I'll tell you what I want (what I really, really want)

Theresa May’s “big speech” on Friday where she outlined her five point plan for what she wants from Brexit, was supposed to be her Spice Girls moment - telling us what she really, really wants. It would bring the Conservative party together, pacify governments elsewhere in the EU27 and apply some balm to the festering domestic wound caused by the vote to leave the EU. To read various domestic media outlets, you could be forgiven for thinking that it had hit many of its targets. According to the FT "Theresa May warns Eurosceptics to 'face facts'". The Telegraph called it “her most pragmatic Brexit speech to date” and noted “if only [she] had given this speech 13 months ago at Lancaster House.”

Instead, I heard a speech that was long on words but short on content. Guy Verhofstadt got it broadly right in his Twitter feed when he noted that “PM May needed to move beyond vague aspirations. While I welcome the call for a deep & special partnership, this cannot be achieved by putting a few extra cherries on the Brexit cake.” In some ways, the Telegraph was right about one thing – it would have made a far better starting point than her car crash Lancaster House speech in January 2017. But it was not a speech which gives anyone any confidence that at this stage of the Brexit negotiations, the UK government is on track for a Brexit that works for anyone – politically or economically.

The five “tests” were themselves an exercise in irony: (i) “the agreement we reach with the EU must respect the referendum”; (ii) “the new agreement we reach with the EU must endure”; (iii) “it must protect people’s jobs and security"; (iv) “it must be consistent with the kind of country we want to be … a modern, open, outward-looking, tolerant, European democracy”; (v) “it must strengthen our union of nations and our union of people.” In terms of (i), the only thing the electorate voted for in 2016 was to leave the EU – not the customs union nor single market. With regard to (iii), most economists struggle to see how we will be better off and on (iv) I have remarked previously about how the world sees the UK as becoming more, not less insular. But (v) really was a corker: Two areas of the union voted to remain and they are being dragged out of the EU because of the choices of voters elsewhere. Brexit poses the biggest danger to the union in modern times.

May’s statement that “we must bring our country back together” produced this rejoinder from Jolyon Maugham QC, the prominent Remain campaigner: “When your Brexit doesn't deny our children the privileges we enjoyed, we'll listen. When you apologise for calling us "citizens of nowhere", we'll listen. When your policies respect the dignity of our friends, colleagues and partners, we'll listen.”

As I parsed the speech, it was difficult to discern anything new. It was similar in tone to that in Florence last September (albeit way better than the efforts of 2016 and early-2017) though it better reflected the reality that the UK is not going to leave the EU on its own terms. There was nothing of any substance about how to resolve the Irish border problem, although the phrase “we want as frictionless a border as possible” was directly used four times and another twice in a slightly different guise. Nor was any justification provided for the decision to leave the customs union. Another thing that struck me was the mention of introducing processes to differentiate between small and large businesses in Northern Ireland to reduce the administrative burden on smaller companies. So we introduce more admin to reduce the administrative burden? It would be laughable were it not so serious, and none of this would be necessary at all if the UK simply remained in the customs union.

To compound the litany of dreadful decisions, May reiterated that the UK would leave the Digital Single Market – the EU's strategy to make it easier for digital businesses to work across borders and which guaranteed things like no roaming charges. And “on financial services, the Chancellor will be setting out next week how financial services can and should be part of a deep and comprehensive partnership.” Only six months too late as banks begin to implement processes to allow them to cope with the business disruption caused by an end to passporting – a process which, once it starts, will not be reversed. With regard to services more generally, “we want to limit the number of barriers that could prevent UK firms from setting up in the EU and vice versa, and agree an appropriate labour mobility  framework.” So there is at least a recognition that non-tariff barriers are a major hindrance for the services sector, so that’s a start, but we have been saying this all along. But scrapping the existing movement of free labour in order to introduce a new set of plans? It all defies logic. As I pointed out in 2015, swapping one set of rules for another means “much of what is currently legislated by the EU would have to be done domestically in the event of Brexit.”

