BrexitCentral: When it comes to the EU, the Treasury has never been impartial and its predictions cannot be trusted

Fear of leaving the EU without a deal, and of trading with the EU thenceforth under WTO terms, has been created primarily by the much-cited series of predictions of severe adverse economic consequences by HM Treasury. It is therefore of some importance to decide whether their predictions are credible.

One set of their pre-referendum predictions referred to the adverse consequences within two years of a vote to Leave the EU rather than leaving itself. Since we have now lived through the period they covered, we now know that apart from one minor point, the fall in the value of sterling, they were all false.  Every other prediction they made, on GDP, (which was predicted to fall rapidly by between 3.6% and 6.0%) on employment, house prices, wages, inflation, FDI and public finances, was wrong, often by risibly large margins, and always in the same direction. This suggests they were deliberately manipulated to give a politically helpful result for the then Government-backed Remain campaign.  They naturally raise questions about the Treasury’s other three sets of predictions about the long-term consequences of Brexit itself.

These cannot be tested by reality until 2030 or beyond, but since they rely on a number of highly improbable assumptions and estimates, they are no less contrived than their short-term predictions, and no more credible. These assumptions and estimates cannot all be examined here, but we can identify the most improbable and incredible, the ones that have contributed most to the Treasury’s characterisation of trading under WTO terms as the worst possible post-Brexit option.

Their first set of long-term predictions was published in April 2016, and depended to a large extent on the assumption that future UK intra-EU trade in goods would increase at the same rate as that of all other members. This was followed by the estimate that by 2030, if it remained a member then, UK trade in goods would have grown by 115%.  If, by contrast, the UK left to trade under WTO rules, it would not enjoy any of that 115% growth, and primarily for this reason, its GDP in 2030 would be 7.5% smaller than it would have been if it had remained a member.

This seems to have prompted Remain supporters to describe the transition to a no-deal exit as a cliff edge, a car crash, or a leap in the dark, and trading under WTO rules as chaos, catastrophe and Armageddon. Since most of world trade, and much of UK trade, is routinely conducted under these self-same WTO rules, the aptness of these metaphors is questionable, but what matters here are the assumptions on which the Treasury prediction was based.

Questions about it might first have been raised with the Treasury itself since a rare piece of in-house classified research conducted in 2005 had shown, like more recent studies, that the rate of growth of the UK’s intra-EU trade during the Single Market has differed greatly from that of other members, most especially from those in Eastern Europe. This HMT research also showed that over the 31 years from 1973 to 2004 it had grown by only 16%, while later IMF/DOTS figures showed that over the 22 years from 1993 to 2015 UK exports to the EU 14 had grown by 25%. To then ‘estimate’, as the Treasury authors do, that over a mere 15 years to 2030 UK-EU trade in goods would suddenly increase by 115%, may be reasonably called absurd, or even a deliberate manipulation to produce a highly misleading prediction. A recent re-examination of the same evidence, using the same gravity approach as the Treasury, but referring to the UK alone, estimated the likely increase of trade in goods with the EU by 2030 to be ‘in the range 20-25%’.

The Treasury was a contributor to the second set of predictions, the EU Exit Analysis Cross Whitehall Briefing of July 2018.  Its wildest assumption was that UK goods trading with the EU under WTO rules would immediately incur tariff, non-tariff and customs charges with a total tariff equivalent value of 30%.It qualifies as wild because the total tariff equivalent value of the goods exports of United States and Japan to the EU have been reliably estimated to be just 20%, or only two thirds as much as those the Treasury predicts for UK exports after a no-deal Brexit, even though its product standards are identical to those of the EU.

Patrick Minford analysed these non-tariff and customs charges in considerable detail, and pointed out that some of the barriers conjured up by the authors of these predictions would be discriminatory and therefore illegal under WTO rules, which the EU generally respects. Why UK civil servants should assume that their EU counterparts would deliberately ignore them post-Brexit is unclear. However, with the help of the 30% total tariff equivalent value, leaving with no EU deal and trading under WTO rules again emerges as the worst post-Brexit option, resulting in a shortfall in UK GDP by 2030 of about 7.7% versus what it would have been had the UK remained an EU member.

The third set of predictions was published in November 2018 specifically to inform Members of Parliament about the long-term economic consequences of various future relationships with the EU in advance of their fateful ‘meaningful vote’ on the agreement negotiated by Mrs May. It contrives, as Andrew Lilico observed, to show the ill-effects of trade under WTO rules by the simple ploy of exaggerating all the future gains of EU membership and minimising all the possible gains that might follow the UK taking back control of immigration, regulation and trade policy.

The outstanding example of the latter is the 0.2% gain to GDP that it estimates would result from FTAs that the UK might conclude with the US, Australia, Canada, India, China and 12 other non-members. It qualifies as an absurdity because the European Commission had previously estimated that the gain to EU GDP of concluding agreements with a similar set of countries would be 1.9%, almost ten times as much therefore as agreements negotiated by the UK alone which would, one imagines, be better tailored to British exporters.

