The Treasury model is resilient. Only a couple of years ago its apocalyptic vision of economic Armageddon (thousands of jobs lost, an immediate recession, a punishment Budget) was widely expected to bring the populace to their senses and consign Brexit to the scrapheap of history.
It failed. The people voted to quit the EU and treated its soothsaying with derision. Then reality kicked in with unemployment tumbling and growth accelerating. Early retirement beckoned as its former master George Osborne took himself off to media land.
But under the redoubtable new management of ‘Spreadsheet Phil’, it was given a makeover. At the risk of getting technical, in the Osborne era, it used “gravity equations” to foresee national penury. As made over in the face of demolition by Economists for Free Trade (EFT) and others of its earlier approach, it changed into a (snappily named) Computable General Equilibrium (CGE) model. Assumptions were made, data fed in, and lo and behold the answers came out much the same – i.e. terrible. These were duly leaked via the website Buzzfeed to warn us off quitting the single market and customs union.
After much detective work, we discovered that this CGE model is similar in principle to the Cardiff World Trade Model that I devised at Cardiff University years ago and from which EFT derived its positive conclusions of more growth and higher revenues from a WTO or FTA deal. The Treasury CGE model produces similar results when the same assumptions are fed in. Its drama of gloom and doom stems from one simple thing: the conflicting assumptions put into the model.
In a little noticed outing before the House of Lords Economic Affairs Committee last week, the Chancellor let the cat out of the bag. He confirmed that our Cardiff model was “very effective”; it was just that our assumptions were “not sustainable”.
I will come to these assumptions in a moment. But I have a challenge for him. It is time the Chancellor came clean. How about a debate between him and EFT about the evidence he has for his assumptions and his resulting doom-laden forecasts? He is a busy man but since we are all attending the Conservative Party conference shortly, we can do it there.
The Chancellor is right: it is no longer the economic model that divides us to any significant degree; it is assumptions. For the first time since the referendum, the Chancellor has spelt out what he doesn’t like about our assumptions. Because this is such an unprecedented event, we have written a report explaining to the Chancellor why he is mistaken.
In summary, firstly he claims that our figures rely on the UK implementing unilateral free trade (UFT) and if this were to happen, we would have no leverage in negotiating FTAs. False. We support the government’s strategy of negotiating FTAs and point out to him that calculations based on UFT assumptions actually understate the gains if the same level of free trade were to be achieved by FTAs because of the reciprocal trade created by FTAs.
He asserts that no other modellers produce gains similar to ours. We show that modellers using the new CGE model produce decidedly positive gains versus his decidedly negative results and produce similar figures to ours when they use our assumptions.
The Chancellor also criticises us for not assuming the same massive new non-tariff barriers (NTBs) that drive his gloomy forecasts. We say, while we cannot guarantee that some new NTBs might not arise, the only way he can justify his doom-laden predictions is to assume that the EU will behave illegally. We ask, if he believes that, why is he negotiating with them?
He alleges that we make incorrect assumptions about the nature of imported goods. We explain that his assumptions about how our model works are incorrect.
We think the Chancellor’s assumptions look quite indefensible and they don’t do justice to the model. Surely they have not been adopted deliberately to damn the case for Brexit?
Have a look at our report on the EFT website and make up your own mind.
In the meantime, we will look forward to debating ‘Spreadsheet Phil’.
To read the piece in full, click here.