As an economist, I found the speech content-free. But increasingly, it seems to me, the problem is Theresa May herself. As the blogger David Allen Green has pointed out, the PM and her colleagues make speeches whereas the EU issues detailed legal documents. Worse still, May is neither a strong leader nor a good communicator. She can't lead because she is a prisoner of the two factions of her party who want either a hard Brexit or the softest possible and can please neither side as she walks the Brexit tightrope, giving the impression of a leader who is in office but not in power. The PM seems not to understand how to communicate with other EU leaders – her speeches are bland and lack any of the specific detail which her soon-to-be-erstwhile EU partners want to hear. I’m afraid to say that whilst her predecessor David Cameron will go down in history as one of the worst prime ministers in recent history, Theresa May is currently running him close.

Major issues

I don’t want to keep banging on about Brexit but as the Article 50 period approaches the halfway mark, the pitch of the debate is intensifying as Remainers line up to point out the flaws in the Leavers arguments, who in turn respond by accusing Remainers of being unpatriotic. Former prime minister John Major waded into the debate yesterday by pointing out all the flaws in the Brexit argument and criticising the government for boxing itself into a corner by refusing to countenance any deviation from a policy which is likely to prove extremely costly.

It was punchy stuff but then Major has never shied away from a fight, and we should not be fooled by his calm demeanour. When it was suggested by the likes of Iain Duncan-Smith that he should hold his counsel in order to avoid undermining his successor, Major responded that he has rarely spoken out on the EU issue, unlike his own predecessor Margaret Thatcher, who in his recollection spoke out “weekly”. Indeed, Major has more cause than most to be irritated by the actions of a vocal minority of backbench MPs who spent the years 1992-97 undermining the efforts of his government.

At the time, Major was not regarded as a particularly impressive prime minister but he increasingly looks like a political giant as we deal with the pygmies attempting to implement policy today. Indeed, in June 1995 he memorably faced down his detractors by resigning as leader of the Conservative Party whilst serving as prime minister and challenged anyone to take him on. In the end, he comfortably beat off the challenge of the Eurosceptic John Redwood (who still haunts the backbenches of Westminster today). It was a very courageous move and one which Theresa May would do well to emulate, though she appears to lack the political courage (and probably the support of her party’s MPs). And lest it be forgotten, it was Major’s government that secured opt-outs from the Maastricht Treaty which kept the UK out of the European single currency. The legacy that he bequeathed to successive UK governments was thus a considerable one which his party now appears intent on squandering.

The years of Major’s premiership were not happy ones, dogged as they were by a party that was split on the issue of the EU, and as prime minister Major often seemed to be a prisoner of events. But his was a remarkable triumph over adversity, coming from a poor household and without the benefit of a university education. If anyone should be able to understand how Brexit will impact on the poorer members of society, surely it is him. And as has been pointed out many times, it is ironic that the leading lights of Brexit are well-educated, well-heeled members of the establishment such as Boris Johnson and Jacob Rees-Mogg. But as well-educated as these honourable gentlemen may be (and I use the term advisedly), they are clearly none-too-bright.

The attached pic shows a tweet from Rees-Mogg which highlights an article from The Sun newspaper outlining how much consumers would save if the UK were to leave the customs union. For example, the article notes that a pair of Nike Air Trainers, which currently cost £120, would be reduced to £99.60 if the 17% tariff on imports of such items was eliminated. Unfortunately, that is arithmetically incorrect. A £120 pair of trainers would actually cost £102.56 if the 17% tariff is abolished because the authors have wrongly calculated the new price as 120*(1-0.17) instead of the correct method of 120/1.17 – and have done so for every single item on the list. Jacob Rees-Mogg, educated at Eton College and Oxford University and who runs his own fund management firm, failed to spot the error and indeed compounded it by retweeting the original. He also accused Jeremy Corbyn of voting against the implementation of the Good Friday agreement in Northern Ireland when in fact he did no such thing.

So the next time Rees-Mogg makes claims in favour of Brexit, remember he is the guy who does not do the checking of basic details. John Major’s speech laid out the Brexit facts – and for too many Leavers the facts are an inconvenient detail which undermines their case. But they must be held to account on the facts because the Brexit vote was determined in their absence – and look where that got us.

Borderline insanity

As we reach the end of another month in which the UK government has failed to make any real Brexit progress, the European Commission has taken the initiative by producing a 119 page draft document detailing the legal text that will form the basis of the UK’s departure from the EU. One of the key protocols indicated that in the absence of any other solution, the EU will establish a common regulatory area in which “the territory of Northern Ireland, excluding the territorial waters of the United Kingdom (the "territory of Northern Ireland"), shall be considered to be part of the customs territory of the Union.”