By repeatedly making other estimates in a similar manner, the report arrives at the desired prediction. Indeed, the final prediction that made the headlines, a 9.3% shortfall in UK GDP by 2035-36, was reached simply by assuming that there would be zero immigration from EEA countries until 2035-36, a proposal that no one has ever made. The recently published White Paper suggests it is far removed from any likely future government policy.

The remarkable thing is that any of these Treasury predictions have been given any credibility whatever and were not dismissed with a laugh, just as the predicted immediate consequences of a vote to Leave have often been. Part of the explanation must be that specialist publications like The Economist and the Financial Times, and specialist correspondents of other media such as the BBC, Sky, The Guardian and The Times did not check and flag these and other questionable assumptions and estimates on which these predictions depend.

Perhaps they did not have the time or maybe they welcomed Treasury support for the Remain cause, but a further reason one suspects, is that, like the rest of us, they wanted to trust Treasury mandarins. They saw them as honest, upright, non-partisan experts performing their duties by providing entirely trustworthy and reliable evidence to inform ministers and public debate.

Unfortunately, on European issues at least, this image is woefully mistaken. The Treasury has never regularly and dutifully conducted impartial research on the impact of EEC/EU membership on the UK economy. And it has never been asked to do so by any government since 1973, probably because ministers were usually engaged in persuading the ever-sceptical British public of the merits of European integration and doubted that empirical research would be an altogether reliable ally.

Since 2000, the Treasury has, like other departments, been obliged to conduct impact assessments of proposed legislation derived from EU regulations and directives, but it never sought to translate them into a meaningful national cost/benefit analysis. In 2003, at the time of the debate on joining the euro, Treasury mandarins searched the world for experts on optimal currency areas and debated and published their differing views shortly before the Chancellor announced his decision. The research conducted in 2005 and mentioned above was a one-off and remained classified until an FOI request in 2010.

When they were asked to make the case for Remain, Treasury mandarins therefore had no historical analyses to draw on, apart from the 2005 one they wanted to forget. And they did not instantly assume a quasi-judicial impartiality. Apart from the one-month purdah periods before the 1975 and 2016 referendums, they had never been asked to be impartial on this issue, and they evidently felt under no obligation to be impartial with respect to the division of opinion in the country at large. Hence, they immediately showed themselves to be fervent, unabashed advocates for continued EU membership and produced predictions to delight their all those who shared their view.

All of us have paid, and are still paying, a high price for the Treasury’s failure to conduct and publish impartial analyses of the impact of EU membership on the UK economy over the preceding forty-plus years in accordance with our image of them, and with their own core values and rule books. Had they done so, the referendum debate would have been rather more informed and enlightening than it was. Instead of constructing Project Fear for the Remain side, they might have tried to match Business for Britain’s superbly documented case for Leave in Change or Go.

In the course of such research, they would necessarily have had to understand and explain why the exports of countries trading with the EU under WTO rules, like the United States, Canada, Australia, Singapore and a host of emerging societies have been growing so much faster than the supposedly frictionless ones of the UK over the life of the Single Market. American exports to the EU, for example, grew by 68% from 1993 to 2015, and the smaller British exports by just 25%. If trading with the EU under WTO rules has proved so successful for others, why would it be the worst possible option for the UK after Brexit?

They might also have been able to explain why it is that UK exports to 111 countries around the rest of the world under WTO rules have also grown so much faster than its exports since 1993 to the EU itself, and to those countries with which the EU has negotiated trade agreements from which the UK was supposed to benefit. These are questions that the Treasury mandarins have preferred not to address.

Much relevant evidence to determine whether or not trading under WTO rules is the worst post-Brexit option could be obtained from UK companies which currently trade with the EU from a member country and with the rest of the world under these rules, since they are able to make direct comparisons. The Treasury is well-placed to conduct such research via HMRC but this is more evidence that it has decided it, or the government, or the country does not need. Some companies have, however, spontaneously testified about their experience of trading under both systems. It directly contradicts the sharp contrast between them which the Treasury has sought, with some success, to make the centrepiece of the debate about the UK’s post-Brexit options.

Lord Bamford, Chairman of JCB, the UK’s largest manufacturer of construction equipment, for instance, recently felt ‘compelled to say this about a no-deal Brexit: there is nothing to fear from trading on World Trade Organisation (WTO) terms… Trading with Australia on WTO terms is as natural to us as trading with Austria on EU single-market terms. John Mills, founder of JML, which sells to ‘80 countries at the last count’, said that ‘about 80 percent of all our international trade is on WTO terms, so we know what the paperwork’s like. Once you’ve done it half a dozen times, you’ve got it all on the computer, it just isn’t that difficult.’

Even more emphatically, Alastair MacMillan, whose company exports to 120 countries in the world including every EU member, points out that ‘there is little difference in the way we handle freight going to the EU compared to the rest of the world. The United States is our biggest market and we compete directly against US companies in their own market, in part, because we deliver next day to anywhere in the United States by 1pm their time, customs cleared. That, to me, is frictionless trade and it is at a cost that is not dissimilar to the same service to customers in the EU’.

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