It’s time Philip Hammond and the Treasury took seriously the economic benefits of Brexit

It’s time Philip Hammond and the Treasury took seriously the economic benefits of Brexit

After Salzburg, the way forward for Theresa May is clear. She must shift her position towards a simpler free trade deal (Canada ++) which would command the support the House of Commons and not compromise the principles of the EU Single Market. At the same time, she must make serious and committed preparations for leaving without a formal trade deal with the EU.

The problem for Theresa May is that her mantra of “No deal is better than a bad deal” has consistently been undermined by her colleagues. It is no surprise that EU leaders do not believe the UK threat of no deal is credible when the Chancellor of the Exchequer again and again tells everyone that it would be disastrous for the UK economy.

In fact, ever since the referendum, a significant number of economists have been pointing out that leaving without a trade deal would by no means be a disaster and would actually bring a number of significant economic benefits. Apart from saving most of the £39 billion divorce payment, a no-deal Brexit would free the UK from EU protectionism, reduce prices on goods from non-EU countries and, due to the resulting pressure, force prices down on goods from EU countries. It would also allow us to develop regulation and other economic policy in the interests of UK workers and businesses rather than big EU multinationals.

Modelling by Professor Patrick Minford, Chair of Economists for Free Trade (of which I am a member), estimates that, even if the EU were to impose tariffs on UK exports, the net effect of leaving on WTO terms would provide a net boost to the economy of at least 4% of GDP. Economists can argue about the precise calibration of such economic models, but there is clearly a big economic prize to be won.

Unfortunately, the Chancellor and his minions at the Treasury have been somewhat bashful about engaging with economists who don’t support their Project Fear 2 conclusions. In the last fortnight, though, there were hints that “the signs, they are a-changin’”.

When giving evidence to the House of Lords Economic Affairs Committee earlier in the month, Phillip Hammond conceded that the Treasury modelling methodology had at last moved closer to the approach advocated by Professor Minford. However, he went on to make a number of criticisms of the assumptions involved in the EFT approach. Many of these criticisms simply misunderstand the EFT approach. But at least it is some sort of attempt at dialogue and in the spirit of constructive debate, EFT has produced a detailed analysis of Mr Hammond’s criticisms clarifying the (very reasonable) assumptions on which the economic forecasts of the impact of leaving on WTO terms have been made.

The key lesson for the Treasury is that if it wants to be taken seriously after the disastrous failure of its Project Fear campaign during the referendum campaign, it needs to start taking seriously the significant benefits that Brexit can bring even if we leave under WTO terms.

By accepting this critical point, the Chancellor would be doing his boss a huge favour. Paradoxically, genuine enthusiasm from the Government for the benefits of leaving without a formal EU trade deal make it more likely that the EU will eventually come round to the obvious end-point: a simple, mutually beneficial agreement for the EU and UK to continue to trade without tariffs and with minimal disruption.

There is another aspect of leaving on WTO terms which is often overlooked. The UK has pledged not to erect a hard border with the Republic Ireland in any circumstances. Theresa May needs to demand the EU tells us if, in the event of no deal, they will force the Republic to impose a border. Answering yes would be utterly unacceptable to the Republic of Ireland. But if the answer is no, whatever arrangements they envisage should form the basis for solving the Irish border question. Put another way, Chequers is not needed to solve the Irish border question.

Underneath the EU’s refusal to countenance any pragmatic UK proposal lies the hope that the UK will retreat in fear and opt to stay in the Single Market and Customs Union but without having a say in setting the rules. That would suit other EU members, but it would be politically unacceptable (as well as economically stupid) for the UK.

Time is short but it is more important than ever for the Government to hold its nerve. If Theresa May wants to reach her goal of achieving the best deal for the UK, she needs her Chancellor to get on board the Brexit express. If he doesn’t fancy the trip, the very least he can do is to hold his silence between now and 29th March 2019.