What those economic forecasts really say about Brexit

Forecasting is unreliable at the best of times. But even so, people are seriously misrepresenting the numbers.

Rob Lyons
Columnist

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Topics Brexit Politics UK

Boris Johnson’s revised EU Withdrawal Agreement (WA) is, for many people, an improvement on the version that Theresa May failed to get through parliament earlier this year. Many hardcore Leavers have said that, while imperfect, the deal is tolerable, while others think that in political and legal terms it is far too similar to May’s ‘vassal state’ deal. Remainers and ‘neutral’ observers, meanwhile, all seem to agree on one thing: that the WA will leave the UK worse off economically.

Many have used the government’s own forecasts to argue that economic gloom lies ahead. But few seem to have understood what these forecasts actually say. For instance, on Sky News last Sunday, former home secretary Amber Rudd said that ‘Our government’s own assessments are that this will hurt the economy by four to six per cent per year. So it’s serious stuff. But I still think it’s the right thing to do because we had the referendum in 2016.’

Actually, those estimates are for a period of 15 years. What’s more, the estimates do not suggest that GDP would fall by four to six per cent, but rather that GDP would be four to six per cent lower than it would otherwise be in 15 years’ time.

Let’s be generous and say Rudd misspoke. But she wasn’t alone in claiming the government’s own figures showed the WA would hurt. Chuka Umunna, spokesperson for whatever party he’s a member of this week, claimed: ‘The government’s own research says that Boris Johnson’s Brexit proposals would lead to a 6.7 per cent drop in GDP and 6.4 per cent drop in real wages – the kind of hit to the economy experienced in the financial crash.’

Let’s be clear what those forecasts are actually suggesting. If the economy grew by an average of two per cent each year (optimistic, by recent standards), then after 15 years it would be roughly 34 per cent larger. If the various estimates noted by Rudd and Umunna are correct, then the growth would be a little lower and the economy in 15 years’ time might ‘only’ be somewhere between 27 to 32 per cent larger than it is today.

As an excellent summary on FullFact points out, to compare Johnson’s deal to the fallout from the crash is utterly misleading. The financial crash led to an economic crisis in which absolute GDP fell sharply within a few months by about six per cent and real wages after inflation took years to recover. There is a world of difference between a major recession like the crash and the economy not growing quite as much as we had hoped.

Actually, even these estimates should be treated with caution. Whether it is the Treasury, academics or think tanks making them, predictions are difficult, especially about the future. All we can do is take economic models, throw in some starting data and assumptions, and hope for the best. Given that these economic models haven’t got a great track record when it comes to guessing the size of the economy in 12 months time – let alone in 15 years’ time – all we can really say is that all other things being equal, we might expect a small dent in economic performance if the UK opts for a free-trade arrangement with the EU instead of full EU membership.

That said, the devil is in the detail. One glaring assumption in the more pessimistic forecasts is that the UK will have net-zero immigration from the European Economic Area (EEA) ̶ that is, as many people leaving as entering the UK from the EU plus Iceland, Liechtenstein and Norway. Of course, immigration may well be lower than if we had EU/EEA ‘free movement’. It follows that there will be less economic activity and therefore a lower GDP. But barely anyone has argued for ‘net zero’ immigration, even if lowering the rate of net migration is a policy shared by many of the big parties. What’s more, lower GDP as a result of lower net migration is not a great concern. The wealth of the economy per person is much more important than how much the economy is worth in total.

Other important aspects are productivity and trade. As the government’s long-term economic assessment noted in November 2018:

‘Trade can increase productivity, a key driver of economic growth, by exposing firms to competition, best practice, new technologies and through investment. This can contribute to higher wages, employment and households’ living standards.’

If we increase barriers to trade, then productivity should fall as domestic firms face less competition. So that report suggests, for example, that the switch to a free-trade agreement would cost 1.2 percentage points of GDP as a result of these investment and productivity effects.

But what if the government acts to increase competition in other ways? For example, if the UK leaves the EU Customs Union, we could lower tariffs on goods coming from other parts of the world. We can remove ‘non-tariff’ barriers – that is, relax regulations to allow in more goods from the rest of the world. These decisions will be in the UK government’s hands after we leave. It is by no means certain that the costs assumed by the various forecasters will actually be imposed. It may be the case that some costs increase but others fall.

