Ten myths from the ‘no-deal’ Project Fear
Prof. David Paton
1 December 2018
Myth 1. The UK economy could shrink by eight per cent in a single year under no deal (Project Fear, Bank of England version)
You will have read about this. The Bank of England now sheepishly claims that this was never meant to be a forecast, only a worst-case scenario. Mark Carney surely knew the headlines it would generate. Doubtless he was shocked – shocked! – to see the newspapers treat scenario as a forecast. Whatever.
But in case there is any doubt, the idea that a no-deal Brexit would cause a crash of such proportions is nonsense, pure and simple. An eight per cent reduction in GDP in one year is the sort of outcome that might be expected after a major civil war but certainly not from a shift to trading under standard and well-established World Trade Organisation (WTO) terms. Even the Brexit-hating (but Nobel prize-winning) Paul Krugman raised an eyebrow at the BoE’s most extreme scenarios. Part of the BoE’s rationale for this scenario was that they might put interest rates up to over five per cent, a decidedly eccentric policy response if the
UK economy did suffer post-Brexit.
This type of scaremongering brings back memories of George Osborne promising a punishment budget and interest rate rises if the UK voted to leave in 2016. Oxford Economics has a scenario of the economic growth slowing for a while to almost zero, but not contracting – let alone falling by a staggering 8pc. The Bank of England’s job is to communicate these things clearly to the public. Either it has failed in this job, or it never intended to be clear in the first place. Shame on us all if we fall for those sort of tricks again.
Myth 2. Leaving with no deal will lead to GDP being 7.6 per cent lower in 2035-6 than staying in the EU (Project Fear, Treasury version)
The Treasury have been letting the side down here, compared to the “full Project Fear” of the Bank of England. Indeed, the Treasury don’t even claim that no deal will lead to us getting poorer, just that we would get richer slightly more slowly.
Let’s remember that the error margins in 17-year forecasts are pretty big. Even a year out, getting Brexit forecasts right can be tough: look at the below forecasts published by HM Treasury in August 2016 for UK economic growth in 2017.
So not much seems to have been learnt from the embarrassing failure of the pre-referendum predictions: immediate recession, a huge rise in unemployment and higher public debt, precisely the opposite, of course, to what actually happened. Let’s look, for example, at the Treasury’s two ‘scenarios’ for employment after the Brexit vote, vs reality.
Why such errors? Forecasts of economic models depend on the assumptions you feed into them and the Treasury continues to base their models on the assumption that the benefits of Brexit are negligible. Basic economics will tell you that leaving a customs union has costs (more costly trade with countries within the union) but also benefits (lower costs of trade with countries outside the union). There would also be potential benefits from having a fully independent tax policy and from no longer having to force all companies in the UK (not just exporters) to follow every rule of the EU single market. Modelling these benefits may not be easy but that does not excuse the Treasury from at least trying.
Myth 3. No deal will decimate trade from the EU, our biggest partner
Trading with the EU under WTO rules is perfectly feasible and is done successfully by many countries around the world. In any case, leaving with no deal on the 29th March does not mean no deal with the EU for ever. Remember that we operate a trade deficit with the EU of close to £100bn per year. Once we have left the EU there will be heavy pressure from member states such as Germany and the Republic of Ireland to ensure that a trade deal is struck with the newly-independent UK as soon as possible. More to the point, the EU will no longer have an interest in offering a bad trade deal to try to keep us from leaving. The likelihood is that we will actually end up with a better trade deal with the EU than envisaged in Theresa May’s “Future Relationships” agreement and without having to endure a long transition period in which the country continues to tear itself apart in endless Brexit debates.
Myth 4. If we leave without paying the £39bn to the EU it will devastate Britain’s international credibility
Even under no-deal, the UK will of course honour its obligations under international law. However, it is clear that our strict liabilities are very significantly lower than £39 bn and, if there is no withdrawal agreement, we will be under no obligation to fork out such a large sum. The exact amount paid could end up being decided by independent arbitration, something that would take a number of years. The EU desperately need the UK cash to avoid a huge hole in their budget. Far from ruining our relationship, leaving with no deal and no payment will help to focus EU minds. They will certainly have every incentive to avoid creating more difficulties for the UK than necessary. From the UK’s point of view, savings on the £39bn bill can be put to good use in the months leading up to and immediately after Brexit with the aim of minimising the short run disruption that may occur as we re-work our systems to cope with new arrangements.
