During the referendum campaign the economic forecasting consensus, led by HM Treasury, forecast a recession or close. The Treasury said the third quarter would produce -0.1 per cent growth at best and it could well be worse. The GDP first estimates out on Thursday are for GDP growth of 0.5 per cent – strong growth, certainly no recession.
Why did the Treasury et al say this? For two reasons: that there would be huge negative effects of ‘uncertainty’ and that people would also react negatively to a long term negative effect of Brexit on the economy. But what justification was there for either?
Start with the last. Why did they project such a long term negative effect? First, the Treasury had a ‘gravity’ model of trade in which effectively the EU is in pole position as our trading partner because it is close, whereas it is really difficult for us to build up our trade with other countries; in this they disregarded our massive trade with the rest of the world which is well over half our trade. Second, they assumed that in post-Brexit policy the UK would erect the same trade barriers that the EU has not just against the rest of the world but also against the EU and that we would not regulate our economy any differently from the EU. But these policies would be damaging and the opposite of what is best for the UK after Brexit. In fact we should get rid of the EU trade barriers and go to free trade and we should pursue a balanced regulative system that both supports business and ensures basic employment rights. With such policies it is plain that the UK will do better than now: my own calculations on a standard trade model and on my ‘Liverpool Model’ of the economy suggests up to 10 per cent better compared with staying in the EU.
Not only did the Treasury assume damaging long term Brexit policy, they also said that ‘policy uncertainty’ would damage the economy. But that uncertainty depends on HM Treasury among other ministries. Fortunately, Theresa May’s government has made big strides in reducing policy uncertainty by telling us that there will be a ‘clean Brexit’ in which we regain control of our laws and our borders unconditionally and we will achieve free trade with all comers including the EU. Of course there is plenty of detail to fill in and the EU itself may not be easy to deal with. But self-interest dictates that for the EU too free trade with the UK is best. In any case, the UK can and should dismantle its trade barriers unilaterally even if the EU will not do so; this is our best policy whether others dismantle theirs or not! A country’s trade barriers harm itself because they raise prices to consumers and encourage the expansion of protected, and so less efficient, industries.
What the third quarter GDP figures show by their robust growth is that the British people are not as stupid as the Treasury, or the consensus it leads among the IMF, OECD and many ‘me-too’ private groups, assumes. They know that Brexit is good for them long term and they already understand where policy is going. As a result any policy uncertainty factor is diminishing by the day. Also they are not economic neophytes: they realise that like death and taxes, uncertainty is always with us! So the Treasury massively exaggerated the effect of any uncertainty on the economy.
It is time for the Treasury to rejoin the government of Theresa May and stop fighting George Osborne’s war against Brexit. That way they will avoid any further discrediting of a major office of state.