This puts the UK government in an awkward position. Last summer it produced a Position Paper in which it committed to (i) upholding the Good Friday Agreement; (ii) maintaining the Common Travel Area and (iii) avoiding a hard border for the movement of goods. It did not give any detail on how these objectives could be achieved but instead talked vaguely of “technical solutions” without outlining what they are nor how they would work. Following the December agreement between the UK and EU, the two sides essentially kicked the can down the road, agreeing that progress had been made on the Irish border question without having done anything of the sort (as I noted at the time).

The extent to which influential Leave supporters really do not understand what is at stake was highlighted by Boris Johnson’s  crass remark earlier this week that the Irish border was no more of a problem than boundaries between different boroughs of London. Apart, that is, from the fact that we are talking about a border between two sovereign states with different legal systems – so pretty much identical, then (and this man is the Foreign Secretary for pity’s sake).

Obviously, the EC’s action met with a hostile reaction from both Prime Minister May and Unionist politicians in Northern Ireland who see this as an attempt to drive a wedge between the UK and the province. May told the House of Commons that “No UK prime minister could ever agree to it and I will be making that absolutely clear.” At that point – and you know what is coming next – the EU’s chief negotiator Michel Barnier will politely ask what is the UK’s alternative plan. Unless the UK can magically find a way to introduce the technology to maintain an open border, it seems to me that the only alternatives are either to reject the EU proposal, raising the likelihood of a hard Brexit, or rethink the plan to leave the customs union which would eliminate the Irish problem but annoy those pushing for a hard Brexit.

Jeremy Corbyn has already committed the Labour Party to supporting EU customs union membership following his speech on Monday. And there are plenty of Conservative MPs who support this position, which gives rise to the possibility that a cross-party grouping could yet force the prime minister to abandon her ruinously idiotic policy of leaving the customs union. From an economic perspective, departure makes no sense. Leavers will, of course, claim that it will give the UK the freedom to sign up to trade deals with rapidly growing countries outside the EU. But as I – and many others – have repeatedly pointed out, the gains from such deals are unlikely to make up for losses incurred by leaving the single market and customs union.

However, the Leavers have now convinced themselves that in June 2016 voters opted for leaving the customs union, even though that was never once discussed (let alone appear on the ballot paper). As a result we have head bangers such as Liam Fox claiming that backtracking on this commitment would be a “betrayal” of voters’ wishes in 2016. But it is clear that opposition to this damaging form of Brexit is mounting. Martin Donnelly, a former senior civil servant who served under Fox, recently described current government policy as like “swapping a three-course meal for a packet of crisps.” If leaving the EU represents the crisps diet, then maintaining customs union membership might be seen as swapping our banquet for a miserable course of cheese and biscuits – still sub-optimal but better than the processed potato-based option.

The EC knows, of course, that what it has proposed regarding the Northern Irish customs union is unacceptable to the British government. But at the very least, this intervention might force the UK to commit to what it wants from Brexit rather than simply talking in vague generalities. It could even persuade Theresa May to stand up to the ultras in her party who have commandeered Brexit to further their own ideological ends, rather than looking after the interests of the UK as they were elected to do. That may be a forlorn hope but with time running short and the prime minister increasingly reminiscent of Captain Queeg of The Caine Mutiny fame, someone has to take control. And if the EU forces the UK to take action to end the vacillation, so much the better. After all, despite their tribulations, Greek voters appear to prefer remaining in the EU than hand the keys over to domestic politicians. I increasingly know how they feel.

Asynchronicity

Comments by new Fed chair Jay Powell in Congressional testimony, suggesting that US interest rates might rise more rapidly than the markets currently anticipate, did nothing to assuage a jittery market which has been on edge since the beginning of the month. Powell indicated that his “personal outlook for the economy has strengthened since December” which has been interpreted as an indication that the Fed may be inclined to raise rates four times this year rather than the three that markets are currently expecting.

Such a pace of tightening would then put the upper limit of the Fed funds rate target corridor at 2.5% by year-end compared with just 0.5% in November 2016. That is not quite as aggressive as 2004-05 when the funds rate rose by 200 bps in the space of just 12 months, and a further 225 bps between May 2005 and June 2006, but having got used to a prolonged period of central bank inactivity over the past decade, that would represent a big move by the standards of recent years.

