Both the government and the Bank of England this week published economic scenarios showing that Britain would be worse off economically from any Brexit outcome compared with remaining in the European Union.
A No-deal Brexit would inflict the most severe economic pain on the economy, people’s standards of living and on the public services. Brexiteers dismissed the warnings as yet another case of ‘Project Fear’, some saying it had become ‘Project Hysteria’. How seriously should we take these estimates of life after Brexit? And if they are anything like accurate, what economic price, if any, should we be prepared to pay for implementing the referendum result and leaving the EU?
The government has published an 83-page study put together across different departments estimating what the effect on the economy would be in fifteen years’ time, other things being equal, of the various possible ways Britain might leave the EU. It showed that in all cases Britain would be worse off than if it remained in the EU. Were Parliament to vote for the deal the Prime Minister has struck in Brussels and were she subsequently able to negotiate a long-term frictionless trading agreement with the EU, it’s estimated that the economy would be 3.9% worse off in 2033 than if we had stayed in the EU. If, however, Parliament rejected Mrs May’s deal and Britain left the EU at the end of March next year with no deal at all, then government economists reckon the British economy would be around 10% smaller.
On the same day, the Bank of England published what it called its own ‘scenarios’ (as distinct from forecasts, which would need to take into account other factors). These are estimates that look simply at how the fact of Brexit and the form it takes would affect the economy relative to how things would be if Britain stayed inside the EU. In the worst-case scenario of Britain leaving with no deal, the Bank reckons the economy would be plunged into a recession worse than anything seen in this country since the 1930s. The economy would actually shrink by 8% (compared with 6.3% after the financial crash of 2008); interest rates would have to rise to around 5.5%; and house prices might fall by up to 30%.
These warnings of the possible fate of the economy after Brexit amounted, according to Brexiteer campaigners, as yet another example of the government mounting ‘Project Fear’, the name they gave to Remainers’ warnings before the referendum of what would happen if the public voted to leave. The Brexiteers argue that the predictions were wrong then and are wrong now. They point out that the then chancellor, George Osborne, a keen Remainer, had warned of an immediate and profound shock to the economy if Britain voted to leave, with a year-long recession ensuing and 820,000 job losses. None of this happened, though the pound did fall, as forecast. Steve Baker, the former Brexit minister and deputy chairman of the European Research Group of Tory backbench Brexiteers, said of this week’s government report that ‘the reputation of government economics is in the gutter’.
As for the Bank’s contribution, one of the former independent members of its own monetary policy committee, Andrew Sentence, said: ‘The reputation of economic forecasts has taken a bad blow today with both the UK government and the Bank appearing to use forecasts to support political objectives. Let’s debate Brexit – which I strongly oppose – rationally without recourse to bogus forecasts’. Mark Carney, the Governor of the Bank, replied that he was only doing the job asked of him: ‘Parliament has demanded this analysis. We have to do it and we have done it. There is nothing more to it than that.’
Few economists, including no doubt those involved in preparing these forecasts, would put too much reliance on the actual figures published. But equally it would be hard to find many economists (though there are a few) who would dispute the broad thrust of the reports that Brexit will impose costs on the economy relative to staying in, over the short to medium term. In the long term it’s anyone’s guess. That’s because most economists would agree that the greater frictionless trade a country has with its nearest trading partners, the greater the prosperity of both.
Since the EU is far and away both our biggest trading partner and on our doorstep, and since few believe that trading opportunities in the wider world could make up for any loss in that trade, at least in the foreseeable future most economists would argue that Britain is bound to take some economic hit initially by leaving the EU. And their theory suggests that the greater the disruption to that trade, the bigger the hit: hence the dire warnings about the economic consequences of a no-deal Brexit in which trade would immediately suffer a big hit.
Back in the autumn of 2016, after the referendum but before the course of Brexit negotiations became clear, Philip Hammond, the Chancellor of the Exchequer, told the Conservative Party Conference: ‘It is clear to me, people did not vote to become poorer’. This week he admitted, on the basis of the published reports, that even leaving with the deal that the Prime Minister has negotiated, people would indeed become poorer, at least relative to what would have happened if they had voted to remain, even if not in absolute terms. He added, however, that they wouldn’t be very much poorer (on these terms) and that it would be a price worth paying for the political benefit of fulfilling people’s democratic instruction to government through the referendum that Britain should leave the EU. In short, it would be an economic price worth paying.
That is the case the Prime Minister is making to MPs and to the wider public about the deal she has struck. She argues that it is a compromise that secures many of the political gains promised from Brexit while minimising the economic costs.
The chances of her getting MPs to back her deal On December 11th seem vanishingly unlikely, so Mrs May seems to have decided to go over their heads to the voters themselves. She clearly hopes that they will put pressure on the MPs to back the deal. That is what lies behind her nationwide tour. She is, in effect, asking voters themselves to answer the question of what price is worth paying for Brexit. Are those who voted to leave really prepared to pay a bigger economic price for a purer Brexit? Are those who voted to remain prepared to pay what she regards as the minimum economic price available to honour a democratic decision.
Back in the Commons, the omens are not good for her. Brexiteer MPs either deny that there is any economic price to pay or that the price (even any price) is worth paying. Nigel Farage, the former leader of UKIP, said years ago that money wasn’t everything when it came to Brexit. And increasing numbers of Remain MPs are saying that the economic price of carrying out the referendum instruction, even on Mrs May’s terms, is too great and that the public should be asked to vote again in a second referendum.
The chances of that second referendum being called seem to be rising even though the Prime Minister has ruled it out in all circumstances. The facts is, the decision may be taken out of her hands. Significantly, John McDonnell, Labour’s shadow chancellor, said for the first time this week that if Mrs May’s deal were thrown out and his party failed to force a general election, a second referendum was ‘inevitable’.
If that turns out to be true, it will be the public not the politicians who will have to answer the question: what economic price is worth paying to secure Brexit? But it will come with another question. For those contemplating the opportunity afforded by second referendum to overturn the result of the first, and for Britain to stay in the EU after all, the chance to avoid any of the economic costs suggested in this week’s reports will have to be weighed against a different sort of cost: the possible political cost of the original Leave voters feeling cheated by having their decision overturned. That possible political cost no one can quantify.
What do you think? Is there bound to be an economic cost of some sort in Britain leaving the EU, or not? If there is, what price are you prepared to pay for Britain to honour the result of the first referendum and leave the EU? If you are not prepared to pay any economic price, do think there should be another referendum? And if you do, will there be any political consequences?
Let us know what you think.