Long-term forecasts claiming that leaving the EU with no deal on trade would be economically disastrous undermine the UK's optimal negotiating strategy, writes Graham Gudgin (Policy Exchange). He points out significant flaws in such forecasts and shows why the estimates they table cannot be accepted as accurate. The great majority of the economic forecasts have concluded that Brexit will damage the ..

Gudgin, Graham

Long-term forecasts claiming that leaving the EU with no deal on trade would be economically disastrous undermine the UK's optimal negotiating strategy, writes Graham Gudgin. He points out significant flaws in such forecasts and shows why the estimates they table cannot be accepted as accurate

LSE Research Online

How	bad	will	Brexit	really	be	for	the	UK?Long-term	forecasts	claiming	that	leaving	the	EU	with	no	deal	on	trade	would	be	economicallydisastrous	undermine	the	UK’s	optimal	negotiating	strategy,	writes	Graham	Gudgin.	He	pointsout	significant	flaws	in	such	forecasts	and	shows	why	the	estimates	they	table	cannot	be	acceptedas	accurate.The	great	majority	of	the	economic	forecasts	have	concluded	that	Brexit	will	damage	the	UKeconomy.	In	the	case	of	‘no	deal’	between	the	UK	and	the	EU,	the	majority	view	is	that	the	loss	ofGDP	could	be	severe.	The	UK	Treasury,	the	OECD	and	the	London	School	of	Economics’	Centre	for	EconomicPolicy	(CEP)	all	agreed,	in	reports	published	during	the	referendum	campaign,	that	with	no	deal	the	loss	of	GDPby	2030	would	be	in	the	range	of	7-10%.	A	free-trade	agreement	(FTA)	would	be	little	better.	Much	of	this	wasignored	by	‘Leave’	voters	in	the	Referendum,	who	had	long	since	lost	all	confidence	in	economic	forecasts.	Thatthe	short-term	forecasts	of	these	forecasting	bodies	were	largely	wrong	strengthened	this	pessimism,	but	thelong-term	projections	remain	influential	and	form	an	important	context	for	the	Brexit	negotiations	now	underwaybetween	the	UK	and	EU.These	long-term	forecasts,	that	leaving	the	EU	with	no	deal	on	trade	would	be	economically	disastrous,undermine	the	UK’s	optimal	negotiating	strategy.	A	‘no	deal’	bottom	line	is	the	most	obvious	negotiating	positionfor	the	UK	but	this	must	be	credible,	and	herein	lies	the	problem.	With	the	UK	Treasury	and	most	othereconomists	predicting	economic	disaster,	the	UK	negotiators	are	in	a	weak	position.	If	the	Treasury	and	othersare	accurate	in	their	assessments	then	this	weakness	needs	to	be	faced,	but	if	not,	this	error	needs	to	becorrected	quickly.The	methods	used	by	the	Treasury	and	most	other	economists	were	similar.	Most	used	so-called	gravity	modelsto	estimate	how	much	trade	and	foreign	direct	investment	(FDI)	between	EU	members	was	due	to	theirmembership	of	the	EU	Single	Market.	The	assumption	was	then	that	much,	or	all,	of	this	additional	trade	and	FDIwould	be	lost	by	the	UK	after	leaving	the	EU.	On	top	of	this	were	knock-on	impacts	on	productivity,	with	researchcited	to	show	that	higher	levels	of	trade	and	FDI	led	to	higher	productivity.	Finally,	the	values	obtained	from	theseexercises	were	entered	by	the	Treasury	into	a	macro-economic	model	to	generate	estimates	of	the	amount	ofGDP	and	employment	likely	to	be	lost	by	2030.The	main	comment	on	the	Treasury	report	by	professional	economists	in	the	UK	suggested	that	its	pessimismwas	underdone	(see	here).	This	CEP	report	viewed	the	Treasury’s	analysis	as	‘economically	reasonable’	butover-cautious	in	its	assumptions	and	its	link	between	trade	and	productivity	as	too	weak	while	suggesting	that	anyfall	in	trade	will	have	a	large	impact	on	productivity.	