In addition, the Fed has already clearly set out a path for running down its balance sheet. Last June, it announced that it would reduce its holdings of Treasury securities at a rate of $6bn per month, rising by $6bn each quarter until it reaches a maximum drawdown of $30bn per month. Mortgage-backed securities are expected to decline by $4bn per month initially, with the drawdown rate being increased by $4bn per quarter up to a maximum of $20bn per month. By the end of this year, we can thus expect the balance sheet to decline at a pace of $50bn per month (ceteris paribus) which implies a $600bn reduction per year. If we assume that the minimum size of the balance sheet required to meet the cash needs of the US economy in future is around $2.5 trillion (it is currently at $4.4 trillion), the planned rate of reduction would enable this level to be reached by the middle of 2021 (see chart). This is at the lower end of the time period given by Powell in today’s testimony, when he said that a “normal” level will be reached in “three, four, five years.”

To the extent that the US economy looks to be back on its feet, posting solid growth and levels of unemployment consistent with full employment, monetary normalisation is clearly desirable. But with the duration of the US economic cycle already highly extended in the context of previous upswings, the fairly rapid degree of policy normalisation could be one of the factors which trips up either the economy or markets over the next one to two years. As the economist Rudi Dornbusch once remarked, “None of the post-war expansions died of old age. They were all murdered by the Fed.”

This also raises a question of how other central banks could or should respond. The ECB is well behind the Fed in the monetary tightening stakes, and is indeed still expanding its balance sheet even as the Fed is reducing its own. If the ECB starts to raise rates in 2019, it will be almost four years behind the US. The Bank of England may be less than happy about having to aggressively tighten if the UK economy suffers from any Brexit-induced weakness whilst the BoJ continues its extensive monetary easing. Such an asynchronous global monetary cycle might be expected to put upward pressure on the dollar. This is all very reminiscent of the situation in the late-1970s/early-1980s when Paul Volcker’s efforts to squeeze inflation out of the US economy necessitated a tight monetary stance which forced the greenback higher. This ultimately led to the Plaza and Louvre Accords of 1985 and 1987 which respectively attempted to weaken, and then stabilise the dollar.

Even today, old-timers in the FX market hark back to these agreements as an example of how to coordinate global monetary policy. We were reminded again in 2008-09 of the value of a co-ordinated policy stance. Today, we are nowhere near this position, and we can hardly blame the Fed for other central banks’ tardy efforts to remove the policies put in place in 2009 to combat conditions which are far different from those prevailing today. Whilst everything today appears to be going swimmingly, particularly in the euro zone, there will come a point where central banks elsewhere will have to start the process of taking away the punchbowl. Man cannot live by bread alone, but nor can he continue to rely on ultra-cheap credit.

Beyond the realms ...

The economic analysis that underpinned the Remain campaign ahead of the EU referendum was widely dismissed as the tool of Project Fear. It is not hard to see why. After all, the Treasury’s analysis of the short-term costs of Brexit sat rather uncomfortably, even at the time, and as events transpired it now looks hopelessly wrong. Indeed, the Treasury suggested that “the economy would fall into recession with four quarters of negative growth. After two years, GDP would be around 3.6% lower in the shock scenario …. the fall in the value of the pound would be around 12%, and unemployment would increase by around 500,000.” As we now know, the UK did not fall into recession and unemployment has fallen, rather than risen. But the Treasury was broadly right about the fall in sterling, and its prediction that “the exchange-rate-driven increase in the price of imports would lead to a material increase in prices, with the CPI inflation rate higher by 2.3 percentage points after a year.”

But the fact that large elements of the analysis used by Remainers was so far off the mark has allowed the Brexiteers to claim they were right all along and that leaving the EU will not be the economic disaster that is claimed. Indeed, the Economists for Free Trade Group (EfFT), led by Patrick Minford, uses the Treasury’s analysis as a counterpoint to suggest in fact there will be significant benefits to leaving the EU, of between 2% and 4% of GDP relative to the baseline of remaining. Their report issued last year was dubious enough (see here for my take on it) but their latest report, released this month appears to be even more of a desperate effort.

