In fairness, the huge downward revision to growth, which now
looks for real GDP to average growth of 1.4% per annum over the next five
years, was triggered by a downward revision to productivity growth – not wholly
related to Brexit. But the OBR did highlight that Brexit-related uncertainty
was likely to impact on business investment and assumed that the UK’s “share of EU market in global markets would
also fall.” The OBR, whether wittingly or not, provided a scathing
indictment of the government’s failure to plan for Brexit: “We asked the Government if it wished to provide any additional
information on its current policies in respect of Brexit that would be relevant
to our forecasts. It directed us to the Prime Minister’s Florence speech from
September and a white paper on trade policy published in February. We were not
provided with any information that is not in the public domain. As in our
previous two forecasts, we have not therefore been able to forecast on the
basis of fully specified Government policy in relation to the UK’s exit from
the EU.”
In the course of this week I have become engaged in a couple of debates about the economic wisdom of Brexit. In the first instance, my interlocutor asked me why I hold the view that the UK needs a trade deal with the EU and why instead we should not simply forge trade deals with the US, China and India. I pointed out that the EU is the UK’s largest single trading partner and that countries located in close proximity tend to trade heavily, which is why the UK exports more to Ireland than to China and India combined. His follow-up question was why the rest of the EU would put up trade barriers against the UK. My response was that if we resort to WTO rules, this will be the default position and because those countries which export a lot to the UK will not be able to do a bilateral deal, we need one with the EU.
The second issue regarded the usefulness of economic forecasts with regard to Brexit, which was particularly appropriate in the wake of the OBR’s assessment. I pointed out that in broad terms the economy is now where most forecasters assumed it would be based on their pre-June 2016 Brexit scenarios. A-ha, said my correspondent, but didn’t most forecasters assume the end of the world in the wake of the referendum. I have to admit most of us were overly gloomy based on our post-referendum forecasts. But as I have noted before, these were made against a backdrop of huge uncertainty: (i) no effective government; (ii) the assumption that Article 50 would be triggered immediately (as David Cameron had indicated) and (iii) some dire survey evidence in the immediate aftermath of the referendum. If you look at what most forecasters (including the Treasury’s longer-term analysis) indicated in their pre-June projections, it was generally assumed that the UK would grow by between 0.5% and 1% more slowly than otherwise – a view which is now being borne out.
Admittedly, the Treasury did not help matters with the dire warnings contained in its publication warning of the short-term implications of Brexit. But most economists dismissed these as being over the top and in retrospect should be viewed as part of the much derided Project Fear. More generally, if we take a medical analogy, and assume that an overly-cautious doctor quarantines a suspected infectious patient, do we then cease to listen to all medical advice? On the whole, I am comfortable with the consensus economic view that, at least over the next couple of years, the UK economy will underperform relative to its developed world peers.
Regarding questions on Brexit, I do welcome the fact that people challenge my views and even if we are unable to persuade each other of our respective case, it is important to have a civil debate about the consequences. I am not sure of the extent to which buyer’s remorse has set in with regard to the Brexit vote. Some people may have changed their mind, though I suspect the numbers are small. But 17 months after the vote and with 16 months until the UK leaves the EU, the understanding of the implications and the degree of preparedness for what follows are shocking. Anger is currently directed at the media (even the pro-Brexit newspapers are focusing on foreign disinformation campaigns), whilst both Leavers and Remainers point the finger at each other (those Leavers arguing that if we all got behind Brexit we could make a success of it, really ought to engage their brain).
But the real culprits are in government. It was David Cameron who took the gamble and failed. It was the Conservative government which adopted a winner-take-all strategy in autumn 2016, and polarised the country rather than seeking to heal divisions. It was Theresa May herself who called an unnecessary election which weakened the government, allowing ministers to intensify their in-fighting. Not that the Labour Party are much better. A large chunk of those who voted for Corbyn in June as a protest against the pro-Brexit Conservatives seem not to understand that he has no intention of halting Brexit. More damningly, the government has no plan for the future, as the OBR told us last week. Unless the EU takes pity on the UK and agrees in December to start trade talks, the outlook is starting to look pretty dire.
In the course of this week I have become engaged in a couple of debates about the economic wisdom of Brexit. In the first instance, my interlocutor asked me why I hold the view that the UK needs a trade deal with the EU and why instead we should not simply forge trade deals with the US, China and India. I pointed out that the EU is the UK’s largest single trading partner and that countries located in close proximity tend to trade heavily, which is why the UK exports more to Ireland than to China and India combined. His follow-up question was why the rest of the EU would put up trade barriers against the UK. My response was that if we resort to WTO rules, this will be the default position and because those countries which export a lot to the UK will not be able to do a bilateral deal, we need one with the EU.
The second issue regarded the usefulness of economic forecasts with regard to Brexit, which was particularly appropriate in the wake of the OBR’s assessment. I pointed out that in broad terms the economy is now where most forecasters assumed it would be based on their pre-June 2016 Brexit scenarios. A-ha, said my correspondent, but didn’t most forecasters assume the end of the world in the wake of the referendum. I have to admit most of us were overly gloomy based on our post-referendum forecasts. But as I have noted before, these were made against a backdrop of huge uncertainty: (i) no effective government; (ii) the assumption that Article 50 would be triggered immediately (as David Cameron had indicated) and (iii) some dire survey evidence in the immediate aftermath of the referendum. If you look at what most forecasters (including the Treasury’s longer-term analysis) indicated in their pre-June projections, it was generally assumed that the UK would grow by between 0.5% and 1% more slowly than otherwise – a view which is now being borne out.
Admittedly, the Treasury did not help matters with the dire warnings contained in its publication warning of the short-term implications of Brexit. But most economists dismissed these as being over the top and in retrospect should be viewed as part of the much derided Project Fear. More generally, if we take a medical analogy, and assume that an overly-cautious doctor quarantines a suspected infectious patient, do we then cease to listen to all medical advice? On the whole, I am comfortable with the consensus economic view that, at least over the next couple of years, the UK economy will underperform relative to its developed world peers.
Regarding questions on Brexit, I do welcome the fact that people challenge my views and even if we are unable to persuade each other of our respective case, it is important to have a civil debate about the consequences. I am not sure of the extent to which buyer’s remorse has set in with regard to the Brexit vote. Some people may have changed their mind, though I suspect the numbers are small. But 17 months after the vote and with 16 months until the UK leaves the EU, the understanding of the implications and the degree of preparedness for what follows are shocking. Anger is currently directed at the media (even the pro-Brexit newspapers are focusing on foreign disinformation campaigns), whilst both Leavers and Remainers point the finger at each other (those Leavers arguing that if we all got behind Brexit we could make a success of it, really ought to engage their brain).
But the real culprits are in government. It was David Cameron who took the gamble and failed. It was the Conservative government which adopted a winner-take-all strategy in autumn 2016, and polarised the country rather than seeking to heal divisions. It was Theresa May herself who called an unnecessary election which weakened the government, allowing ministers to intensify their in-fighting. Not that the Labour Party are much better. A large chunk of those who voted for Corbyn in June as a protest against the pro-Brexit Conservatives seem not to understand that he has no intention of halting Brexit. More damningly, the government has no plan for the future, as the OBR told us last week. Unless the EU takes pity on the UK and agrees in December to start trade talks, the outlook is starting to look pretty dire.
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