Forget the short-term Brexit predictions, the crucial part of the OECD’s new report was the emphasis on domestic policyby / October 19, 2017 / Leave a comment
These days, whenever the experts from one of Michael Gove’s “organisations with acronyms” produce a new forecast or analysis of the UK economy, there is a predictable chorus of “I told you so” from both sides of the Brexit divide. On the Remain side, it’s vindication of their claim that the predicted economic downsides of Brexit are now materialising. Unsurprisingly, George Osborne’s Evening Standard claimed that this week’s OECD “bombshell report” “painted an apocalyptic vision of a ‘hard’ exit from the European Union in 2019.”
On the other hand, Brexiters point to the fact that some of the more alarmist pre-referendum forecasts—not least, Osborne’s own scaremongering claim that an emergency tax-raising budget would be required—have proved wrong. This is a reasonable point. Unfortunately, however, they tend to supplement this—as Gisela Stuart did this week and Gove, again, has done in the past—with facile smears that the views of the experts in question have been influenced by their receipt of “EU funding.” This is simply absurd in the case of the OECD, which gets a tiny percentage of its income from the EU.
But in fact, aside from a headline-grabbing reference to a second EU referendum, the views of the OECD on the short-term economic impacts of Brexit are neither particularly new nor particularly interesting. They note that growth has slowed—at the same time as it is accelerating in continental Europe and elsewhere—and forecast that it will slow further, driven by the post-Brexit fall in the exchange rate and the increasing impact of Brexit on consumer and business confidence, and hence investment. All this is very much in line with the prevailing consensus—which doesn’t mean it will necessarily be right or wrong, but certainly doesn’t justify the headlines.
“The OECD’s comparative advantage—and it is very good indeed at this—is on the ‘supply side’ of the economy, in policies like labour markets, housing and education”
And nor should this be surprising. The OECD’s main job is not forecasting or indeed making recommendations about monetary or fiscal policy. Indeed, when it did try its hand at this during the eurozone crisis, it was repeatedly, obviously and embarrassingly wrong, as I and otherspointed out at the time. In economists’ jargon, the OECD’s comparative advantage—and it is very good indeed at this—is on the “supply side” of the economy, in policies like labour markets, housing and education.
And it is here that the OECD’s message is worth paying attention to. As we all know, real wages in the UK are well below their level of a decade ago, reflecting the UK’s abysmal productivity performance. And, the report argues, Brexit is likely to make that worse not better. The reason is simple: the causes of this poor performance—low skills, underinvestment both public and private, and persistent regional imbalances—are not caused by our membership of the European Union, while the direct impact of Brexit will be to reduce productivity still further:
“Brexit could reduce total factor productivity by about 3 per cent after ten years, mainly through the channel of diminished trade openness, but also owing to a weaker research and development intensity and a smaller pool of skills”
The OECD analysis of the impact of immigration is particularly noteworthy. As they point out “immigration has enhanced living standards through higher labour resource utilisation and productivity gains,” and in recent years migration has boosted not just GDP but GDP per capita. So restrictions on EU migration are likely to be damaging.
This all sounds depressing, but it need not necessarily be a counsel of despair. If, as the OECD argue, the UK’s fundamental economic weaknesses are little to do with the EU, it follows that the solutions to those weaknesses are mostly under our control. The report is full of sensible recommendations on infrastructure, devolution, training and so on.
Pessimists will argue that the UK government will neither have the money, civil service resources or the political will to implement them at the same times as it is dealing with Brexit—but that’s no excuse for not trying. Nor indeed does Brexit oblige us to make our immigration system still more bureaucratic, expensive and restrictive—it is Theresa May’s determination to reduce immigration regardless of the economic cost that does that.
The bottom line of the OECD report is that the set of economic challenges the UK faces is very complex. And, as HL Mencken put it: “To every complex problem, there is an answer that is clear, simple and wrong.”