It begins with the premise that consensus economic forecasts cannot be trusted, and argues that the economics profession has been wrong on many of the big issues over the years (Thatcher reforms; leaving the ERM in 1992 and failure to join the euro). That is a pretty bad place from which to start because it is a claim that since the consensus was wrong on all the big issues, we should trust Minford and his pals. To quote the report, “Fortunately, a number of leading economists with considerable expertise and good forecasting track records suggest a very different outlook.” We’re so glad you could help out!

But it is a disingenuous claim. Even now there are many who would argue that the Thatcher reforms did not produce the improvements that Minford et al claimed – certainly the costs of those policies were high and their after-effects linger today.  It is certainly wrong to suggest that the economics profession in 1992 “argued that if we left [the ERM] disaster would ensue: inflation would soar and this would necessitate higher interest rates that would lead to an even deeper recession.” (I know because I was there). Similarly, whilst there may have been some prominent commentators suggesting that not joining the single currency was a bad idea, the majority view was not in favour. Nor do EfFT give the Treasury credit for the 2003 report which argued against euro membership.

One of the tactics of irritant groups like EfFT is to set up straw man arguments which they can easily dismiss, thus bolstering their case. “Being  proved  so  wrong  about  the  immediate  impact  of  the  vote  to  leave  has  not  deterred  the economics establishment from continuing to predict disaster in the long term.” The “disaster” in this case is the likelihood that incomes will grow more slowly in the absence of EU membership. Nobody is now seriously arguing that the UK economy will hit the rocks – merely that it will grow more slowly. Not what I would call a “disaster” – more a relative disadvantage.

Aside from the bluff and bluster, it is once we start digging into the details of the EfFT analysis that the weaknesses really emerge. As I mentioned in my previous post, EfFT assume no role whatsoever for gravity. Their claim that gravity effects have “been totally bypassed by the progress of technology” is simply not true. It is less important than it once was, admittedly, but to dismiss it because it does not fit with the story you are trying to tell is intellectually dishonest.

Even more significant is that the empirical work is based on a computable general equilibrium (CGE) model. They are great in theory but suffer from so many practical drawbacks that their results are often little better than guesswork. In brief, a CGE model is based on an input-output matrix and assigns a significant role for prices by assessing how much demand, supply and prices have to change following an economic shock in order to order to restore equilibrium. Amongst their many disadvantages is that it is difficult to determine the functional form used to model at the disaggregated level required by a CGE model. Moreover, because they are not estimated using standard statistical methods, but instead are calibrated (i.e. the parameters of the model are assigned using judgement), we have little idea whether the structural form of the model is consistent with the data in the real world. This is totally unacceptable for policy reasons (and to be fair, the Treasury’s own regional estimates of Brexit costs which are based on similar models, are subject to similar criticisms).

 So the models are somewhat dodgy, but wait until you hear about how Minford and his colleagues bend them to give the number they first thought of. EfFT start from the premise that the UK will benefit from unilateral tariff abolition. They cite the work by Ciuriak and Xiao who point to a 0.8% gain in GDP on the basis of unilateral tariff abolition. But theirs is a relatively cautious work and is obviously based on the assumption that the UK’s trading partners will necessarily reciprocate. EfFT blithely adopt the assumption as a matter of fact. Furthermore, they argue that Ciuriak and Xiao’s analysis suggests that “the combination of tariffs and non-trade-barriers eliminated is just 4 per cent ...” but if we “eliminate non-tariff barriers set up by the EU against the world … Ciuriak’s and Xiao’s results can be multiplied five times.” In other words, a cautious technical result is magnified by a factor of five.

But think about what that statement means. EfFT assume that the EU will reduce its non-tariff barriers. But why should it? It is one thing to talk about tariffs but quite another to quantify the impact of non-tariff barriers which are there to protect EU firms in their home market. This is a race-to-the-bottom assumption which appears to suggest that many of the standards we currently employ today will be swept away. And it is also worth heeding Ciuriak and Xiao’s conclusion that “in a long-term perspective, if the world (including the EU) moves to a similar free trade equilibrium, the first mover advantages to the UK of full liberalization against the rest of the world would eventually be eroded.” In other words if everybody adopts the policy, the UK will be out-competed in a number of key markets.