More importantly, as Phil Mullan noted earlier this week on spiked, the UK’s productivity problem is longstanding and has nothing to do with our membership, or not, of the EU. Rather, it is a problem of profitability resulting from failures of UK economic policy, whether it is extremely lax monetary policy or the sustaining of debt-encumbered ‘zombie’ businesses. There is much we can do to boost the UK economy and leaving the EU could very well make such policies easier to enact.

In any event, there are higher principles at stake here when it comes to Brexit than a few decimal points of GDP. In the past, people have fought bloody and expensive wars for greater democracy and sovereignty, from the English Civil War and the American War of Independence through to the great anti-colonial struggles of the 20th century and to the Kurds and others battling in Syria today. Historians estimate, for example, that 3.6 per cent of the population of England died in the Civil War. Relatively speaking, a worst-case loss of 0.4 per cent of GDP per year for the next decade and a half looks like an absolute bargain. And the true cost of Brexit with a free-trade deal will probably be much less. Even the costs of a ‘No Deal’ Brexit have been hugely overblown.

So while economic assessments are not unimportant, the truth is the EU really isn’t crucial to the UK’s economy. Scare stories about the economy are not a proper basis for preventing Brexit. Now can we please just get on with it?

Rob Lyons is science and technology director at the Academy of Ideas and a spiked columnist.

Picture by: Getty Images.

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Comments

Forlorn Dream

29th October 2019 at 1:06 pm

It’s good to see Project Fear is still alive and well.

Brandy Cluster

24th October 2019 at 10:06 pm

What a magnificent visual representation of modern Britain you have in that picture at the top of this article. Very clever. And alarmingly real.

James Batterham

26th October 2019 at 6:39 pm

So I’m not the only one who thinks that building looks like one of Boris Johnson’s famous ‘letterboxes’? Probably owned and built by one of them.

Christopher Tyson

24th October 2019 at 9:18 pm

Greens believe that the pre-occupation with economic growth is misplaced and damaging. UK Greens, however, are remainers with regard to EU membership, despite the fact that the remain arguments are mainly about the potential shrinking (or collapse) of the UK economy, clearly this vision of a contracting economy does not fill the greens with enthusiasm. The remainers who fret about the likely fall in economic growth are supportive of the Greens whose main thing is the reduction of economic activity. Leavers are not motivated by economics, but in truth neither are remainers. As mentioned above, Phil Mullan has talked about the problem of low productivity and the need for state policies to redress this. It is difficult to see how this will happen. I ‘studied’ economics for seven years, the wrong subject for me, but back then they didn’t have subjects like ‘the history of pop music’ or ‘celebrity culture examined’, much more my thing. Regarding this Mullan does hint at cultural aspects although he does not use the term ‘entrepreneurialism’ he also doesn’t use the term ‘labour theory of value’. Culturally we do have the precautionary principle and a general risk averseness in society, but these developments cannot be reversed by a handful of charismatic individuals. I could ramble on for a long time but I would just like to give a couple of examples. In pop culture, when I grew we dreamed of being footballers and pop stars, we thought that we could be talent spotted having a kick about on Tooting Bec common, or an A&R man might hear us rehearsing and offer us a massive record deal. Today we have pop music academies, we have moguls as the stars of TV pop shows. Football clubs find talent at incredibly young and grooms them and coach them in to ‘good habits’. It is not a maverick culture. Even a show like The Apprentice, we have would be entrepreneurs competing for a job working for someone else, and this makes sense. If you want to get in to business become a lawyer or an accountant, you can make a lot of money without taking any personal risk. But it’s not just psychological, markets tend towards cartels and monopolies so it becomes harder for the lone operator to break in. Capitalism is driven by the profit motive, but not just the profit motive. Think of the city trader whose made a fortune and gets out to pursue his own passions, setting up a small cottage business, keeping things ticking over matters more than raking in maximum profits.
I don’t deny that I’m giving myself away, I am more familiar with the bureaucratic, administrative mindset than the cutting edge of business, but bureaucracies have a strong sense of self preservations and mission creep. Just a complete of analogies that I’ve come up with. If you are a house builder and you are making a profit of 20K per house, you can invest in machinery that will cut your labour costs and increase your profit to 25K a house. But business is going well, you’ve got a good team, you don’t want to get involved in re-training and maintenance of unfamiliar equipment, whatever the reasons you might prefer to keep things ticking along. You’re driving an old banger. You see a car that does everything that your car does, but has amazing fuel economy, there might even be tax and insurance incentives. But this car cost 20K, way out of your price range, so you stick to your old banger. Really we know that economic disruption usually happens during something like a war or disaster of some kind, not really from politicians however visionary, and where a sizeable proportion of the population is doing quite well, there is no incentive to rock the boat too much. In terms of Brexit we’ve seen what out creatives can do when they put their minds to it, Olympics games, Royal Pageants, even war (destructives rather than creatives perhaps). It seems that the creatives (and possible the destructives) are firmly in the remainer camp. Brexit could be a disaster, I don’t think that we can predict this for sure, or it might be an anti-climax, which might be embarrassing for some who may want to save face by constantly pointing out how terrible things are, how much worse it’s going to get, ‘I told you so’ etc.

