The Mayor of London, Sadiq Khan, has published yet another negative assessment of the long-term economic consequences of Brexit. The report itself is an honest attempt by a reputable consultancy, Cambridge Econometrics. But like almost all such studies, it uses flawed assumptions to arrive at flawed conclusions. The credibility of the specific numbers has also been spun well beyond breaking point.

The authors claim to have provided a unique insight into the local economic impacts of the UK’s exit from the European Union, including ‘the first comprehensive assessment of Brexit across key indicators and sectors at a sub-national level’. This is based on five different scenarios, ranging from a status quo to an extreme ‘no-deal’ outcome. The results are said to ‘show that Brexit will not only reduce the size of the UK economy (compared to what may have happened if the UK remained in the single market and customs union), but also put it on a slower long-term growth trajectory’.

If that sounds familiar, it’s because the report adopts the same approach as many others before it, including the Treasury’s analysis of the long-term economic impact of alternatives to EU membership. Indeed, the report draws extensively on the ‘existing literature’. In that respect, it’s quite a useful summary of the thinking of those whose views on the immediate impact of the referendum have, for the most part, already been proved wrong. But does the report really add anything? Unfortunately, no.

For a start, the five scenarios considered do not include the one that the UK government (and the EU) are actually working towards, namely a two-year transition followed by a preferential EU/UK trade agreement. The closest to this in the report is a transition followed by ‘falling back’ on WTO rules.

The results from this ‘harder Brexit’ scenario (and a variation without a transition period) are very sensitive to the assumptions made. Two stand out. First, it is taken as given that net migration would be much lower if the UK leaves the Single Market. That’s plausible, of course, but future policy in this area would be in the hands of the government of the day to decide.

What’s more, even if this assumption is correct, the main impact of lower migration would be felt on GDP, rather than on GDP per head, which is arguably more important. Put another way, if the economy is x% smaller only because there are x% fewer people, would it really be right to say that UK households are x% worse off?

Second, the ‘harder Brexit’ scenarios assume that the UK satisfies the requirements of the WTO’s ‘most favoured nation’ rules by imposing new tariffs on trade with the EU. This is a common assumption in all the more pessimistic assessments. It has even led to claims that households could be as much as £930 a year worse off. But as we have discussed elsewhere, the UK could maintain the level playing field by eliminating tariffs on trade with the rest of the world instead, with positive results.

More generally, the report makes little attempt to address the potential benefits of Brexit. For example, a footnote on page 19 acknowledges that ‘this study does not consider that, following Brexit, the UK might negotiate more preferential trade agreements with non-EU countries than the existing deals’. Nor is there any serious discussion of the potential gains from reforming or replacing EU regulations and programs, such as the Common Agricultural Policy (CAP).

These omissions might be excused on the basis that these sorts of benefits are all too difficult to model. To be fair, neither the UK nor the EU have provided much clarity. But similar difficulties have not prevented the authors from making heroic assumptions about the potential costs. For example, the assumed negative impact on investment until 2030 is largely based on simple extrapolations of the trend since the referendum, which has been a relatively short period of exceptional uncertainty.

The much-hyped ‘sector analyses’ don’t really add much, either. They typically assume that the government messes everything up, for example by allowing skills shortages to grow, or by failing to protect or replace valuable EU funding in areas such as education, science and infrastructure investment. Admittedly, the track record to date here hasn’t been great. Uncertainty about the status of nationals from the rest of the EU living and working in the UK has been allowed to persist for too long.

But again, the outcomes after Brexit will depend on decisions which are yet to made. The UK government is increasingly recognising the importance of EU labour in key sectors, as well as committing to remain engaged with EU programs that do have a clear benefit. In the meantime, the UK economy, including London, is continuing to defy the doomsayers.

In summary, the report does underline a few good, if rather obvious, points, such as the importance of a sensible migration policy. However, it is not the game-changing evidence that the Remain spin-doctors and leader writers would have us believe.

 

Julian Jessop is Chief Economist and Head of the Brexit Unit at the IEA. He has thirty years of experience as a professional economist in the public and private sectors, including senior positions at HM Treasury, HSBC and Standard Chartered Bank. Prior to joining the IEA in March he was a Director and Chief Global Economist at the leading independent consultancy, Capital Economics. Julian has a First Class degree in economics from Cambridge University and post-graduate qualifications in both economics and law.

2 thoughts on “Groundhog Day in Brexitland”

  1. Posted 12/01/2018 at 09:45 | Permalink

    Given parliament is now to be given a meaningful vote on the final deal, presumably there needs to be a detailed plan b – otherwise the vote is a joke (and I don’t think it is healthy for the opposition to be able to argue forever that the EU deal was forced on them). Given the number of economic analysis we see that assume bad policy choices and go from there, what would the opposite exercise look like. i.e. if you wanted to minimise economic harm then what policies should the UK adopt unilaterally in the scenario of no deal. Where is this being spelled out in detail?

