How the Treasury’s dodgy dossiers grossly exaggerated the economic impact of Brexit

David Blake
David Cameron Speaks To Business Employees About Remaining In Europe
The claim that GDP per household would be £4,300 lower by 2030 has been widely used in the referendum campaign (Source: Getty)

With just over a week to go before Britain votes, the Remain campaign is relying heavily on analysis produced by the Treasury which claims a variety of extremely negative impacts in both the short and the long term from the UK leaving the EU.

Having reviewed the two models used by the Treasury, however, it is clear that its “dodgy dossiers” grossly exaggerate the economic consequences of Brexit.

The long-term model

First, the Treasury uses a gravity model with the EU at its centre, which predicts that GDP per household will be lower by £4,300 by 2030 if the UK votes to leave the EU.

But this model is inconsistent with:

  • The UK’s reduction in its share of exports to the EU from 54 per cent in 2006 to 44 per cent in 2015 while the Single Market was deepening;
  • The rapid growth of Greenland’s economy when it left the EU in 1985;
  • The fact that Ireland’s trade with the UK was unchanged by her exit from the sterling area in 1979.

The same model would predict that:

  • The UK would be better off joining the euro;
  • If Scotland left the UK, its trade with the rest of the UK would fall by 80 per cent – this effectively means no trade which is just not credible.

The short-term model

Second, the Treasury uses a vector autoregressive (VAR) model to predict an immediate recession if the UK votes to leave the EU.

There is no causality in a VAR model – it merely projects forward the existing trends among a series of variables. For example, during the 2008 global financial crisis, there was a negative relationship between a “comprehensive UK uncertainty indicator (UI)” and GDP – the former went up and the other went down almost instantaneously.

Yet GDP is a slowly moving juggernaut compared with the UI, which can change on a daily or hourly basis. The UI might well be elevated at the same time that GDP is falling, but it takes a leap of faith to then say that the heightened level of uncertainty “causes” GDP to fall almost instantaneously.

The Treasury assumes that voting to leave the EU will constitute an economic shock equivalent to 50 per cent of the shock of the global financial crisis.

It also assumes that the shock to uncertainty remains constant throughout the two-year period after Brexit. Yet not even in the global financial crisis did the shock stay constant for two years.

Read more: The true impact of Brexit is drastically less certain than economists claim

These two assumptions will automatically generate a recession – “caused” by the heightened uncertainty – that cuts UK GDP by 6 per cent in two years’ time. This is equivalent to 50 per cent of UK trade with the EU – yet we will still be in the Single Market during this period.

The depth of the recession is made worse by another Treasury assumption, namely that there will be no policy response to this shock – the Treasury will just sit on its hands while the economy dives.

Had the Treasury behaved in the same way during the global financial crisis, this would have been catastrophic for the economy. Yet it carefully managed expectations (“we will do whatever it takes”) and backed this up by pumping £375bn into the economy.

In short, the Treasury’s reports are completely unbalanced because they consider only the benefits of staying and the risks of leaving – but not the benefits of leaving and the risks of staying. They are written in an alarmist, scaremongering tone that would delight Private Fraser in Dad’s Army.

Read more: Osborne is entirely wrong: Voters would gain from Brexit

They also fail to consider the results of other models that predict that leaving the EU will make very little difference to the UK economy. The key model that is not considered is a gravity model centred on the world under WTO rules: no need to wait years negotiating a trade agreement, just agree to trade.

Our economy will be fine outside this small customs union facing big internal problems – such as the democratic deficit, the failure of Schengen and the euro, and the disastrous implications for political and social stability in the EU.

I prefer to heed the words of Corporal Jones – “don’t panic” – but first I am going to bin the Treasury’s two “dodgy dossiers”.

Click here to read David Blake's full report.

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