/Official Brexit forecasts show Britain getting poorer

Official Brexit forecasts show Britain getting poorer

Chancellor Philip Hammond erected a high hurdle for Brexit to cross in the autumn of 2016 when he told the Conservative party conference: “It is clear to me, people did not vote [in the EU referendum] to become poorer.”

Two official assessments of Theresa May’s compromise Brexit deal on Wednesday suggested the prime minister had failed to clear Mr Hammond’s bar for a successful UK departure from the EU.

Government and Bank of England economists produced reports that said Mrs May’s deal was better for the economy than the UK crashing out of the EU without an agreement, but added Britain would ultimately be better off with no Brexit.

The BoE’s analysis contained the chilling warning that a no-deal Brexit could unleash a worse recession than the one during the financial crisis, but it was the downbeat official assessments of Mrs May’s deal that are likely to trouble her as she tries to persuade MPs to vote for it in the House of Commons on December 11.

Government economists produced a huge range of potential outcomes from the Brexit process, which resulted in a mild to severe hit to British living standards.

The outcome closest to Mrs May’s deal — involving some new trade frictions at borders and sharp restrictions on immigration — would leave Britain missing out on 3.9 per cent of gross domestic product that it would otherwise have had in 15 years time.

That difference translates into Britain foregoing an annual £100bn in its productive capability, leaving everyone on average £1,100 worse off a year when compared with staying in the EU. Much of this outcome came from an assumption of a sharp drop to zero in net immigration from the EU.

“The analysis shows that higher barriers to UK-EU trade would be expected to result in greater economic costs,” said the government document about the long term impact of Brexit outcomes on the UK economy, including Mrs May’s deal. It stressed that the figures were uncertain and should be thought of as rough rather than precise estimates.

G2907_18X UK Brexit impacts chart

Closer arrangements between the UK and the EU would limit the economic damage, according to the government analysis. But one government insider said more distant ties — such as a bare-bones customs arrangement between the two sides, potentially involving a so-called backstop to avoid a hard Irish border — could result in a hit to GDP of 5.3 per cent.

Economists outside the government welcomed the analysis as reasonable and in line with independent research.

Professor Jonathan Portes of King’s College London described the report as “professional and credible”, and while he questioned the decision to model Mrs May’s Chequers white paper on future UK-EU relations, he said the breadth of analysis allowed others to make sensible assessments of the likely Brexit effects.

Gemma Tetlow, chief economist at the Institute for Government, said the report had passed the nine tests she had set for it and was “very clear”.

Garry Young, head of macroeconomics at the National Institute of Economic and Social Research, a think-tank, said that despite the effects of Brexit being “very uncertain”, the government’s analysis was “very fair”.

The team of government economists which carried out the study came from across Whitehall.

Insiders said the work was not influenced heavily by ministers, but added the negative results for Brexit outcomes regularly caused significant tensions within government. This partly reflected how none of the results suggested Mrs May’s deal was better than remaining in the EU.

Steve Baker, a leading Eurosceptic Tory MP and opponent of Mrs May’s deal, said the government analysis showed “the reputation of government economics is in the gutter”.

Tuesday, 27 November, 2018

Eurosceptics had also attacked dire predictions by the Treasury made shortly before the June 2016 EU referendum that said a vote in favour of Brexit would result in an immediate recession.

The BoE risked putting itself in the Eurosceptics’ line of fire on Wednesday by stating that if the UK crashed out of the EU without an agreement it could cause the steepest recession since the second world war.

The central bank’s assessment of the short-term impact of Mrs May’s deal was more measured, saying it may or may not improve the current economic outlook.

If the UK stayed close to the EU, the BoE indicated it would have to raise its economic growth forecasts a little. But if Britain took a harder form of Brexit, growth forecasts would be pared back somewhat.

But in each case, the outcome would be worse than what the BoE was forecasting in May 2016 on the basis of remaining in the EU.

Mark Carney, BoE governor, said that if the government’s proposed future economic partnership with the EU was signed in five years’ time “GDP is between 1.25 per cent and 3.75 per cent lower than it would have been had it continued to grow at its May 2016 trend rate”.

Chart showing the impact on GDP with Bank of England’s Brexit scenarios