Brexit sec­re­tary should work with Trea­sury

Financial Times Middle East - - Letters -

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

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