The models used to assess the economic impact of Brexit were
misleading, according to new analysis published by Policy
Exchange.
At the time, the projections made by the Treasury, OECD and IMF
were used by the then government and Remain campaign to argue
that the British economy would face a significant and permanent
loss of income in the event of a vote to leave. A careful
analysis of the gravity trade economic models used to generate
these pessimistic projections suggests that the impact of Brexit
on our economy will be much less significant than the economic
consensus constructed at the time of the referendum.
Dr Graham Gudgin, Policy Exchange’s new Chief Economics Adviser
and the co-author of the report, said:
“As we start formal negotiations to leave the European Union, now
is a good time to reflect on the predictions which suggested that
the British economy would collapse immediately in the event of a
Brexit vote.”
“The forecasts for the impact of Brexit on international trade
undertaken by the Treasury, OECD and IMF were based on ‘gravity
models’, which predict the amount of trade between countries
based on account factors like the size of trading economies and
the distance between them. We have replicated the Treasury’s
gravity model results and examined them in detail and we believe
that they were overly pessimistic.”
“The Treasury’s models did not take into account that not all
economies are created equal and the UK is a significantly larger
and stronger economy than many of the smaller countries which
were given equal weight in the model. We therefore estimated an
alternative gravity equation based on data for the 60 largest UK
export partners, which account for close to 100% of UK exports
and include all 28 EU members. The result is that the measured
impact of EU membership on goods trade for all EU countries on
average falls from 115% to 90%.”
“Most important is the fact that the Treasury and OECD estimated
the average potential trade loss across all 28 EU members, and
did not take into account that the UK has a very different trade
relationship with the EU. In our analysis the estimated loss of
UK trade is only 23%. This is consistent with the declining
importance of the EU in UK trade over the last 20 years.
The overall conclusion is that the effect of leaving the EU on
economic growth, while negative, will be small, and any
associated knock-on impacts will similarly not be large.”
“We concluded that the gravity model approach lacks the
degree of precision needed to make a definitive estimate of the
impact of EU membership on trade. In particular, estimates need
to focus on the UK itself if they are to have relevance to the
Brexit negotiations. A smaller economic impact is in line with
our view that the small average external tariff of the EU,
together with the fact that most UK firms are already compliant
with EU regulations, will mean that the impact will be more
limited than the Treasury estimated.”
ENDS
This paper will be published on the same day that Policy Exchange
hosts ‘Who’s Afraid of No Deal? Trade Policy after
Brexit, with the following panel:
- Dr Geoff Raby, Head of Trade Policy, Policy
Exchange & former Australian WTO Ambassador
- HE Alexander Downer AC, Australian High
Commissioner to the UK
- Dr Graham Gudgin, Chief Economic Adviser, Policy
Exchange
-
, former Secretary of
State for Trade and Industry
- Rt Hon MP, Former Secretary of
State for Education
Please register to attend here:
https://policyexchange.org.uk/pxevents/whos-afraid-of-no-deal-trade-policy-post-brexit/
Notes
Graham Gudgin has joined Policy Exchange as our new Chief
Economic Advisor. He is currently Honorary Research Associate at
the Centre for Business Research (CBR) in the Judge Business
School at the University of Cambridge. He is also visiting
Professor at the University of Ulster and Chairman of the
Advisory Board of the Ulster University Economic Policy Centre,
and was senior Economic Advisor at Oxford Economics from 2007 to
2015. He was director of the ESRC-funded Northern Ireland
Economic Research Centre from 1985 to 1998 when he became Special
Adviser to the First Minister in the NI Assembly until 2002.
Prior to this he was economics fellow at Selwyn College,
Cambridge and a member of the Cambridge Economic Policy Group
under Wynne Godley. He is the author of a large number of books,
reports and journal articles on regional economic growth in the
UK, the growth of small firms and electoral systems. He is
currently working with Ken Coutts on a macro-economic model and
forecasts for the UK economy and on the economic impact of
Brexit.
