Economics & StrategyEmail
What is the biggest risk of a no-deal Brexit for the UK economy? Fuel shortages? Empty supermarket shelves? A recession? A flair-up of violence in Northern Ireland? All would represent rather more of an impact than Prime Minister Boris Johnson’s “bumps in the road”. However it may be another, less talked-about risk, that creates the bigger long-term problem. That risk is that a no-deal Brexit passes off with little observable damage. This may seem paradoxical. Perverse almost. But let me explain.
For the past three and a half years the British public have watched on as the majority of experts in the fields of politics, economics, law, business and civil society have presented sober warnings over the negative impact of leaving the European Union. More recently these warnings have focused on the most disruptive version of leaving: where there is no deal in place to manage the transition to a new EU-UK relationship.
At various junctures these warnings have foreseen economic damage on a scale rarely seen during peacetime. Official Treasury analysis estimates that the UK economy will see a cumulative loss of growth of between 6 per cent and 9 per cent by the middle of the 2030s in the event of a no-deal Brexit. Robbed of its extensive caveats, this analysis has entered the public psyche as the most likely outcome of leaving the EU without a deal.
Make no mistake: this outcome, and the associated non-economic disruption, is not guaranteed in the event of a no-deal. Forecasting in the social sciences simply doesn’t work like that of its natural cousin. There is no economic equivalent to the 100 degrees Celsius boiling point of water. Forecasts of Brexit – even the very best – are based on assumptions on how a variety of groups will behave including EU27 leaders, the Treasury, the Bank of England, dissident Irish republicans and global investors.
Should these, and other groups, act in a way that soften the impact of a no-deal Brexit then many of the most dramatic concerns will simply not materialise.
These behavioural assumptions will be tested immediately should the UK leave without a deal on October 31. Estimates, forecasts and scenarios published in recent months will inevitably find themselves compared to reality. The British public will be watching. Their judgement will be swift and, I suspect, uncompromising. And it is this judgement, and its political chain-reaction, that will shape British politics for years to come.
The starting point for this judgement is not promising. There is already significant scepticism of official Brexit forecasts, given the perceived performance of the UK economy since the 2016 referendum. Over the past three years unemployment has continued to fall, house prices have held steady and pay growth has lately picked up. Economists can sit on bar stools and correctly argue that the UK economy is 2 per cent smaller, domestic stocks and shares are 25 per cent cheaper and the pound has devalued by 15 per cent over this period. Doing so would probably lead to them drinking alone. Consensus is that the decision to leave the EU has, to date, created little lasting economic damage.
Should this happen again in the aftermath of a no-deal Brexit, analysts face being accused of crying wolf too many times. They may also be given less charitable labels. The risk is that the voting public will get a taste for rejecting the best available analysis for a whole raft of public policy areas. It is this sustained post-evidence age that we should fear the most. Whilst economists should never be given the status of a tribal shaman whose views are left unchallenged, if the public conclude that ignoring experts comes with little penalty then the ideological takeovers of health, education and economic policy become ever more likely.
Before those on the Brexiteer right get too smug at the prospect, what happens if the voting public’s takeaway from a no-deal is that economic warnings from across the political spectrum should be ignored? That the magic money tree does exist, and is there to be vigorously shaken? Michael Gove infamously announced during the Referendum campaign that Britons had heard enough from experts. I felt at the time that this was a dangerous threshold for any politician to cross in order to justify a policy stance. Conservatives attacks on the Labour Party for risking a currency crisis or for displaying a lack of fiscal discipline may fall on deaf ears. The lessons learnt over the next few months will not necessarily get applied by the electorate along convenient party political boundaries.
In 2003 the government released an estimate that the enlarged EU would lead to between 5,000 and 13,000 workers from eastern Europe relocating to the UK in the first 12 months. In the end an average of more than 200,000 eastern European workers arrived each year between 2004 and 2007. Was this a politically-motivated “project suppression” or was it illustrating that a forecast is only as powerful as its conditioning assumptions? In this case the forecast assumed other EU countries would open up their economies, immediately, to workers from the new member states. This proved to be an incorrect reading; many workers who would have headed to Germany, Austria, Italy or France sought work in the UK. This played a huge role in the public’s lack of faith in migration statistics and informed one of the tenets of the argument to take back control. But the mistake was the policy assumption about the UK’s nearest economic partners.
So, as we head into the endgame for no-deal Brexit, the private sector is watching for clues on the government’s long-term plans. Investment spending continues to flatline. The disruption of Brexit in almost any form will be absorbed by business. If Brexit is used to justify a wide-ranging and sustained rejection of analysis in favour of ideology, that would generate a far more toxic economic legacy.
A version of this piece was published in The Times.