Mr Philip Hammond on Tuesday stated in the House of Commons that a “No Deal” Brexit could cost the country £90 billion. Mr Jeremy Hunt — supposedly prepared to preside over a “No Deal” if necessary — nevertheless warned that it could do economic damage equivalent to the 2008 Financial Crash. Both these forecasts are at the most extreme end of alarmism, even if they are worded ambiguously (“a disruptive No Deal”; “if we get this wrong”). They are not justified by any serious analysis. Given the positions presently held by these two men, they are utterly irresponsible.
At least Mr Hammond is consistent: he has always opposed Brexit, and done his best to make it impossible, frightening and (by holding back necessary preparations) damaging. What on earth can Mr Hunt be doing? Looking for excuses to go back on his ambiguous promises?
1 The Chancellor stated that “the Government’s analysis suggests that in a disruptive no-deal exit there will be a hit to the Exchequer of about £90 billion.”
- This seems still to be relying on old Treasury forecasts made to influence the 2016 Referendum, and which he is again presenting in the most tendentious and alarming way. These forecasts were made using methods and inputs that can only have been chosen to produce the desired result: to try to show that Brexit was a disaster.
- They have been so thoroughly discredited that even the Treasury has given them up.
- Among the authoritative independent economists who have rubbished these forecasts are former Bank of England governor Lord King (“a scare story”); the Nobel laureate and Remain-sympathiser Paul Krugman (“sloppy thinking is always a vice, no matter what cause it’s used for”), and the former assistant director of the International Monetary Fund’s European Department, Professor Ashoka Mody (“their projected costs of exit have no basis in economic theory or empirical findings”).
- Moreover, the Treasury have blankly refused to discuss their methods and results with academic economists.
- This is shameless propaganda, once again being wheeled out for blatantly political purposes.
2 Mr Hunt’s comparison of No Deal with the 2008 Crash is seemingly based on Bank of England forecasts: he said that the Bank’s “predictions are that it wouldn’t be quite [as bad as the financial crisis], but that it could be very serious if we get this wrong”, leading to an increase in the national debt of £90 billion (that suspiciously magic number again!) The Bank of England’s forecasts have a record of inaccuracy just as bad as those of the Treasury. No serious economic analysis suggests that a ‘No Deal’ could be anything like 2008. Paul Krugman said that the Bank had “gone pretty far out on a limb here” … “I don’t understand how you can get that kind of cost without making some big ad hoc assumptions”.
3 What is the real likely effect of a WTO Brexit?
Of course, this depends to a great extent on what British and EU governments do. It is now clear that thorough preparations have been made on all sides to minimize or eliminate disruption. Normal business and travel will carry on. Arrangements have been made to transmit goods without hindrance. Trade agreements with many of our most important global customers have already been agreed or are close to agreement.
On the other hand, what the Treasury and Bank forecasts resolutely refuse to contemplate are the major short and long-term gains that a WTO exit offers.
- Big price reductions in food and consumer goods such as clothing and footwear: EU tariffs and other trade barriers raise clothing prices by up to 8%, and food prices by around 5%. Essentially, the EU currently works to impoverish UK households by forcing them to buy expensive goods from within the EU.
- The ability to reorient our future trade towards the most dynamic areas of growth, e.g. Asia, South America and Africa. The EU’s own analysis suggests a network of such deals could add 2% to UK GDP in the long term.
- After Brexit, the UK can reduce trade barriers with the rest of the world and reorganise its regulatory system, dropping many of the costly EU regulations that hold back UK businesses (these costs are estimated by the EU itself at as much as 4-6% of GDP) and adopting best practice systems in line with those of more dynamic economies.
- No longer paying £10bn a year to the EU in membership fees – which are equivalent to a tariff of 6% on our exports to the EU
- Taking full control of fishing grounds – worth up to £3bn a year in the medium term
- Having a tailored, skills-based immigration policy without EU preferences, which could cut the benefit bill by £1.6bn per year
- This would constitute in total a major spending boost: tariff cuts alone could boost consumer incomes by £15 billion – around £800 per family per year.
Taking all these benefits into account, the result of a well managed WTO exit would be not a major economic loss, but potentially a huge economic gain of up to £80 billion a year.