The Treasury’s new Brexit paper: rubbish in, rubbish out
24 May 2016
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The anti-Brexit Project Fear reached its zenith yesterday. Having published a paper suggesting GDP per household would fall by £4,300 in the long term (by 2030) if Britain left the EU, the Treasury yesterday turned its guns on the short-term implications of leaving.
And guess what? Research produced by a department run by a chancellor who thinks we should stay in the EU suggests the results of leaving would be very bad! If we vote to leave, we’d supposedly see a year-long mild recession, the economy 3.6 per cent smaller relative to remaining after two years, inflation higher, house prices lower, higher unemployment and a range of other bad outcomes.
As with the first lamentable Treasury offering, key to dismembering this biased account is working out the assumptions behind it. And here we do not need to dig long to find buried bodies. Essentially, the results are driven by three economic phenomena: people adjusting their spending and investment patterns because they expect Brexit to permanently lower their incomes, the near-term effects of uncertainty, and volatility in financial markets.
The first impact can be summed up quite easily as “rubbish in, rubbish out”. A large part of the result is driven by people reducing spending and investment because the Treasury assumes that the results of its long-term paper are correct (that we would be poorer than if we remain) and this changes behaviour now.
As outlined previously in this column, however, that Treasury paper was riddled with bizarre assumptions – not least that we would not adjust any regulatory policy or pursue more expansive trade when we had secured those freedoms outside the EU. This is particularly amusing, because just this weekend a leaked civil service document outlined how other member states made the EU a barrier to more free trade.
The first Treasury paper’s modelling methods were also extensively critiqued by our Economists for Brexit group – for relying on a range of economic associations with little theoretical underpinning and for being prone to extensive biases in the equations.
The short story is this: if you use the highly exaggerated negative long-term Treasury results then this effect on spending will be exaggerated in the short term too.
If, on the other hand, you presume that sensible policies on trade, migration, regulation and government spending are adopted and expected post-Brexit, and that as a result Brexit was beneficial to long-term performance (as papers by CEBR, Open Europe and Economists for Brexit have shown), then the short-term effect would in fact be an economic boost. The biggest threat of a negative impact happening from Brexit, therefore, is precisely the scaremongering of the Treasury and its effect on expectations.
Of course, no sensible person on the Brexit side would suggest that there would be absolutely no uncertainty from leaving the EU. The Treasury is well within its rights to model that effect on investment and spending. There will be some short-term adjustment in the two years after Article 50 is triggered and an exit is negotiated (though during that time all current arrangements will remain in place and it would be in the interests of both parties to pursue a mutually-beneficial transition).
To a degree, therefore, Brexit will be a very short-term shock, the probability of which will already be factored in. But previous research by the OECD has shown that economies react better to shocks when they can adapt quickly – with independent macro policies, flexible labour market policies, a political system conducive to structural reform, and a liberal approach to trade. The UK fulfils these criteria and thus is much more resilient to shocks than, say, the Eurozone. In fact, Brexit would enable the UK to improve the economy’s institutional flexibility to future shocks further, as we would not be sucked into greater political union.
So the flipside of any short-term Brexit risks is a range of significant long-term opportunities. An opportunity to run a more expansive trade policy and exit the disastrous common agricultural and fisheries policies. An opportunity to reshape regulation to domestic circumstances. An opportunity to protect the City of London from Brussels’s regulatory zeal. And an opportunity to spend money better or cut taxes from any savings from our large gross contributions to Brussels.
Provided one trusts that the UK’s democratic processes will over time produce good policies in these areas, there is nothing to fear from the economics of Brexit and thus the Treasury’s results fall apart.
Ryan Bourne is the IEA’s Head of Public Policy, and Director of the Paragon Project. This article was first published by City AM.
And guess what? Research produced by a department run by a chancellor who thinks we should stay in the EU suggests the results of leaving would be very bad! If we vote to leave, we’d supposedly see a year-long mild recession, the economy 3.6 per cent smaller relative to remaining after two years, inflation higher, house prices lower, higher unemployment and a range of other bad outcomes.
As with the first lamentable Treasury offering, key to dismembering this biased account is working out the assumptions behind it. And here we do not need to dig long to find buried bodies. Essentially, the results are driven by three economic phenomena: people adjusting their spending and investment patterns because they expect Brexit to permanently lower their incomes, the near-term effects of uncertainty, and volatility in financial markets.
The first impact can be summed up quite easily as “rubbish in, rubbish out”. A large part of the result is driven by people reducing spending and investment because the Treasury assumes that the results of its long-term paper are correct (that we would be poorer than if we remain) and this changes behaviour now.
As outlined previously in this column, however, that Treasury paper was riddled with bizarre assumptions – not least that we would not adjust any regulatory policy or pursue more expansive trade when we had secured those freedoms outside the EU. This is particularly amusing, because just this weekend a leaked civil service document outlined how other member states made the EU a barrier to more free trade.
The first Treasury paper’s modelling methods were also extensively critiqued by our Economists for Brexit group – for relying on a range of economic associations with little theoretical underpinning and for being prone to extensive biases in the equations.
The short story is this: if you use the highly exaggerated negative long-term Treasury results then this effect on spending will be exaggerated in the short term too.