The	CEP	also	argues	for	adding	the	(negative)	impact	ofpotential	future	reductions	in	EU	internal	trade	barriers,	and	for	making	allowance	for	a	potential	fall	in	EUimmigration,	since	it	views	migration	as	productivity-enhancing.	It	agrees	with	the	Treasury	that	few	gains	will	beavailable	from	greater	freedom	to	deregulate	and	thinks	the	UK	will	be	at	a	disadvantage	relative	to	the	EU	instriking	future	trade	deals	with	non-EU	countries.Our	own	analyses	(here,	here	and	here)	are	much	more	critical	of	the	Treasury	and	of	similar	work	by	the	OECDand	IMF.	We	have	fully	replicated	the	Treasury’s	huge	‘gravity-model’	analysis	of	trade	in	goods	to	obtain	anestimate	of	the	advantage	of	being	inside	the	EU	Single	Market.	We	find,	as	the	Treasury	did,	that	the	averageadvantage	to	intra-EU	trade	of	being	inside	the	Single	Market	doubles	goods	trade	between	EU	members.Neither	the	Treasury	nor	the	OECD,	however,	focused	specifically	on	the	UK.	This	is	vitally	important	since	ourestimate	of	the	gain	specifically	to	UK	exports	is	only	a	quarter	of	the	wider	average	for	all	EU	members.	In	otherwords,	the	UK	is	not	typical	of	other	EU	members	in	trade,	and	an	EU-wide	average	for	trade	gains	or	lossesshould	not	be	used.British Politics and Policy at LSE: How bad will Brexit really be for the UK? Page 1 of 2		Date originally posted: 2017-09-18Permalink: http://blogs.lse.ac.uk/politicsandpolicy/how-bad-will-brexit-really-be-for-the-uk/Blog homepage: http://blogs.lse.ac.uk/politicsandpolicy/What	is	disturbing	is	that	the	Treasury	knew	of	this	disparity,	from	an	earlier	unpublished	report	of	their	own,	butfailed	to	mention	this	in	their	Brexit	report.	The	Treasury	estimate	of	the	impact	of	EU	membership	is	muchsmaller	for	services,	and	we	accept	their	calculation.	Our	overall	estimate	for	the	impact	on	both	goods	andservices	is	much	lower	than	that	of	the	Treasury	and	others.	Since	most	of	the	rest	of	the	Treasury’s	analysisdepends	on	this	trade	estimate,	its	calculated	final	impact	of	Brexit	on	the	UK	economy	should	be	viewed	ashighly	exaggerated.	Since	the	CEP	did	not	replicate	the	Treasury	work,	it	too	failed	to	identify	its	major	flaw.Why	should	the	Treasury	do	this?	We	do	not	know,	since	they	have	refused	multiple	requests	to	discuss	theirwork.	The	most	obvious	reason	is	that	the	then	Chancellor	of	the	Exchequer,	George	Osborne,	was	a	strongproponent	of	remaining	within	the	EU.	If	readers	have	not	heard	about	what	is	surely	a	serious	matter	of	civilservice	integrity,	there	is	a	reason	for	this.	Although	some	pro-Brexit	journalists	have	covered	our	work,	the	majoreconomics	media	including	the	Financial	Times,	and	the	Economist	have	not	done	so.	The	FT	refuses	to	publishany	letters	referring	to	this	major	flaw	in	the	Treasury	analysis.	Instead	of	the	7%	loss	of	per	capita	GDP	in	2030,our	modelling	suggests	a	worst-case	loss	of	under	2%	in	2025.	If	we	assume	that	losses	of	trade	with	the	EU	areslowly	replaced	elsewhere	over	20	years,	there	may	be	no	loss	of	per	capita	GDP	by	2030.	Uncertainty	surroundsany	forecast,	but	our	work	indicates	that	existing	estimates	cannot	be	simply	accepted	as	accurate.____The	article	was	originally	published	on	Social	Europe.About	the	AuthorGraham	Gudgin	is	Honorary	Research	Associate	at	the	Centre	For	Business	Research	(CBR)	inthe	Judge	Business	School	at	the	University	of	Cambridge	and	Chief	Economic	Advisor	at	PolicyExchange	in	London.		Feature	image	credit:	Pixabay/CC0	Creative	Commons.	British Politics and Policy at LSE: How bad will Brexit really be for the UK? Page 2 of 2		Date originally posted: 2017-09-18Permalink: http://blogs.lse.ac.uk/politicsandpolicy/how-bad-will-brexit-really-be-for-the-uk/Blog homepage: http://blogs.lse.ac.uk/politicsandpolicy/

How bad will Brexit really be for the UK?

