28 November 2018

MPs, including the Prime Minister, should take the Government’s Brexit economic analysis seriously rather than downplay or obfuscate its implications, argues Gemma Tetlow.

Projecting how any Brexit deal will affect the UK economy is not an exact science, nor is the economic impact the only factor that determines the merits of deal, no deal or no Brexit. But the economic impact is one of the things that voters care about, and is where economists can provide some insight.

We set out nine tests that the Government needed to address to ensure that MPs and other interested parties were able to scrutinise their economic modelling and interpret it appropriately. These include making clear what their assumptions were in areas like trade barriers, productivity and migration, and showing the sensitivity of their results to alternative assumptions.

It is welcome that the published report passes these tests, allowing observers to understand exactly how the Government has reached its conclusions.

Not everyone will agree with the Government’s assumptions

The Government’s analysis of the possible long-term economic impact was always going to be an important contribution to the debate but also one that would be subject to criticism. But the broad picture is clear and is consistent with the conclusion reached by the vast majority of economic analyses of the impact of Brexit: leaving the EU will raise trade barriers between the UK and the bloc, putting a drag on UK economic growth.

MPs should not simply dismiss the analysis out of hand or try to mislead the public about what it shows.

Theresa May should lead the way, but her appearance at Prime Minister’s Questions today did not set a good example. In telling the House that the analysis “does not show that we will be poorer [under the proposed Brexit deal] than the status quo today”, she did not quite lie – but she certainly added to the confusion.

Even the most optimistic scenario presented in the Government’s report – Theresa May’s White Paper aspiration for a future relationship with the EU, coupled with no changes to migration policy – would leave UK GDP 0.6% smaller in 15 years’ time than if the ‘status quo’ continued. The Government’s report defines the status quo as ‘today's institutional arrangements with the EU’.

The Government’s projection of the economic impact of Brexit is a serious piece of analysis

A more realistic assessment of the likely outcome, based on the Withdrawal Agreement and Political Declaration – suggests future economic output would be reduced by 3.9%.

Exactly how large the effect is depends on the precise assumptions that the Government has made. Because the Government has been transparent about those assumptions, others can challenge them. This is a debate that should be had if people disagree on points of substance. There is also an important debate to be had about how any economic costs should be weighed against other perceived benefits of leaving the EU.

But for that to happen MPs – including the PM – need to start discussing the findings seriously rather than trying to brush them aside.

Comments

Thanks very much, Gemma. You have been burning the midnight oil!

"Theresa May should lead the way, but her appearance at Prime Minister’s Questions today did not set a good example. In telling the House that the analysis “does not show that we will be poorer [under the proposed Brexit deal] than the status quo today”, she did not quite lie – but she certainly added to the confusion."

Was TM trying to say that GDP will still be bigger than it is today, and draw a veil over the fact that it is likely to be smaller than it otherwise would have been. I assume she is also omitting the effect of a growing population (per capita GDP) - right?

How does a projected output reduction of 3.9% translate into per capita terms? (I'm sure you noticed Nicola Sturgeon quoting a figure of £1600 something for how much worse off Scots will be. If you could do that sum and put it up on the website, we will all be in your debt and will use our influence to give you a stonking pay rise!

Hi Willy,

The 3.9% impact on total GDP equates to a 2.7% reduction in future GDP per capita (this is shown in Table E.4 of the Government's report today). In other words, in that scenario, their projections include both lower net migration and lower GDP per person. Together these add up to a larger impact on total GDP than on GDP per capita.

I'm afraid I don't have to hand the exact figure for what that translates to in £ but I think it would be something like £1,000 per person. I have not (yet) compared the Government's analysis to the Scottish Government's analysis to try to work out where they agree/differ.

Gemma

The modelling is pretty much useless. Both HMT and BOE assume that there is slightly more friction in trade under the Brexit scenario (which I suppose is fair) but they then hold everything else constant. And there is a lot that could change. That is the point of Brexit. So the modelling is rubbish. It just tells one that you have assumed there is more friction.

"-0.6% after 15 years"

Oh my! .... but that's - 0.04% per annum! Gosh.

Any upside scenarios in there? Ah, quelle surprise.

With a WTO exit, what happens to e.g. Mercedes vs Mazda prices ... or the weekly shooping basket?

Does any analysis discuss the growing influence of other continental trading communities, like AEC, ASEAN and MERCUSOR, all of whom have ambitions for continent wide political and financial unity, and have generally growing Educations, technology, populations and economies? Another thing that they have in common is that people writing for them regard the post Brexit UK as a small and isolated country from whom concessions may be won. It seems likely that my grandchildren will be obeying rules laid down in Singapore, Nairobi and Rio, over which they will have as little influence as they will have over Brussels. An economic analysis of the influence of growing global trading communities would make interesting reading. we should note that of the two countries to leave the EU before us, Algeria simply swapped to regional organisations within the AEC, which were close neighbours. WHat close neighbour can we join?

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