There would be some initial disruption but no long-term damageby Graham Gudgin and Robert Tombs / November 2, 2018 / Leave a comment
There is confusion on what is meant by a no deal Brexit. Threats have abounded—for example that the EU will prevent flights from landing, or that the Eurostar would stop running. None of these threats is plausible. Negotiations are proceeding to avert outcomes greatly damaging to both the UK and the EU. A realistic no deal scenario would involve the absence of a free-trade agreement, at least for a while, combined with side-deals to maintain smooth operation of flights plus the safety of vehicles, medicines and other goods and services. Customs borders would be set up and tariffs imposed.
It is difficult to know how the UK economy would fare in such a “no-deal-lite” scenario because official forecasts are so unreliable. Forecasts in the UK come largely from the Treasury. The Office for Budget Responsibility and the Institute for Fiscal Studies do not generate their own estimates for Brexit. For this week’s Budget the OBR assumed a trade deal with mild impacts on trade and said nothing about a no deal.
The very negative Treasury forecasts should be completely ignored. Officials serving Ministers with known positions on Brexit are in no position to be objective. At least one former Cabinet Secretary would not have allowed the Treasury to publish estimates of the impact of Brexit for this reason.
The Treasury’s two-year forecasts published in 2016 have been hugely and embarrassingly wrong. They included a prediction that unemployment would rise by half a million when it has fallen by a quarter of a million. An error of three-quarters of a million over just two years is stupendous when total unemployment is currently 1.3m. Predictions of soaring interest rates and collapsing share prices have also proved false.
Some claim that a failure in short-term forecasting does not necessarily mean that the Treasury’s long-term (12-year) predictions will be wrong. However, we do know that these include assumptions that hugely exaggerated the estimated negative impact of no deal. Strikingly, a report obtained under the Freedom of Information Act shows that the Treasury must have known that the approach it took in 2016 was flawed. But it has subsequently refused to discuss this.
The Treasury has since dropped its discredited “gravity” model. We know little about the replacement model because the prime minister has refused a request…