Winston Stanley

24th October 2019 at 8:33 pm

To J im, 1 / 3

N on-E U mi grants t end t o h ave a n et d eficit t ax c ontribution b/c t hey h ave k ids a nd s chooling, c hild b enefit e tc. I s p ricey, b ut I t d oes r aise t he n ext g eneration. U K b orn a lso h ave a n et d eficit t ax c ontribution, £41.4 b illion. O nly E U mi grants h ave a s hort t erm n et t ax b enefit, n ot n on-E U a nd n ot U K. B eyond t axes, o bviously im mi grants c ontribute t o t he o verall p roductivity o f t he m arket, w hich I s w hy t he c apitalist s tate b rings t hem I n e n m asse a nd w ill c ontinue t o d o s o. M ost o f U K e mployment I s l ow s killed o r m edium s killed s o I t I s h ardly s urprising t hat im mi gration I ncludes l ow s killed. H owever t hey a re o ften a ble t o b e t rained t o a h igher s killed l evel I f s uch w ork e xists. T he e conomy t ends t o d etermine t he s kill s et r ather t han v ice v ersa.

Winston Stanley

24th October 2019 at 8:37 pm

2 / 3

T he l ow p roductivity p roblem e conomically (a nd t emporally) p re-e xists i mm igration p olicy a nd I t I s r ooted I n t he t endency o f t he r ate o f p rofitability t o f all I n l ate c apitalism, a nd I n c apitalist s tate p olicies t hat m aintain a l ow p rofit, z ombie e conomy; e asy m oney, s tate s upport o f f ailing, I ndebted b usinesses; w hich c auses c ongestion a nd s luggishness I n t he e conomy, a nd t hus r einforces l ow p rofitability i nvestment o pportunities; I n l ieu o f t he c hurn t hat I s n atural t o a n ormally f unctioning c apitalist e conomy. T he U K e conomy I s p olitically a nd s tructurally b roken. I mmigration c ontributes t o G DP, a nd I n a w ay p robably d oes r einforce l ow p roductivity g rowth, b ut t he p roblem I s p re-e xistent a nd I t c an b e s olved o nly b y a p olitical w ill t hat f rankly d oes n ot e xist.

Winston Stanley

24th October 2019 at 8:40 pm

3 / 3

W hat w e h ave I s w hat w e w ill h ave a d n auseum. C apitalism i s n ow d egenerate a nd c apitalist p olitics r eflect t hat. E verything e lse I s a c onsequence r ather t han p er s e a c ause, e ven I f t hey a s a c onsequence b ecome c ontributive c auses. I mm igration m ay c ontribute t o a h igh o r l ow p roductivity e conomy, I t I s t he e conomy I tself t hat d etermines w hich I s t he c ase. W orkers m eans p rofitability a nd I nvestment m eans m ore p rofitability; l ess o f e ither m eans l ess I n o utcome.

Winston Stanley

24th October 2019 at 8:27 pm

The comment section is broken, it simply deletes posts all of the time even when it says that they have been posted. sp iked need to get on the case and to sort it out. Dis qus was fine.