If, on the other hand, you presume that sensible policies on trade, migration, regulation and government spending are adopted and expected post-Brexit, and that as a result Brexit was beneficial to long-term performance (as papers by CEBR, Open Europe and Economists for Brexit have shown), then the short-term effect would in fact be an economic boost. The biggest threat of a negative impact happening from Brexit, therefore, is precisely the scaremongering of the Treasury and its effect on expectations.
Of course, no sensible person on the Brexit side would suggest that there would be absolutely no uncertainty from leaving the EU. The Treasury is well within its rights to model that effect on investment and spending. There will be some short-term adjustment in the two years after Article 50 is triggered and an exit is negotiated (though during that time all current arrangements will remain in place and it would be in the interests of both parties to pursue a mutually-beneficial transition).
To a degree, therefore, Brexit will be a very short-term shock, the probability of which will already be factored in. But previous research by the OECD has shown that economies react better to shocks when they can adapt quickly – with independent macro policies, flexible labour market policies, a political system conducive to structural reform, and a liberal approach to trade. The UK fulfils these criteria and thus is much more resilient to shocks than, say, the Eurozone. In fact, Brexit would enable the UK to improve the economy’s institutional flexibility to future shocks further, as we would not be sucked into greater political union.
So the flipside of any short-term Brexit risks is a range of significant long-term opportunities. An opportunity to run a more expansive trade policy and exit the disastrous common agricultural and fisheries policies. An opportunity to reshape regulation to domestic circumstances. An opportunity to protect the City of London from Brussels’s regulatory zeal. And an opportunity to spend money better or cut taxes from any savings from our large gross contributions to Brussels.
Provided one trusts that the UK’s democratic processes will over time produce good policies in these areas, there is nothing to fear from the economics of Brexit and thus the Treasury’s results fall apart.
Ryan Bourne is the IEA’s Head of Public Policy, and Director of the Paragon Project. This article was first published by City AM.
5 thoughts on “The Treasury’s new Brexit paper: rubbish in, rubbish out”
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‘Provided one trusts that the UK’s democratic processes will over time produce good policies’. Perhaps an even more implausible assumption than some of the Treasury’s?
Whatever one thinks personally of Brexit as a choice, it seems pretty clear that the public is being swayed by the huge resources being mobilised by Remain. And this has little to do with the inherent strength of the arguments.
I seem to remember that the leader of the Remain campaign, Stuart Rose, said some time ago that in the first five years after Brexit nothing much would happen. That hardly seems consistent with the Treasury’s latest prognostication of doom and gloom. Assuming after a decision to leave the EU, the Article 50 button isn’t pressed for (say) twelve months, together with the two-year negotiating period written in to the Treaty of Lisbon, that would give us three years from 24th June 2016 to try to sort things out. But even if one thinks the economic consequences of Brexit are likely to be significant (I don’t), surely the decision on how to vote in the Referendum should be based on long-term considerations? And as far as that goes, the reality is that nobody has any idea whether the UK’s rate of economic growth in 2030 will be higher, lower, or about the same if we leave the EU (compared with remaining in). I have found the most readable projection to be that of PwC for the CBI, which suggests that if we remain in the EU, by 2030 GDP per capita will have grown by 29%; if we Brexit, with some kind of Free Trade agreement, by 28%; and if we Brexit and go the WTO route, by 25%. As someone whose most recent book was entitled ‘Margins of Error in Accounting’, to me those three guesses seem pretty close together
Thank you, I have now made my mind up to leave.
A good clear article, well done.
Good blog and great to see Prof. Myddelton posting, some 30 years after I had the honour to attend his lucid lectures.at Cranfield SoM.
As one that naturally feels that all Government is too big, I just cannot see the logic for another level added on top of current UK institutions, especially one constructed along the Continental model.
I decided to go and work in France in the mid ’80s and stayed for 15 years, before returning to the UK. I lived under the enterprise stifling nanny State regime(s) there, where directly or indirectly, 1 in 3 of the active population are employed by the State. As a small business owner, I was subject to Orwellian treatment on all things State: France is a socialist country even when their Conservatives are in power, a place where to all intents and purposes a Company Director is guilty before proven innocent and Employee rights are all. It is only successful corporate desperation that leads to taking the risk to employ someone and pay the NICS equivalent at 49%. The perpetual unemployment rate in France around 10% and that pre-dates the Euro,
The Treasury has behaved in a most unprofessional way under Gideon’s distorted guiding hand since 2010, supporting his conservative social agenda and mismanagement of the economy in the finest Continental fashion. Pasty tax anyone?
More worrying is the descent along The Road to Serfdom that we have seen at Cameron’s hands, aided and abetted by Osborne. These rascals are going to get themselves booted out at the next election, in fine British fashion, whichever way the Referendum vote goes. I plan to vote Brexit to make sure that we don’t find them as EU Commissioner’s in 2021 and that they are obliged to join the dole queue. If only…
A very useful article and it is nice to see ‘democratic process’ mentioned. For me, far and away the most disappointing aspect of the campaign so far is the absence of any real debate about our freedoms and how disenfranchised the people of this country have become over recent decades. Put very simply, I don’t believe in the long run that one can forge a strong, thriving economy that serves all citizens of a country without first under-pinning it with a thriving democracy, where politicians are answerable to their local constituents and are as readily booted out as they are elected. So all this debate about economics is fine up to a point, but it is not the issue and it is not why I have been in favour of withdrawal for most of my adult life.