Why we should ignore the Treasury and Bank of England’s latest attempts to frighten us out of Brexit

Why we should ignore the Treasury and Bank of England’s latest attempts to frighten us out of Brexit

The Treasury and Bank of England are at it once again, trying to terrify us into abandoning Brexit. The Treasury has just produced its new report on all forms of Brexit including Theresa May’s Withdrawal Agreement and lo! They are all worse than staying in. The Bank has run a ‘stress test’ on its ability to cope with a ‘worst case scenario’ for the UK economy; and lo! This is a ‘disorderly Brexit’ where the economy plunges into a deep 8% recession, unemployment surges to 7.5%, and house prices and sterling collapse. But God be praised, under good old Captain Carney the Bank can still cope!

What is one to make of this return of the bizarre circus duo?

Let us start by dismissing the Bank’s rodeo performance. The Bank’s latest warning of potential short-term Armageddon has no probability attached to it by the Bank. This is just as well because it is made up of absurd assumptions, each of which is highly improbable. Jointly their probability drops to virtually zero. The Bank might just as well have forecast what would happen if we went to war with the EU. It wants it both ways: as anti-Brexit propaganda and yet fully deniable. Let us waste no more time on a dangerous and irresponsible manoeuvre.

Move on to the Treasury. It has form on these awful forecasts. They said that in the year and half after the referendum the economy would contract by between 0.1% and 2.1%. In fact it grew by 2.8% and has continued to perform quite steadily, hitting what looks like over-full employment and causing the Bank to raise interest rates at last.

Now it has launched a second Project Fear. Apparently our economy will be badly hit under Brexit, whether we leave (worst case) with No (Trade) Deal on WTO rules or with a Canada+ Trade Deal. All this plus warnings of serious ‘disruption’ and ‘possible recession’. Poor Theresa May’s deal too will reduce GDP ‘in 15 years’ time by 1.4%’.

But as Mrs May agrees as she must, these forecasts are no better than the assumptions the Treasury have put into them.

Those assumptions are incredible in the extreme. The Treasury has spelt them out for us finally in full, after the past ten months of targeted leaks and some scribbled-on powerpoint slides extorted from it by the House of Commons. They are much as we expected.

First, they assume free trade deals around the world will yield only tiny gains to our economy – only 0.2% of GDP. Yet current EU protection is so high that on the Treasury’s very own model, eliminating it in a full set of trade deals for better access to all other countries would give a gain of 4% of GDP. The Treasury wriggles out of this by assuming that this protection is only about 8%, that only a quarter of it will actually be abolished, and finally that anyway the deals will cover half or less of our non-EU trade. To find this astonishing denial of the Government’s ‘bold plan to strike out for free trade with the world’ you have to trawl through the technical appendix paper; Mr. Hammond has not exactly confessed it on the Today programme, and nor will you find it out from the main report. Thus has the Treasury got rid of the biggest positive factor for Brexit.

Second, we come to the big negatives. The Treasury assumes that large costs will arise at the EU border for UK-EU trade even if we negotiate ‘free trade’ with the EU. One is pure ‘border costs’; such as extra paperwork and lengthy inspections. However, computerisation means that almost all cargoes are now cleared before reaching port; and this is now mandated by WTO rules.

Another new border cost according to the Treasury would be costly EU claims that our exporters do not satisfy required product standards. However, under WTO rules this is illegal since existing product standards are already exactly obeyed.

How does the Treasury rebut this point? It does not; it mentions it in its appendix but then sidesteps it, relying on an econometric comparison of EU trade correlations with countries outside the EU versus ones with EU countries. This finds not surprisingly that on average there are more barriers with the former. Of course: the EU deliberately makes its standards such that the US and other non-EU countries cannot sell some of their products inside the EU. But this misses entirely the point that to do this with the UK which exactly meets those standards is completely illegal under WTO rules. Having been in the EU, our situation is not reversible into that of a country that has never been in the EU.

Put in sensible assumptions into the Treasury’s own model in place of this nonsense and out pop big gains from a proper Brexit.

The Treasury says lots of institutions agree with its negative assessment of Brexit. What it fails to do is any analysis of just why they agree. It is for two reasons. First, most of them used the trade correlations the Treasury itself used before the referendum: but, as it has now agreed with critics like us, such correlations could not reveal causation and should be replaced by a full new trade model such as it has now moved onto. Second, for the minority which do use such a model, they put in much the same assumptions as the Treasury.

The last fear factor invoked by the Treasury is the ‘disruption’ and ‘recession’ from ‘crashing out with no deal’. But in practice No Deal would incorporate by administrative cooperation all existing agreements that are quite uncontroversial – on electricity in Northern Ireland, on aviation and so on. When the current deal is voted down in our Parliament, as it surely will be, the Government will need to move rapidly so that when we leave, these practical cooperative actions are in place. And if it can negotiate Canada+ so much the better.

As we look ahead, we will need to have a properly informed debate on the meaty question of how to work out the effects on our trade and welfare of different trade deals. We have our own World Trade Model which we have tested and found to do a good job of matching the facts of UK trade. Its details are published and anyone can find out what it says. The Treasury has rightly moved on from the misdirected ‘gravity correlations’ it used in the referendum and has now subscribed to the big GTAP World Trade Model from Purdue University in Indiana. This has some weak ‘gravity’ elements and is far too large to test; but at least it is logical and transparent. As taxpayers’ money has been used to acquire it and get it running, Parliament should insist that we taxpayers can access it and find out exactly how it behaves in response to different trade policies and assumptions.

The Treasury has finally given us a full report and appendix on its views. For this much, thanks. Now the citizens must have access to redo its flawed analysis, so that we know what its own model truly says about Brexit as properly conceived.