Myth 5. In a no-deal Brexit, WTO rules would require the enforcement of a hard border between the Republic of Ireland and Northern Ireland
This myth is being repeated ad nauseam as a statement of fact and without challenge, the most recent example being BBC Radio 4’s The Briefing Room. The problem is, it simply isn’t true. If tariffs are levied between the UK and EU then there needs to be a system of checks but this does not have to be via infrastructure at a border. WTO rules require us not to discriminate against importing countries but do not specify how or where customs are collected or checked. Time and time again in Select Committee hearings, Jon Thompson, the Head of UK Customs, has told MPs that there is no need for the UK to erect a hard border under any scenario, including leaving without a deal. To nail the point home, WTO officials stated just this week that “There is nothing in WTO rules that forces anyone to put up border posts”.
Myth 6. No deal will lead to prices in the shops going up
An end to tariff-free trade would put pressure on prices of goods from the EU, but the other side of the coin is that the UK would regain control over tariff levels. We can’t charge different tariffs to different countries, but we could unilaterally choose to lower tariffs. Goods such as trainers, wine and other foodstuffs face particularly high tariffs, designed to protect inefficient EU producers. Lowering rates in such cases (and eliminating them entirely in the case of goods which are not produced in the UK) will provide a quick boost to the economy. Over time, as the UK switches away from the EU towards more competitive producers from elsewhere prices are likely to decrease more generally. It is consumers who suffer most from EU protectionism and who have most to gain from a clean Brexit.
Myth 7. Since the Referendum, the UK has become one of the slowest growing members of the G7
No less an authority than The Economist claimed precisely this last week. It’s a shame they didn’t check the latest OECD data which reveal that the UK is the third fastest growing G7 economy during 2018, ahead of France, Italy and even Germany. Here’s its latest chart, with the UK second from the right.
Myth 8. Investment into the UK has plummeted since the referendum and will decrease further under no deal
An assumption that foreign direct investment (FDI) into the UK will go down as a result of Brexit underpins many of the forecasts of lower economic growth. Now some companies may indeed be less attracted to the UK once we are no longer part of the EU single market. But the UK is a good FDI proposition for reasons beyond the EU: language, infrastructure, culture, legal system, time zone and historical geo-political alliances are just as, if not more, important. Our advantages in these areas mean the UK will remain a hugely attractive investment opportunity. Further, for companies keen to access the important UK market, it will become even more vital after Brexit that they have a strategic base here.
So there will be movement of companies in both directions and the early indications are that Brexit could even prove to be a net benefit to FDI. For example, in the first half of 2018, FDI into the UK was higher than anywhere else in the world bar China and far outstripping every other EU country. Of course Brexit hasn’t happened yet but investment decisions are made on the basis of future expectations. Even the forward looking A.T. Kearney 2018 FDI Confidence Index shows that international investors are more confident about the UK than before the referendum.
Myth 9. No deal will see border trade grind to a halt.
No deal will mean that customs tariffs become payable. However, as a recent Open Britain report makes clear, the vast majority of customs declarations against non-EU goods take place electronically. Even where physical checks are necessary, these can happen away from the border. The UK has already indicated that priority in the short run will be given to maintaining the flow of goods, even at the risk of losing some customs revenue. Of course some disruption in the first few weeks is possible but it should be the job of civil servants to do everything between now and the 29th March to make sure it is minimised.
On the European side, we cannot rule out the possibility that France might seek to disrupt goods coming from the UK. However, such is the importance of UK trade to Calais, and so worried are they about the competitive threat from other ports such as Rotterdam, that the authorities there have made clear they will be doing everything to ensure an efficient free flow of goods.
Hold-ups on the M25 continue to pose more of a threat to just-in-time manufacturing than a no-deal Brexit.
Myth 10. A no-deal Brexit would mean families having to do without Christmas trees*
*feel free to substitute food, water, medicines, Mars bars or whatever is the next item in the Project Fear crosshairs.
The latest claim is indeed that, “Sadly Brexit means this could be the last Christmas UK families can afford a traditional fresh Christmas tree.” This despite the fact that 75% of the UK market is supplied by domestic growers. One suspects that existing Christmas tree exporters such as Denmark and Ireland might be quite keen to carry on selling us their trees even under no deal. But if not, perhaps there is a non-EU country, close to the UK that grows quite a lot of trees and that could be persuaded to fill the gap? I don’t know… just off the top of my head… Norway?
Professor David Paton holds the Chair of Industrial Economics at Nottingham University Business School and is a member of Economists for Free Trade.