How	bad	will	Brexit	really	be	for	the	UK?Long-term	forecasts	claiming	that	leaving	the	EU	with	no	deal	on	trade	would	be	economicallydisastrous	undermine	the	UK’s	optimal	negotiating	strategy,	writes	Graham	Gudgin	(PolicyExchange).	He	points	out	significant	flaws	in	such	forecasts	and	shows	why	the	estimates	theytable	cannot	be	accepted	as	accurate.The	great	majority	of	the	economic	forecasts	have	concluded	that	Brexit	will	damage	the	UKeconomy.	In	the	case	of	‘no	deal’	between	the	UK	and	the	EU,	the	majority	view	is	that	the	loss	ofGDP	could	be	severe.	The	UK	Treasury,	the	OECD	and	the	London	School	of	Economics’	Centre	for	EconomicPolicy	(CEP)	all	agreed,	in	reports	published	during	the	referendum	campaign,	that	with	no	deal	the	loss	of	GDPby	2030	would	be	in	the	range	of	7-10%.	A	free-trade	agreement	(FTA)	would	be	little	better.	Much	of	this	wasignored	by	‘Leave’	voters	in	the	Referendum,	who	had	long	since	lost	all	confidence	in	economic	forecasts.	Thatthe	short-term	forecasts	of	these	forecasting	bodies	were	largely	wrong	strengthened	this	pessimism,	but	thelong-term	projections	remain	influential	and	form	an	important	context	for	the	Brexit	negotiations	now	underwaybetween	the	UK	and	EU.These	long-term	forecasts,	that	leaving	the	EU	with	no	deal	on	trade	would	be	economically	disastrous,undermine	the	UK’s	optimal	negotiating	strategy.	A	‘no	deal’	bottom	line	is	the	most	obvious	negotiating	positionfor	the	UK	but	this	must	be	credible,	and	herein	lies	the	problem.	With	the	UK	Treasury	and	most	othereconomists	predicting	economic	disaster,	the	UK	negotiators	are	in	a	weak	position.	If	the	Treasury	and	othersare	accurate	in	their	assessments	then	this	weakness	needs	to	be	faced,	but	if	not,	this	error	needs	to	becorrected	quickly.Image	licencedunder	CC0	Creative	Commons.The	methods	used	by	the	Treasury	and	most	other	economists	were	similar.	Most	used	so-called	gravity	modelsto	estimate	how	much	trade	and	foreign	direct	investment	(FDI)	between	EU	members	was	due	to	theirmembership	of	the	EU	Single	Market.	The	assumption	was	then	that	much,	or	all,	of	this	additional	trade	and	FDIwould	be	lost	by	the	UK	after	leaving	the	EU.	On	top	of	this	were	knock-on	impacts	on	productivity,	with	researchcited	to	show	that	higher	levels	of	trade	and	FDI	led	to	higher	productivity.	Finally,	the	values	obtained	from	theseexercises	were	entered	by	the	Treasury	into	a	macro-economic	model	to	generate	estimates	of	the	amount	ofGDP	and	employment	likely	to	be	lost	by	2030.LSE Brexit: How bad will Brexit really be for the UK? Page 1 of 2		Date originally posted: 2017-09-12Permalink: http://blogs.lse.ac.uk/brexit/2017/09/12/how-bad-will-brexit-really-be-for-the-uk/Blog homepage: http://blogs.lse.ac.uk/brexit/The	main	comment	on	the	Treasury	report	by	professional	economists	in	the	UK	suggested	that	its	pessimismwas	underdone	(see	here).	This	CEP	report	viewed	the	Treasury’s	analysis	as	‘economically	reasonable’	butover-cautious	in	its	assumptions	and	its	link	between	trade	and	productivity	as	too	weak	while	suggesting	that	anyfall	in	trade	will	have	a	large	impact	on	productivity.	The	CEP	also	argues	for	adding	the	(negative)	impact	ofpotential	future	reductions	in	EU	internal	trade	barriers,	and	for	making	allowance	for	a	potential	fall	in	EUimmigration,	since	it	views	migration	as	productivity-enhancing.	