Brexit secretary should work with Treasury
Sir, Your reporting of David Davis’s appearance before the Commons Brexit committee (March 16) omits reference to the pre-referendum Treasury assessment, which included the possible scenario of trading without the benefit of a trade agreement. The Brexit secretary did not say that no assessment had been made but rather that none had been made since the Treasury’s earlier modelling of the impacts.
We should recall that this consisted of a set of projections for the first two years following a vote to leave and 15year projections under different assumptions for how we would trade with the EU, including World Trade Organization terms. The short-term projections were right about a possible shock to the exchange rate. The immediate fall in fact exceeded the Treasury’s two-year, worst-case shock assumption, as currency traders immediately priced in a hard Brexit as an inevitable outcome, ignoring all policy objectives.
But the Treasury has been wildly wrong about the effects on the wider economy. It is as if the role of the exchange rate as a shock absorber was fundamentally misunderstood.
This in turn calls into question the Treasury’s long-run assumptions about the exchange rate as an offset to both the inefficiency costs of dealing with non-tariff barriers and the trade volume effects of having to pay as well as levy tariffs. The Treasury did not reveal the currency assumptions behind its worst-case projection that after 15 years gross domestic product would be 9.5 per cent lower out than in.
Mr Davis’s embarrassment at the Treasury’s modelling record is understandable, but it is still sensible to work with the Treasury, seeking both to improve its modelling and explain better the limitations of modelling. Otherwise, the impression may be given that the real costs of Brexit are known and are being withheld. Stuart Fowler Managing Director, Fowler Drew, London SE11, UK