    Working from some basic rules such as:
    – keep control of future rule changes
    – treat current people fairly (with one-off changes you can afford to be generous so err on the side of giving too many people rather than too few the right to remain – no ECJ though)
    – aim for a self created transition regime
    — thus the initial policy should allow free movement of EU workers, students, tourists as the initial policy (rights to benefits are a separate discussion)
    — no new impediments to incoming trade
    — risk based standards, with the EU being the first regime given equivalency. Structuring standards this way makes it clear that EU products (including medicines) will always be legal (with some safety over ride), and long term the UK has the ability to grant the same recognition to other regimes in order to expand trade
    – drop tariffs rather than raise them (WTO gives you the choice of raise tariffs vs EU or drop vs ROW)
    – super simple processes to minimise costs and execution risk – current inspection regimes are sufficient for health, safety, etc. Dropping import tariffs would avoid the expense of creating new customs infrastructure and the ongoing cost – as importantly, no new inspection regime avoids any risk of the silly “trucks backed up for hundreds of miles and food rotting in yards”
    – if companies can create/retain EU access through the creation of EU subsidiaries then provide whatever facilitation might be required under UK law [e.g. some insurance companies will have an issue with servicing current policies post exit, this can be addressed by a change of corporate form but that needs a slow court proceeding – the UK can simplify these processes]
    – Ireland, zero border we shouldn’t worry about people or goods smuggling across the border (especially if EU goods are deemed legal and customs free). With smuggling if it is small it does not matter, if it is large you can track and stop it. Full co-operation with the Irish (data, etc) to help them minimise whatever border the EU requires them to build. If it is legal in Ireland it is legal in Northern Ireland, does not imply that it is only legal in Northern Ireland if it is legal in Ireland – regulatory recognition but as a subset not ongoing automatic adoption of EU rules.
    – if this frees up 40bn then that should not just be swallowed into the government budget, there should be a clear allocation of the money between handing back to citizens or specific increases in spending or short term mitigation spending. [Massively off topic, but hopefully they don’t give it to the NHS, if you want to get change in structure then you usually have to offer money, so increase spending by giving people their own healthcare accounts (and put “free” money in those) and introduce charging – but don’t just tip more money into the current structure]

    When you pick through it it seems you can get 80% of the benefits of any transition regime with no payment and without the freedom of movement to engage with the ROW. In the unilateral scenario what you do not control is
    – the EU can treat UK citizens in Europe badly – hopefully a generous offer to their citizens here can shame people, and at worst offer money to individual countries (not the EU)
    – the EU can stop UK people from working and studying in the EU or make it more difficult for them to travel there. True, but if people can freely come here then the EU would just be being petty and self destructive – acting in a classy way proves that something is possible and thus undermines any “we have to treat you as a 3rd country arguments”.
    – the EU can impose tariffs and may create issues with customs – again their choice, but if goods are flowing freely into the UK and the pile up occurs in france then the French look pretty silly.

    Some other benefits would come from a more clearly articulated and debated no-deal option
    – a clear BATNA helps in any negotiation
    – it makes the vote on the deal meaningful and gives it much needed legitimacy
    – I believe that an open no-deal scenario should command the support of many remain supporters and a large share of the brexit supporters and it would be very good to help move the debate towards who do we want to be, away from leaving-is-a-disaster vs the-eu-is-a-disaster

  2. Posted 14/01/2018 at 02:16 | Permalink

    One thing I cannot understand is this. What will the EU do to punish us? Will they put tariffs on imports from Britain risking our retaliation? Will BMW stand for that? We are not an insignificant consumer market. Will they put export tariffs like the desperate Argentina where nobody pays VAT nor income tax so they have to resort to export tariffs! No, I do not think so. Why are there such fears? Also, Economics is a most imperfect of subjects. They say that the engineer can diagnose and fix the machine because he or she built it. The doctor can hardly fix the body as he did not build it but evolution did! and doctors were until recently bleeding patients or treating them with water. And Economists I ask you a question which the late Lotfi Zadeh asked me in a lift at the Intercontinental in Wellington New Zealand: “what is the value of a mathematical proof in a subject such as Economics?” The answer is of course: none. Did Economists predict the miracle on the Han River? Obviously not! Did they predict the financial crisis of 2008 or the crash in the 1930s. NO. More likely they caused it. Look, the answers are NOT financial. The South Koreans and Chinese will make the robots, spend two decades training them and send them to our consumer market to replace all of our employment. The country that makes the robots will train the robots and will benefit from full employment and high productivity. This will happen whether we are in the EU or not and is more likely we can adopt a nationalistic Trump approach by standing on our own two feet to catch up with the Far East if we go Brexit. Did China, South Korea and Japan need an EU? Not at all, they all hate each other, and they came took our STEM knowledge, kept virtually zero immigration and a mono-racial and mono culture and they are selling us mobile phones they make for 100 USD for 1000 USD much as the Spanish exchanged mirrors for the Amerindian gold in the 1400s.

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