal of trade barriers with the EU and has argued for an ambitious first step in the "reset" of relations at November's summit, where barriers to trade in food are expected to be removed.

Analysts at Goldman Sachs said last week that closer relations with the EU would "notably reduce the cost of Brexit" as they examined the benefits of different options.

While the status quo delivers only limited benefits via sector-specific deals with Brussels, a customs union would increase GDP by about 1 per cent, the investment bank said. Single market membership could give a boost of between 2 and 5 per cent by easing regulatory barriers.

Griffith's comments came as new Persuasion polling for the left-of-centre IPPR think-tank found that 52 per cent of voters wanted to rejoin the EU against 29 per cent who wanted to stay out.