Leaked Brexit analysis fails to break new ground
Just like the Treasury’s infamous 2016 report on the long-term costs, the leaked analysis only looks at three ‘off the shelf’ options – essentially ‘Norway’, ‘Canada’ or ‘WTO rules’ – rather than the bespoke deal that the UK government is actually seeking. It therefore does not allow, among other things, for the possibility of streamlined customs agreements that minimise the costs of leaving the EU’s Customs Union, or a more comprehensive trade deal that covers financial services.
The latest report does at least take more account of the potential benefits of Brexit. The leaks are not clear on what is being assumed about changes to the regulatory environment, or the long-term savings from contributions the EU budget. But they do refer to the scope to sign independent trade deals, which is a step in the right direction.
This presumably also explains why the estimated costs in terms of lost GDP are mostly smaller than those published earlier. However, these costings are not so very different. The latest analysis concludes that the level of GDP in the three scenarios would be 2%, 5% or 8% lower respectively in 15 years’ time, relative to remaining a full member of the EU. This compares to the central estimates of 3.8%, 6.2% and 7.5% in the 2016 report.
This similarity isn’t a surprise, because the approach is essentially the same as that adopted in 2016. In particular, the latest analysis assumes that even a small increase in frictions (tariffs or non-tariff barriers) would have a devastating impact on the UK’s trade with the EU. It also relies heavily on ‘gravity models’, which give disproportionate weight to the existing relationship with the EU compared to the potential for increased trade with faster growing economies in the rest of the world.
What’s more, the WTO (or ‘no deal’) scenario is assumed to be particularly damaging because the UK would then impose tariffs on imports from the EU. Most other academic studies have taken this for granted too. But, instead, the UK could maintain the level playing field required under the WTO’s MFN rules by eliminating tariffs on imports from the rest of the world. This would boost GDP, rather than reduce it. A serious ‘scenario analysis’ would surely consider all the options, especially when they are based on decisions which would be entirely in the UK government’s hands.
Finally, these very long-term estimates need to be put into some sort of perspective. Let’s assume that UK GDP growth would average something like 1.5% to 2% over the next 15 years, if it remained in the EU. That implies that the level of GDP would increase by around 30% over this period. A 5% loss relative to this baseline would still mean that the level GDP is 25% higher than it is today.
The difference between 25% and 30% would be significant, of course. But you also only have to look back at the Treasury’s similarly gloomy analysis of the immediate impact of Brexit to see the difficulty of forecasting the implications for GDP even one or two years’ ahead. In reality, the UK economy has continued to confound the doomsayers.
Overall, this report can be chucked on the same pile as the many previous studies that have used much the same assumptions and models to come up with much the same results.