We could go on but it might be wise just to draw a veil over the nonsense. Suffice to say, with the same model as that applied by EfFT I could come up with a different set of results. But the reason that the economics profession does not buy these results is simply because EfFT assumes that EU membership today is all about costs with no compensating benefits, and if we leave then the costs will simply fall away. Most of us do not see it that way. There are costs, but they are offset by the benefits and leaving the EU will reverse that situation. It is, of course, possible that the majority view will be wrong but I wouldn’t put money on it – even to hedge my bets.

The laws of economic gravity

As the debate over the costs of Brexit continues to rage, it is worth taking a look at the different approaches which have been used to try and quantify the impacts. There are two main types of analysis: (i) gravity models and (ii) computable general equilibrium (CGE) models, both of which have strengths and weaknesses. Gravity models have long been used in the literature and are the economic analogue of Newton’s law of gravitation which states that the attractive force between two objects is the product of their mass proportional to the (squared) distance between them. In 1962, the economist Jan Tinbergen proposed that a similar model could be applied to international trade with the basic relationship shown below:

In other words, the trade flow (F) between two countries (i and j) depends positively on the respective size of the economies and inversely with the distance between them. In broad terms we can think of distance as a proxy for trade costs, which can have a significant impact on cross-border flows. If we take the logarithm of this equation we have a linear expression which can be estimated using standard regression techniques (in reality, the estimation methods are today quite complex but we will leave this aside). Over the years, the basic equation has been augmented with variables to take account of factors such as shared borders, common language, colonial links and whether they share some form of trade agreement (partly to explain why trade flows between countries such as the UK and US are so large), but the basic idea still holds: Large countries which are located relatively close to each other are likely to have significant trade flows. (Here for much more detail on gravity models, including a paper by Keith Head and Thierry Mayer covering all you ever wanted to know and much that you did not).

I looked at data for goods and services exports from the UK to 33 countries, representing 86% of total UK exports, over the period 1999 to 2016. If we fit a trend relationship between them, the slope of the line is negative – as theory predicts (see chart). But it is interesting that the line is less steep today than at the turn of the century. This reflects the notion often put forward by proponents of Brexit that rapidly growing markets such as China have become significantly more important for UK trade. Indeed UK exports to China rose from 0.3% of the total in 1999 to 3.1% by 2016. Over the past 20 years many commentators have suggested that distance is increasingly no barrier to trade, reflecting technological advances which have led to improved inventory management techniques and the like. But although the curve may have flattened, it is not flat, nor is it likely to be at any point in the foreseeable future. Rumours of the death of distance have been greatly exaggerated.

CGE models are much more computationally onerous but they do try to account for all the linkages between the various sectors of the economy to examine how a disturbance in one area feeds throughout the rest of the economy. They rest on the idea that there is a circular flow of income between sectors and also assume optimising behaviour by economic agents (subject to certain constraints). A CGE model of trade, looking at various sectors of the economy across a range of countries, involves a huge amount of data and one of the criticisms is that such models are often based on calibrations which may not necessarily be validated by the data (in contrast to gravity models which are estimated and therefore data coherent). But they are a useful way to understand how shocks percolate throughout the system and to that end are a valuable tool in trying to quantify Brexit shocks.

It is notable that the analysis of Gretton and Vines, which I cited in this post,  is based on a CGE model and as I noted, the welfare losses they report are significantly lower than other estimates I have seen. But the pro-Brexit group Economists for Free Trade, led by Patrick Minford, stretched the limits of CGE-based modelling too far in their latest paper by claiming that Brexit will actually lead to welfare gains. Their analysis is based on some highly dubious assumptions (which Chris Giles in the FT skewers here). I will return to the details of the Minford et al paper another time in order to look more closely at why this is a case of “garbage in-garbage out,” but aside from any issues regarding the basic assumptions, CGE analysis allows no role for economic gravitational effects. No serious analysis of trade can ignore this factor.

As the WTO put it, “the numbers that come out of [CGE] simulations should only be used to give a sense of the order of magnitude that a change in policy can mean for economic welfare or trade. But much more can be done to create confidence in the results.” This is not to say that gravity models are perfect either. But so long as the lines in our chart have a negative slope, we should never dismiss what they have to say.

I, Franz Kafka

For those of you looking for a feelgood film, the works of British filmmaker Ken Loach would not be high on anybody’s list. Loach is a renowned social commentator, whose political stance is avowedly socialist and who was described by the New York Times as having “the political outlook of a British Michael Moore.” Loach has been making films for more than 50 years and his 1966 television play Cathy Come Home was one of the most important British TV dramas of all time, offering a savage critique of the unemployment and homelessness problems facing those at the bottom end of the social strata. Such was its political impact that it prompted the foundation of Crisis, the charity for homeless people, in 1967.