It	agrees	with	the	Treasury	that	few	gains	will	beavailable	from	greater	freedom	to	deregulate	and	thinks	the	UK	will	be	at	a	disadvantage	relative	to	the	EU	instriking	future	trade	deals	with	non-EU	countries.	the	UK	is	not	typical	of	other	EU	members	in	tradeOur	own	analyses	(here,	here	and	here)	are	much	more	critical	of	the	Treasury	and	of	similar	work	by	the	OECDand	IMF.	We	have	fully	replicated	the	Treasury’s	huge	‘gravity-model’	analysis	of	trade	in	goods	to	obtain	anestimate	of	the	advantage	of	being	inside	the	EU	Single	Market.	We	find,	as	the	Treasury	did,	that	the	averageadvantage	to	intra-EU	trade	of	being	inside	the	Single	Market	doubles	goods	trade	between	EU	members.Neither	the	Treasury	nor	the	OECD,	however,	focused	specifically	on	the	UK.	This	is	vitally	important	since	ourestimate	of	the	gain	specifically	to	UK	exports	is	only	a	quarter	of	the	wider	average	for	all	EU	members.	In	otherwords,	the	UK	is	not	typical	of	other	EU	members	in	trade,	and	an	EU-wide	average	for	trade	gains	or	lossesshould	not	be	used.	What	is	disturbing	is	that	the	Treasury	knew	of	this	disparity,	from	an	earlier	unpublishedreport	of	their	own,	but	failed	to	mention	this	in	their	Brexit	report.	The	Treasury	estimate	of	the	impact	of	EUmembership	is	much	smaller	for	services,	and	we	accept	their	calculation.	Our	overall	estimate	for	the	impact	onboth	goods	and	services	is	much	lower	than	that	of	the	Treasury	and	others.	Since	most	of	the	rest	of	theTreasury’s	analysis	depends	on	this	trade	estimate,	its	calculated	final	impact	of	Brexit	on	the	UK	economyshould	be	viewed	as	highly	exaggerated.	Since	the	CEP	did	not	replicate	the	Treasury	work,	it	too	failed	toidentify	its	major	flaw.Why	should	the	Treasury	do	this?	We	do	not	know,	since	they	have	refused	multiple	requests	to	discuss	theirwork.	The	most	obvious	reason	is	that	the	then	Chancellor	of	the	Exchequer,	George	Osborne,	was	a	strongproponent	of	remaining	within	the	EU.	If	readers	have	not	heard	about	what	is	surely	a	serious	matter	of	civilservice	integrity,	there	is	a	reason	for	this.	Although	some	pro-Brexit	journalists	have	covered	our	work,	the	majoreconomics	media	including	the	Financial	Times,	and	the	Economist	have	not	done	so.	The	FT	refuses	to	publishany	letters	referring	to	this	major	flaw	in	the	Treasury	analysis.	Instead	of	the	7%	loss	of	per	capita	GDP	in	2030,our	modelling	suggests	a	worst-case	loss	of	under	2%	in	2025.	If	we	assume	that	losses	of	trade	with	the	EU	areslowly	replaced	elsewhere	over	20	years,	there	may	be	no	loss	of	per	capita	GDP	by	2030.	Uncertainty	surroundsany	forecast,	but	our	work	indicates	that	existing	estimates	cannot	be	simply	accepted	as	accurate.The	article	gives	the	views	of	the	authors,	not	the	position	of	LSE	Brexit	or	the	London	School	of	Economics.	Itfirst	appeared	on	Social	Europe.Graham	Gudgin	is	Honorary	Research	Associate	at	the	Centre	For	Business	Research	(CBR)	in	the	JudgeBusiness	School	at	the	University	of	Cambridge	and	Chief	Economic	Advisor	at	Policy	Exchange	in	London.	LSE Brexit: How bad will Brexit really be for the UK? Page 2 of 2		Date originally posted: 2017-09-12Permalink: http://blogs.lse.ac.uk/brexit/2017/09/12/how-bad-will-brexit-really-be-for-the-uk/Blog homepage: http://blogs.lse.ac.uk/brexit/

How bad will Brexit really be for the UK?

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