Leaving the EU with a Customs Union deal would leave Brits an average of £800 worse off according to research.
Economists predict that leaving with the kind of deal backed by the Labou r Party would deliver an annual £80 billion hit to the UK's national income.
The analysis, which was commissioned by the People’s Vote campaign, highlights how such a deal would affect the spending decisions facing an incoming Labour or Conservative government first in 2022, and then in 2027.
Economists from the National Institute of Economic and Social Research (NIESR) say such a deal would equate to a reduction in the Treasury’s tax revenue by £26 billion and cut money available for public services by £13 billion.
A form of customs union is understood to be a key point for discussions in the cross-party talks between Labour and the Tories.
The talks are continuing this week but both sides suggest they may have to pull the plug if there is no sign of agreement.
Even if the talks collapse, a form of customs union is likely to remain an option after it lost by the smallest margin during a series of indicative votes.
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The NIESR report concludes: “While this type of customs union arrangement is seen as being as frictionless a trade relationship as is possible without the UK being in the single market, it would nevertheless involve significant non-tariff barriers that would hinder trade, particularly in services. That would be a material economic burden in view of the importance of services trade to the UK economy.”
NIESR’s modelling, which also takes into account the costs of ending free movement and having less net inward migration, says the outcome would be lower investment and productivity.
It also predicts that the UK’s economy would be 3.1 per cent smaller a decade after leaving than it would have been had we stayed in the EU, while GDP per head would be around 2.3 per cent lower.
This is around half the impact NIESR expects from leaving the EU without any deal because the impact on trade in goods would be softened, but it would still result in a significant fiscal effect of a £26 billion reduction in government tax revenue.
Some of this would be off-set by lower contributions to the EU budget and costs to public services because of reduced immigration, it would nonetheless mean the Government would have £13 billion-a-year less to spend on public services.
Such a shortfall could be met by an increase in the basic rate of income tax of around 2½p in the pound, higher public borrowing, or public service cuts.
Garry Young, Director of Macromodelling and Forecasting for NIESR, said: “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% of our economy.
"This inevitably will have economic costs, with widespread implications. We estimate that all regions will be adversely affected and that there will be fewer resources available to pay for public services.”
Rachel Reeves MP, a leading supporter of the People’s Vote campaign, said: “A customs union deal is not as a damaging for our economy than a no deal Brexit .
"But it is a mistake to regard it as a soft option – let alone a fix-all for a political crisis that has its roots in promises that can’t be met, real costs that have been ignored and the reality that there is no stable majority in Parliament or a lasting settlement in the country without this going back to the people in a new public vote.”
It comes as a leading thinktank warned the UK is "dangerously exposed" to economic risk due to the focus on Brexit.
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The country is not prepared for risks including trade wars, mounting debt, climate change and political uncertainty, according to a new IPPR report.
Three years of focusing on Brexit have left the UK economy dangerously ill-prepared for a likely global downturn, said Carys Roberts, IPPR chief economist.
Mr Roberts, who is head of the IPPR's new Centre for Economic Justice, said policy decisions had made previous economic crises worse.
He said "this time must be different" and his new centre would focus on developing economic policies that would create a "stronger and fairer economy".
