By David Milliken
LONDON (Reuters) - Britain's economy will be around 3 percent poorer over the long term if it leaves the European Union and retains a customs union with the bloc, the option favored by the opposition Labour Party, academic forecasters predicted on Thursday.
The National Institute of Economic and Social Research (NIESR) said the long-run loss after 10 years, compared to staying in the EU, would be equivalent to around 800 pounds ($1,040) per person per year.
"Leaving the EU for a customs union will make it more costly for the UK to trade with a large market on our doorstep, particularly in services which make up 80 percent of our economy," NIESR economist Garry Young said.
A customs union would allow goods to flow across the border more easily than if Britain left the EU with no deal at all, but it would not guarantee frictionless trade and would limit Britain’s capacity to strike its own free trade deals.
NIESR's report did not look at the option favored by Prime Minister Theresa May, which would see a looser EU trading relationship than a customs union.
After May's deal was rejected three times in parliament, forcing her to delay Brexit, the government has spent more than four weeks in talks with Labour - so far without reaching any agreement.
NIESR, Britain's best known academic economic forecasters, said overall gross domestic product 10 years after Brexit would be 3.1 percent lower in a customs union scenario than if Britain stayed in the EU, and tax revenues would fall by 2.9 percent.
Lower immigration would limit the per capita reduction in GDP to 2.3 percent, equivalent to 800 pounds per head.
Britain's finance ministry estimated in November that the government's preferred policy would reduce per capita GDP by 2.1-2.7 percent, depending on the effect on immigration, though its assumptions are not directly comparable with NIESR's.
"We know that the terms on which the UK will trade with the EU after Brexit will not be as favorable to the UK as they are now," NIESR said. "This would discourage investment in the UK and ultimately mean that UK workers were less productive than they would have been if the UK had stayed in the EU."
Brexit supporters argue that outside the EU and its customs union, Britain would find it easier to strike deals with economies that are growing faster than the EU's, even if they account for a fairly small share of British trade at present.
Most economists think the benefits of this are likely to be significantly outweighed by reduced access to markets in the EU, currently Britain's biggest trading partner.