Dominic Straiton

24th October 2019 at 5:39 pm

Getting rid of fossil fuels while the rest of the world takes no notice is going to do far more harm to the economy than Brexit. Time for new politicians.

James Knight

24th October 2019 at 5:20 pm

There is no deal to do an assessment on.

How about an assessment on the impact of Corbyn in power and the net zero carbon austerity agenda. It looks like a disaster.

Jim Lawrie

24th October 2019 at 4:11 pm

How do unskilled immigrants who cost us £10,000 a year of borrowed money equate to economic activity? Is the author averaging out German investment among unproductive third worlders?

Jim Lawrie

24th October 2019 at 3:36 pm

“Let’s be generous and say Rudd misspoke. ” No. Let’s be honest and say she is either deceitful, or as thick as shite. I think she is both.

Jane 70

24th October 2019 at 3:25 pm

Immigration boosts GDP says the article, but then says that wealth per person is more important, as it is.

https://www.migrationwatchuk.org/briefing-paper/269/20-bogus-arguments-for-mass-immigration

See above.

The UK needs to

Jane 70

24th October 2019 at 3:25 pm

Meant to remove last unfinished sentence; need an edit button.

Andrew Leonard

25th October 2019 at 4:51 am

Draft in text editor or word processor. Then copy & paste. 🙂

Jim Lawrie

24th October 2019 at 4:02 pm

I totally agree Jane 70. Wealth per person is likely to rise if immigration is cut. Mor so if we send back the many parasites.

What these forecasts do not tell us is that the people leaving the UK are far wealthier per capita than those coming in or remaining. Many of these people represent white flight, especially in the medical professions. Economic development in the regions is hampered by the lack of medics. The movement of retirees to rural areas is halted by this, resulting in vacant properties there and stopping the release of houses in areas where they are needed by workers.

Jane 70

24th October 2019 at 4:52 pm

There’s also the fact that we are encouraging professionals from impoverished chaotic countries to come here; most of them do not return , thus depriving their homelands of the skills and expertise which they so desperately need.GDP is far too broad a measure and, apparently, now includes the proceeds of drug dealing and prostitution: ‘ every little helps’ in the Treasury’s economic assessments.

Jerry Owen

24th October 2019 at 3:08 pm

Is that an islamic building !

jessica christon

24th October 2019 at 7:46 pm

I thought it was a woman in a bhurka for a split second when I saw it. Or maybe a moment in a sci-fi movie? If not for the title I wouldn’t have known it was the city!

Jonathan Andrews

24th October 2019 at 8:17 pm

It looks remarkably like a woman in a burka, I’m glad it wasn’t just me that thought that

Andrew Leonard

25th October 2019 at 12:07 am

It’s a close-up of Treasury’s suggestion box

Michael Lynch

24th October 2019 at 2:44 pm

If we could predict the future then we’d all be millionaires! They’re just well educated bookies this lot, but even they failed to see the biggest economic crash since the thirties coming until it ran them over. Give me a break, they just a bunch of puffed up nobodies that created the current economic crisis because of their greed. You don’t need a degree in economics to understand that.

Jim Lawrie

24th October 2019 at 5:53 pm

There is a Nobel prize every year in economics. It makes zero difference to anything. It is awarded on the basis of plausible and interesting theory, by a bunch of economists. It should be scrapped. Ditto the peace prize, as awarded to Obama.
Or maybe we need a new one, called the The Nobel Prize for Feminism, followed by the prize for Anti-Fascism, and one for anti-Racism, and one for anti-Sexism.

Jonathan Andrews

24th October 2019 at 8:21 pm

Having studied a little economics, I can only agree with you. Economists should stop pretending that they are engineers.

C J

24th October 2019 at 2:28 pm

>>Whether it is the Treasury, academics or think tanks making them, predictions are difficult, especially about the future.<<
What other kind of predictions are there?

Ven Oods

24th October 2019 at 6:30 pm

Presumably, there are pre-predictions, as made by those clever folk who claim to pre-prepare things.

Jonathan Andrews

24th October 2019 at 8:19 pm

The line is a Yogi Bearism, I think. Wasn’t he famous for these sort of lines? Wasn’t he the one who said “it ain’t over, til it’s over”?

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