The national interest is best served by an open debate on the impact of Brexit – not spurious comparisons

Feb 8, 2018

Lord Turnbull, former Head of the Civil Service and Cabinet Secretary, has attacked leading Brexiters  – in particular the assertion that Treasury officials had deliberately developed an impact assessment model to show that all Brexit options were bad. This culminated in Lord Turnbull’s warning that, as the Observer put  it, “Brexiters who accuse civil servants of sabotaging Britain’s exit from the EU are adopting dangerous tactics similar to those of right-wing German nationalists between the two wars”.

Nazi analogies are best eschewed by all sides of the political spectrum – except when dealing with real Nazis and other totalitarian movements. They rarely make much sense as history, as Turnbull’s wild comments illustrate. The point of the Nazi ‘Dolchstosslegende’ was that it was an invented excuse for losing the First World War. The reality was that Germany suffered a stunning military defeat.

Dolchstosslegende was a lie to mask the truth. Criticising Treasury forecasts is another matter altogether. The Treasury’s short-term forecasts, which featured prominently in the Remain campaign, or “Project Fear”, turned out to be wildly inaccurate – the economy did not crash when Britain voted to leave. Rather, despite the official forecasts, the economy has proved durable. Their long-term forecasts contain flaws that they have been unwilling to discuss.

Turnbull’s view that criticisms of civil servants verge on fascism are in line with past attempts to keep the civil service above criticism. This rarely serves the national interest and certainly does not do so over such an important and controversial issue as Brexit. Former very senior mandarins have privately expressed unease at the Treasury producing the kind of Brexit report it did. Turnbull’s ‘over the top’ reaction is hard to support. Those of us who have replicated the entire Treasury exercise are more likely to spot the key flaws of which Lord Turnbull and others may be unaware even though non-economists like Peter Lilley have gone a long way in pointing them out..

The Treasury’s forecasts on Brexit were at least misleading. The Treasury 2016 report on the short-term impact of Brexit selected an arbitrary level of uncertainty and passed this off as a rigorous forecast to underpin HMT’s famously erroneous prediction of an immediate 4 quarters of recession.

The core of the current Brexit debate is the question of how much damage, if any, could be done to the UK economy when it leaves the EU Single Market and Customs Union.  The Treasury estimate published in its long-term impact report during the 2016 Referendum campaign was that GDP could be up to 9.5% lower by 2030 if the UK was to leave without a trade deal. It is this pessimistic estimate that underpins the view of many politicians and commentators that a ‘no trade deal’ Brexit would be a catastrophe for Britain. This, in turn, must be having a material influence on the Brexit talks. The great weakness of the British position has been its inability to establish a ‘no deal’ bottom line. Without a bottom line the EU27 have been able to dictate terms to the UK and seem likely to be able to continue doing so.

If the Treasury estimates are wrong, as I believe they are, then damage has been done to the national interest.  Policy Exchange has been arguing for many months that the Treasury analysis was deeply flawed. The questions raised about Treasury conduct are legitimate and require reasoned responses rather than vituperative jibes.

The Treasury’s 2016 long-term forecast estimated that GDP in 2030 would be 5.4 – 9.5% lower if the UK left the EU with no deal on trade. HMT’s analysis firstly estimated an impact on the loss of trade and then added a large ‘knock-on’ effect from trade to productivity. The estimate for trade loss wrongly took an average across all EU countries even though the Treasury’s own previous research had shown that the gains to UK trade from EU membership were much smaller than for other EU countries. Secondly, the productivity impact was based on two papers using out of date statistics dominated by emerging economies. The Treasury did not re-examine whether trade and productivity are related across richer countries. In fact, they are not. This sin of omission is inadequate when assessing such a major issue of public policy.

The Treasury has shown too little sign of reconsidering this. Even former Trade and Industry Minister Peter Lilley had to bring the issue up in Parliament to secure a brief meeting. Is this acceptable? And what of last week’s paper with similar predictions?  The paper remains secret and we do not know who made the calculations. Many say that only the Treasury has the capacity in economic analysis to calculate an impact for Brexit, and the figure of an 8% reduction of GDP for a ‘no deal’ scenario was close to the Treasury’s 2016 estimate. The only new concession seemed to be a view that perhaps very small gains in UK trade might be from future free trade agreements with the USA and China. The 2016 Treasury report had, in contrast, pessimistically assumed that no new trade would be generated outside the EU. We know nothing of the methods used in this report and it is thus unacceptable that large negative impacts for Brexit should be widely publicised without any means of questioning how they were derived.

The business of forecasting is difficult, even for the best trained. What is easy to avoid, however, is the use of inflammatory, inaccurate language about a situation already highly-charged with emotion.

Author

Dr Graham Gudgin

Dr Graham Gudgin
Chief Economic Adviser Read Full Bio

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