The Cost of Brexit and how much you should Trust the Forecasts – Explained by an Economist
Nauro Campos offers some guidance to those wishing to, and trying to, predict what Brexit may hold.
Brexit is like a box of chocolates: you never know what you’re gonna get. The latest surprise is that Downing Street has ruled out staying in the customs union, which allows uninhibited trade in goods within the EU. It follows the leak of the government’s pessimistic assessment of the economic impact of Brexit. The leaked document reinforces the academic consensus on the costs of Brexit and shows that staying in the customs union would be better for the UK economy.
The full report is not yet available to the public. Instead, it was leaked in two instalments. The first shows that Brexit will be economically damaging in every scenario – including the scenario the government says it prefers, which seems to be somewhere between membership of the single market like Norway or a trade deal like Canada. The bottom line is that after Brexit, the UK will be inexorably poorer.
The second instalment showed not only that migration has been beneficial to the UK economy, but also that its Brexit-driven reduction will be costly. To add insult to injury, it also showed that these losses will not be compensated by gains from a free trade agreement with the US. The net benefits from migration may be small but as the leaked report shows they are significantly larger than the gains from free trade agreements with countries on the other side of the globe.
It will not be at all shocking if there is a third instalment. It may show that EU regulations have been beneficial to the UK (the benefits have long been overlooked). Or maybe that Europe does not need the City of London to sustain high rates of economic growth. Or that there is not a single region in the UK that would clearly benefit and that the ones that will be hurt the most are the ones that voted Leave.
Don’t shoot the messenger?
The choice the government has is how to leave. Leaving like Norway, the report estimates, will make the UK roughly 2% poorer (Nobel-prize winning and economics expert Paul Krugman has written that, in this context, “2% is a lot”). Leaving like Switzerland will make the UK 5% poorer and leaving like Russia, 8% poorer. Unsurprisingly, this last figure is in line with the estimated benefits the UK historically enjoyed from its membership in the EU.
In fact, the leaked scenarios have not moved us an iota away from what we knew pre-referendum. There is mention that a new method was used, but that is highly unlikely. There is no time, energy nor capacity in the civil service to develop a new model amid this chaos.
Otherwise, there is no meaningful difference between the figures in the leaked report and analysis carried out before the referendum by the Treasury or economists at the LSE, NIESR, or the IFS.
The only thing that is different is that this time the message is coming from the Department for Exiting the European Union, DExEU. And it’s very much in DExEU’s interest to make Brexit work.
Nonetheless, you may ask: how can we trust these forecasts? One of the key Brexit ministers, the MP Steve Baker, claims that Whitehall economic forecasts are always wrong. Many point to how the UK economy has weathered the Brexit vote and not fallen off the cliff edge that was supposedly forecast.
But the forecasts published in the run up to the Brexit vote have not been disproved. First and foremost this is because the UK has not yet left the EU. When it does, what these forecasts predict is not that the economy will collapse, shrink or self-destroy. They predict that because the UK will grow more slowly and the gap compared to an average EU member (treated as an approximation to a “UK that remained in the EU”) will increase.
This prediction was based on three important assumptions. The first was immediate withdrawal from the EU – this hasn’t happened yet. The second was that the UK government remains stable. The snap election and hung parliament meant this did not happen either.
And the third assumption the forecasts are based on is that the economic performance of the rest of the EU would remain similar to what it was before the referendum. In fact, Britain’s economy has been helped by a buoyant EU and global economy.
So what happens next? Reactions to the leaked report seem to be that those sceptical of the EU – and “experts” – will remain that way. Hard Brexit supporters are keen to undermine the report.
What’s different now compared to before the referendum, though, is that the political and economic elites are no longer on the same side as the media, which was skewed toward Brexit. Although media coverage can still only be described as lukewarm at best, there is now more consensus among political elites against a hard or no-deal Brexit. Moreover, business has said loud and clear that it fully concurs with the conclusions from the leaked report – that the UK needs to stay in the customs union.
Nauro Campos, Professor of Economics and Finance, Brunel University London.
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