How Brexit will reinvigorate the British economy

How Brexit will reinvigorate the British economy

In the Economists for Free Trade ‘Budget for Brexit’ launching this week, we proclaim a heresy: Brexit will be good for the British economy.

Our in depth research reveals that Brexit will speed up economic growth, create extra jobs and generate additional revenues to be spent on tax cuts, spending increases or a combination of the two.

Of course, this is not the conventional view. Before the 2016 referendum, the Treasury predicted an immediate recession and a longer term winter for the economy. None of this has come to pass. Nonetheless, the Treasury (and its satellites such as the OBR) continue to view Brexit in the gloomiest light. I disagree. The Treasury is wrong – not for the first time. Brexit is a new dawn for the UK economy.

So why do I and my group – Economists for Free Trade – believe that we can move from Project Fear to Project Prosperity? The reason lies in the numbers. We have taken our baseline forecast for the UK economy and factored in the key changes that will flow from Brexit.

Start with the baseline under the status quo. This is not half as bad as we seem to be hearing from ‘official sources’. Public Borrowing is undershooting the March Budget’s forecasts and implies at current rates that the debt to GDP ratio has started to fall from its current 80% or so. This debt figure rightly excludes the Bank of England’s operations in the money markets and of course the debt of the Royal Bank of Scotland, to be sold off as soon as possible. The money coming in from revenues is growing more strongly at some 4% than the money going out in spending (at some 3%). It looks as if borrowing this year will be around 2% of GDP. On the baseline assumption that spending rises in money terms by around 2.5% a year, by the Brexit year 2020, borrowing will have got close to zero- hovering on the edge of a surplus- and by the end of 2021 debt would have reached 75% of GDP, well on its way towards the safe target level of 60% of GDP, where the risks of a sharp interest rate rise causing a crisis become manageable.

The current economic facts also suggest that the economy is growing reasonably well. Growth even according to the ONS is running at just below 2% per annum; we think that when all the data is in, as so often the finally revised GDP growth rates will be seen to have been running at 2% plus since the referendum. That would fit with the data from the Purchasing Manager Indices, from the CBI surveys and from robustly growing employment. It also fits with the steady improvement in the public finances.

And what about all the official gloom about UK productivity growth stalling? This talk is totally misleading. There is a huge measurement problem for the quality and so the productivity of services, now 80% of the economy. It is easy enough to measure the number of plates rolling off a production line and it was much easier to see our productivity growth when manufacturing was 25% of employment in 1980; but how to measure the service you get from your mobile phone or your computerised booking agency, not to speak of all the ‘free stuff’ such as internet searches? For example according to the ONS productivity figures productivity in education, healthcare and social services has been falling since 1998 at 4% a year- an obviously absurd figure. Unfortunately until we can get some grip on the measurement issue the only reliable figures for the economy’s growth are money GDP- the money value of what we spend and produce.

So much for the baseline. Now turn to the effects of Brexit. These include a big fall in consumer prices because of the prospect of tariff-free trade with the rest of the world; the elimination of the UK contribution to the EU budget and subsidies to unskilled EU migrants; less Brussels red tape for business; and an improvement in our terms of trade. Together, these changes add about 7 per cent to UK GDP over the next decade. Factored into our model of the economy, they have dramatic effects on our fiscal outlook.

Taking this all into account, our forecast shows that post-Brexit, the British economy is reinvigorated. Growth rises from 1.9 per cent in 2020, the Brexit year, to over 2 per cent in the early 2020s and then to nearly 3 per cent by 2025. This growth spurt generates higher revenues, driving down the PSBR and enabling the government to start repaying the national debt. Sterling falls back a little but unemployment, already low, falls further. Inflation holds steady at around 2 per cent. Interest rates return to normality but don’t go beyond 3 per cent. By 2025 the PSBR is in surplus by around £60 billion a year. Debt falls to below 60% of GDP during 2025.

This implies there is scope to cut taxes and raise spending while keeping debt under control, by which I mean still hitting the 60% safe ratio soon after the mid-2020s. We estimate that the Government could spend an extra £25 billion a year from the Brexit year of 2020 until 2025. How to spend the money is a political judgement. Let us assume we split the money evenly between tax cuts and necessary rises in spending on public services and infrastructure.

Then we could have headline tax cuts in 2020 of two per cent off corporation tax, two per cent off the top rate of income tax, and abolish the 45% additional rate. This would cost £12 billion and still leave another £13 billion for spending increases. This programme would emphasise how Britain is determined to underpin the Brexit revolution with policies for maximum competitiveness.

Looking further ahead to 2025, one can do still more quite responsibly. The government should have an extra £40 billion a year to play with – scope to knock 2 per cent off the standard rate of income tax and the top rate and 3p off corporation tax – at a total cost of £20 billion, again allowing an extra £20 billion for public services.

Project Fear was wrong in 2016 and it is wrong now. Brexit will be a shot in the arm for the UK economy, helping create the conditions for a supply-side revolution that will in itself provide dynamic benefits for growth, jobs and tax revenues. We should forget Project Fear and embrace Project Prosperity.