Whilst Loach’s work may not be a barrel of laughs, it does shine an important light on areas of British society that may otherwise be overlooked by a wider audience. His 2016 Palme d’Or winner I Daniel Blake carries on this grand tradition, offering a gritty take on the Kafkaesque workings of the UK benefit system. The story centres on the eponymous Daniel Blake who has suffered a heart attack and whose doctor determines that he is medically unfit to return to work. However, his benefit claim is denied because the Work Capability Assessment, to which all claimants are subject, deems that he is not sufficiently incapacitated. The reason for that is that the criteria that claimants must pass in order to make a benefit claim did not cover his condition (see here for a list of requirements). As result, our hero is eligible only for a particular category of benefit which requires him to prove that he is looking for work, despite having been told by his doctor that he is medically unfit.

The point of Loach’s film is to demonstrate that the system is not fit for purpose and is designed to put obstacles in the way of claimants to dissuade them from proceeding further, which reduces the numbers and eases the state’s financial burden. This is not simply a piece of social drama: I have heard it time and time again from people involved in dealing with benefit cases. According to the House of Commons Work and Pensions Committee (WPC) “290,000 claimants … – 6% of all those assessed – only received the correct award after challenging DWP’s (Department for Work and Pensions) initial decision.” The DWP’s own statistics show that between October 2013 and March 2017 roughly half of those people initially claiming some form of long-term invalidity benefit either had their benefit withdrawn or were required to claim one which requires them to look for work whilst in receipt. The WPC highlighted “a deficit of confidence in the assessment processes. Central to the lack of trust are concerns about the ability of the Department’s contractors to conduct accurate assessments.” All in all, the WPC’s report was a damning indictment of a system which claimants increasingly distrust.

Although the WPC did not touch on the subject, there are many insiders who claim that there is pressure to impose quotas on the numbers eligible for benefits. The system of benefit assessment is in any case initially carried out by people who are not necessarily qualified to make the appropriate medical judgements, and in 2016 a United Nations report criticised the UK system for being “focused on a functional evaluation of skills and capabilities, and puts aside personal circumstances and needs, and barriers faced by persons with disabilities to return to employment.” 

Even though only 6% of cases are overturned, this still represents 290,000 claimants who are being denied the support to which they are entitled. As the Institute for Fiscal Studies put it, “this is arguably suggestive of a system that is not working well.” In an excellent article in the Financial Times in November, Sarah O’Connor highlighted that “while national policy has been focused on pushing people from incapacity into the labour market, it is not clear that every local labour market is willing or able to absorb them.” To put it another way, in areas where jobs are scarce, getting people off the incapacity register may fulfil one set of government targets but it does nothing to resolve the underlying problems.

This is unfortunately all very bleak and depressing and further undermines the public’s trust in government in general and the benefits system in particular. Whilst reform of the system is not per se a bad idea, the experience of the past eight years is that the government has failed to manage the process of welfare reform. Universal Credit, which was designed to replace a multitude of different benefits in a bid to reduce outlays, was unveiled in 2013 but is still nowhere near completion having initially expected to have been completed within a four year cycle. Moreover, in a report released last month the OBR questioned whether the savings promised by this reform will even be realised.

Quite why the reform of the benefit system has proven to be such a shambles is no mystery: It is too complex and insufficient resources have been committed to make it work. Meanwhile the most vulnerable members of society are bearing the brunt of the adjustment. For those of us who spend our time looking at the big fiscal picture, it is quite an eye-opener to look below the surface at how the system actually works. Whilst such methods have (arguably) been successful in helping to bring down the public deficit, the more we look at the social costs the less justified some of the actions appear to be. With the government now focusing all its policy efforts on Brexit, it is difficult to see any light at the end of this tunnel.

Of course, the supreme irony is that a good number of those who appeared to be abandoned by this failed benefit system are likely to have been those who voted for Brexit on the basis that they had nothing to lose. If the leading lights in David Cameron’s government ever wonder why they lost the Brexit vote, they might reflect on their inability to deliver a benefit system which provides the support it promised.