LONDON — Researchers at the University of Cambridge’s Centre for Business Research say the Treasury’s pre-referendum forecasts of the economic impact of Brexit were “pessimistic rather than realistic.”
Graham Gudgin and Ken Coutts of the University of Cambridge and Neil Gibson from the Ulster University Economic Policy Centre write in a recent paper that the Treasury’s analysis is “found wanting” and has “little basis in reality.”
The Treasury under former Chancellor George Osborne predicted an immediate year-long recession in the wake of a vote to leave the EU, a loss to GDP growth of 3.6% over two years, a 12% fall in the value of the pound, an increase in unemployment of half a million, and inflation jumping by 2.3% within a year. The Treasury warned that Brexit could lead to a loss of GDP of 7.2% by 2030.
The academics write in a working paper titled “The Macro-Economic Impact of Brexit” published recently: “Writing five months after the referendum result, only one of the Treasury’s expectations has been clearly realised. This is the fall in the value of sterling.”
The Centre for Business Research’s own economic modelling predicts a far milder impact from Brexit. The academics forecast “a 2% loss of GDP by 2025 but little loss of per capita GDP, less unemployment but more inflation… the path of GDP is projected to be only a little lower than it might have been in the absence of a Leave vote.”
The academics pin the blame on the Treasury’s methodology, saying the Brexit estimates “provide virtually no information directly about UK trade with the EU” and are instead based on “cross-sectional averages across a range of countries at different dates.”
As a result, much of the government department’s conclusions on trade after Brexit appear “implausible.” The impact of the fall in sterling in cushioning the blow of tariffs is not factored in, for example, and there is little expectation of export trade being diverted to non-EU countries.
A boost for the ‘Vote Leave’ camp?
The conclusions will come as a boost to the “Vote Leave” camp, who attacked forecasts from the Treasury and others on the Remain side as “Project Fear” — intentionally pessimistic forecasts designed to scare people into voting to stay in the EU.
MPs and pro-Brexit campaigners have continued to attack economic forecasts and economists since the vote, with Tory Philip Davis saying the Office for Budget Responsibilities forecasts at the Autumn Statement were “based on their personal political opinions about Brexit rather than on any genuine attempt at an accurate and independent forecast.”
However, the Centre for Business Research advises that its own conclusions should be taken with a pinch of salt. The report states: “The best we can do is to construct a series of scenarios based on assumptions about future trading arrangements, migration controls and about the short-term uncertainties which could affect business investment in the run-up to the likely leaving date of 2019.”
The working paper, for example, assumes that Theresa May prioritises immigration controls and manages to reduce net migration to around 165,000 from 2020. It also assumes an eventual free trade deal with the EU and a transition arrangement while it is negotiated. While these assumptions are likely, they are by no means certain.
The academics also caution that their conclusions do not amount to a rosy economic outlook for Britain. Real wages, for example, are forecast to be only slightly higher in 2025 than they were in 2004 due to the return of inflation and sluggish wage growth.
The study concludes: “The deeper reality is the continuation of slow growth in output and productivity that have marked the UK and other western economies since the banking crisis. Slow growth of bank credit in a context of already high debt levels, and exacerbated by public sector austerity prevent aggregate demand growing at much more than a snail’s pace.”