Ministers betting on Covid recession as economic cover for a no-deal Brexit
There’s a well-known tendency for people to loosen their purse strings generally when they buy a house.
So they’ll splurge on fancy new furniture, high-end kitchen appliances, and all sorts of other things too. Why? Because the outlay on the house is so large relative to their normal outgoings that it makes things that they would normally think were too pricey seem reasonable, trivial even. The spirit of “what the hell” takes over.
Are government ministers and their advisers thinking along similar lines when it comes to a no-deal Brexit?
There’s no economic logic here. Just as that new £1,000 sofa doesn’t actually become any cheaper simply because you’ve spent £300,000 on a house, the fact that we’re going through the worst recession on modern record would not make a no-deal Brexit in the wake of it any less damaging to our economy.
Assuming the economy is bouncing back from the lockdown slump later this year, a no-deal Brexit that yanked us out of the pan-European regulatory regime and imposed tariffs overnight on a large share of our trade in early 2021 would raise the risk of double dip recession for the UK. This would, of course, be bad for jobs and incomes. And the Office for Budget Responsibility estimated last year that even a “relatively benign” no-deal Brexit would open up a £30bn hole in the public finances, creating pressure for additional tax rises or spending cuts to close it.
The economist Thomas Sampson of London School of Economics also points out that even the prospect of a no deal could impede the recovery from the Covid-19 slump. “Will firms with European supply chains that were disrupted by Covid want to invest in restarting those supply chains with a potential no deal round the corner?” he asks.
Assuming the economy is recovering from the Covid collapse it will need stimulus and other forms of support. The last thing it will need is a no-deal Brexit shock.
It’s also important to separate the short-term and the long-term economic impacts of a no-deal Brexit. The bulk of the long-term damage from a no-deal Brexit, according to every credible piece of analysis, comes over the long-term as a downward shift in the intensity of our trade with our largest trading partners in Europe, which holds back our national productivity growth relative to where it would otherwise rise.
The fact of the Covid slump – massive as it is likely to be – will not mitigate any of these long-term no-deal costs.
But let’s not be naive. The “costs” that those in government are talking about are referring to are less economic than political.
Advisers are calculating that it will be difficult to disentangle the economic impact of a no-deal Brexit from the fallout from the Covid slump, thus making it less likely they will be blamed for inflicting unnecessary further suffering on the UK population. For a certain type of politician, lower cost means a lower risk of being held accountable.
But are they correct in their assessment of the political risks? Perhaps. “If the Covid bounce back is delayed to the first quarter of 2021, it could swamp the Brexit effect,” says Sampson.
Yet the pond might not be so muddy. Even then it might well be possible to trace shocks to specific sectors of the economy – agriculture or transport for instance – to the severing of trade or a brutal regulatory rupture with the EU.
And, in the end, just like a spendthrift homebuyer, the politicians that oversee the mess will have to own it.