Leaked Brexit analysis fails to break new ground


The latest Whitehall analysis of the economic impact of Brexit would have to be published and critically reviewed before it could be taken seriously. But the leaks so far add little, if anything, to the debate, and settle nothing at all.

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.

 

Julian Jessop is an independent economist with over thirty years of experience gained in the public sector, City and consultancy, including senior positions at HM Treasury, HSBC, Standard Chartered Bank and Capital Economics. He was Chief Economist and Head of the Brexit Unit at the IEA until December 2018 and continues to support our work, especially schools outreach, on a pro bono basis.


2 thoughts on “Leaked Brexit analysis fails to break new ground”

  1. Posted 30/01/2018 at 21:14 | Permalink

    Julian, thanks for the summation. Have you had a chance to look into the Policy Exchange validation of the original gravity model extravaganza from the Treasury?

    https://policyexchange.org.uk/publication/defying-gravity-a-critique-of-estimates-of-the-economic-impact-of-brexit/

    The report explains gravity model is used to conclude that approximately 50% of UK trade would disappear under the WTO option. *This turns out to be based on looking at the average impact of the single market for the whole EU.* The report then analyses the single market’s impact on Britain using the same model and finds that around 20% of current trade is due to the single market and that is before the impact of changes in the FX rate. (There is a high degree of uncertainty around that figure to be sure).

    Nevertheless, surely deliberately obfuscating this central assumption is deeply disingenuous? This is either a deliberate misuse of statistical analysis in which case it is not very different from lying or if the Treasury really thinks the UK is just like all the other EU nations economically this difference of opinion goes right to the heart of why brexiteers and remainers see the world differently.

  2. Posted 30/01/2018 at 22:15 | Permalink

    So should we just do what Michael Gove once said and ignore the experts ( I think that would include you with your first class Economics degree)? Is the only way to evaluate the best strategy to approach leaving the EU to ‘play it by ear’ (the current government line) who seem to dismiss impact assessments as rubbish and shed no light on what they are actually aiming for. Just because the number crunching yields a consistent result does hat invalidate it as it seems human nature is cravibg some new news and we are all getting a little tired of debating Brexit?

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