It’s a myth that no-deal will make us poorer

Philip Hammond is still relying on old, flawed Treasury research to make his dire predictions

Last week, the Chancellor, Philip Hammond, warned against a nodeal Brexit, suggesting it would cost the UK economy £90 billion. It is disappointing to see his predictions still so heavily reliant on the Treasury’s “Project Fear” economic model first published in November 2018 – especially when several recent models employed by economists independent of the Government, notably the World Trade Model developed at Cardiff University, have found the opposite: that the total positive impact of nodeal could be in the region of £80 billion.

This £170 billion discrepancy can be accounted for by examining the assumptions fed into the Treasury

model, which range from the absurd to the merely dubious. The most egregious is the failure to include the annual savings from no longer paying the £20 billion annual gross budget contribution to the EU. This omission tells you all you need to know about the Treasury’s pessimistic mindset.

The assumption with the greatest negative impact is the idea that “behind the border” non-tariff barriers will suddenly spring up. Simply stated, this means the Government believes that all sorts of new product standards will face our exporters and importers, despite over 20 years of shared rules and standards. This is predicted to lead to new compliance costs so high they would depress GDP by a staggering 4.2 per cent, accounting for around half of the £90 billion negative impact cited by Mr Hammond.

The Treasury, of course, fails to acknowledge that such behaviour on the EU’S part would be illegal under WTO anti-discrimination rules.

Then there is the silly idea that there would be essentially no positive contribution (only 0.2 per cent of GDP) to the UK’S economy from agreeing free-trade deals with non-eu countries. This compares with the Treasury’s own separate claim that a UK Free Trade Agreement with the EU alone creates a 3 per cent boost to the UK economy, and Cardiff University’s model showing deals with non-eu countries would yield a 4 per cent boost in GDP.

The silliness does not stop there. The Treasury also seems to think that the EU and the UK will impose tariffs on each other forever and that net EEA migration to the UK will cease. Neither of these ideas reflects mooted post-brexit government policy and it is difficult to imagine the EU and the UK not agreeing some form of free trade agreement at some point.

Finally we come to two key assumptions where at least some debate might be had about the figures: the impact of better regulation post-brexit and the cost of customs procedures at the border.

The Treasury assumes virtually no positive impact on the economy from better regulation (0.1 per cent of GDP) – but this is based on less than half a page of argument in the report. In contrast, an extensive Cardiff University study of the potential benefits from better regulation post-brexit produced a positive impact on GDP of 6 per cent that, even taking into account a conservative estimate for implementation costs, would still lead to growth of 2 per cent.

When it comes to the borders, costs for the processing of customs declarations, rules of origin certificates and goods inspections are predicted to be so high that together they would reduce GDP by a ridiculous 1.8 per cent.

Astonishingly, this includes the assumption that the impact of border costs for services will reduce GDP by 0.5 per cent which, of course, cannot be correct, given that services do not attract tariffs and are not inspected at the border.

The approach to border costs also reflects a lack of understanding of how modern, computerised, pre-declared border procedures actually work. Inspections are intelligence-led and consequently rare, often requiring only confirmation of computerised documentation: in 2017 only one per cent of UK imports were physically inspected. What’s more, these conclusions fly in the face of actual experience which show the typical costs of modern border procedures to be well below 1 per cent.

Put simply, the idea that we will be poorer in the long-term and even in the short-term after Brexit is a myth.