Treasury Select Committee statement on Withdrawal Agreement: Economic Analyses - Dec 13

It is a pleasure to speak under your chairmanship, Ms Ryan. I thank the Backbench Business Committee for the opportunity to make a statement to the Chamber on the 25th report of the Treasury Committee on the economic impact of the withdrawal agreement and political declaration, and on the Bank of England’s analysis. I place on record my thanks to the Treasury Committee’s staff, my fellow members of the Committee, the witnesses who appeared before us, and all those who submitted written evidence—all of whom played a vital part in producing the report with great speed.

 

Over the summer, I wrote to the Chancellor, the Governor of the Bank of England and the Financial Conduct Authority on behalf of the Treasury Committee and asked them to produce and publish analysis of the economic impact of the Brexit withdrawal agreement and of the future framework, once it had been negotiated by the Government with the EU. The purpose of securing those analyses was to ensure that Parliament’s meaningful vote on the withdrawal agreement, whenever that may be, is properly informed. Like many other Select Committees, the Treasury Committee has spent the last few weeks poring over the details to ensure that all right hon. and hon. Members walk through the voting Lobbies with the best possible evidence.

 

When the analysis we requested was published a couple of weeks ago, there were accusations of “Project Fear Mark 2”. Some ramped up the rhetoric even further, with cries of “Project Hysteria”. Let me clear: the analysis of the withdrawal agreement published by the Treasury, the Bank of England and the FCA was requested by the Treasury Committee for Parliament. The timing of the publication was driven by us to ensure that there was enough time for evidence sessions on the analysis ahead of the vote as we then expected it. Any personal criticism of the Chancellor, the Governor of the Bank of England, our regulators or witnesses, all of whom were responding to parliamentary requests, is wholly unfair and does not aid constructive discussion of the issues—and they are important issues. The analysis that the Treasury Committee received helped it greatly in producing its report on the Brexit deal, which was published and sent to all Members of Parliament on Tuesday morning.

 

Although Committees can be divided along ideological, party and, more recently, Brexit lines, consensus is always sought. There are 11 Members of Parliament on the Treasury Committee, and I am sure that there are at least 12 different views on Brexit, but this report, like the other 24 reports that we have published since I became Chair 17 months ago, was unanimously agreed. That shows that while the House, and indeed the country, appears more divided than ever, compromise can be achieved. As I have told the House before, all hon. Members will have to compromise if we are to find a way through Brexit.

 

The firm aim of the report was not to recommend how Members of Parliament should vote, but to ensure that they are as informed as possible and as aware as possible of all the relevant evidence when it comes to choosing a Division Lobby. Unfortunately, the Government made this difficult to achieve. They provided economic analysis of the UK leaving the EU under five different scenarios. The White Paper scenario, which is akin to the Chequers proposal, represents the most optimistic reading of the political declaration, rather than a more realistic scenario. It does not represent the central or most likely outcome under the political declaration, and therefore cannot inform Parliament’s meaningful vote.

 

In the report, the Treasury Committee expresses its disappointment that the evidence provided by the Treasury does not analyse the backstop. The Treasury also failed to include any short-term analysis, including on public finances and on regional and sectoral job losses or gains. Members of Parliament, as representatives of their constituencies, will understand how important that regional analysis is now and in the future.

 

Specifically on the Government’s decision not to model the backstop, the Committee concluded that that was a mistake. The Governor of the Bank of England told us

 

“on average for a trade deal from start to finish, it is something in the order of four years”,

 

but we know that previous EU negotiations have taken longer—for example, the trade agreement between the EU and Canada took eight years. Even if the implementation period is extended for one or two years beyond December 2020, it is feasible that the UK could enter the backstop, which, as we know, is politically contentious, given what we have already heard in the withdrawal agreement debate. Despite it being neither the UK’s nor the EU’s preferred position, the Government should have modelled the backstop.

 

We as the Treasury Committee would not be doing our duty to the House of Commons if we did not look at the effects of the withdrawal agreement on the financial services sector. In each of the five modelled scenarios, the sector will contribute less to the UK economy, but we know that it is a critical taxpayer, as well as being part of presenting a face of global Britain on the world stage. The Financial Conduct Authority expressed its concern that the UK would be a rule taker during an implementation period. In assessing the financial services sector’s ability to withstand a no-deal Brexit, the Governor provided reassurance that the Bank of England is

 

“sleeping soundly at night, because the core of the financial sector is in the position that it needs to be in for the tough scenario.”

 

While the Governor’s sleeping patterns may provide some succour to MPs, it is clear that a vacuum of information exists. There is a dearth of analysis that shows how the economy will transition to a new trading relationship. There is also a lack of modelling on the future framework between the UK and the EU.

 

However, Parliament may wish to draw from the range of scenarios that have been modelled, in order to assess the economic impact of the draft withdrawal agreement and political declaration. The scenarios range from 0.6% less GDP under the Chequers plan than would otherwise have been the case, to 7.7% less GDP in a no-deal scenario.

 

Select Committees play an increasingly important role in the life of this Parliament, particularly given its make-up and the nature of the Brexit issue that it faces. I was very clear, and I would like to thank the Committee’s members again for their support, in saying that we wanted to make sure that analysis and evidence were put before MPs. As I said, we wanted to do that not to tell them how to vote—we are all grown-ups and should be able to make decisions on behalf of our constituents as their representatives—but to make sure that the information was out there.

 

We know what happened earlier this week, which is that the meaningful vote was suspended and postponed. It will come back before the House at some point—maybe not until the new year. I suggest to the Minister here today—the Exchequer Secretary to the Treasury—that that gives time for some of the issues that are identified in our report to be potentially remedied, or for more evidence to be given to the Committee, which we will report to the House, as we have done before.

 

In conclusion, whenever this vote comes back to the House, I hope, on behalf of the Treasury Committee, that all Members of Parliament will find time amid the turkey, crackers and festive wrappings to read our report before that Division bell rings.

I am delighted to serve under your chairmanship, Ms Ryan. The Treasury Committee’s report is a damning read for those who had dared to hope that the Government’s withdrawal agreement analysis would enlighten the debate. We already knew that this Government’s Brexit was going to damage our economy; every piece of credible independent analysis has shown that, and the Government’s own analysis has shown it, too. As we see from the Committee’s report, the Government failed to provide all the evidence the Committee requested and

 

“modelled scenarios…yet did not model scenarios that are considered probable and have the potential to be persistent over the medium to long term”.

 

What is worse, none of the Government’s economic analysis even attempts to give Members or our constituents accurate information about the things that matter most, which are jobs, incomes and prices over the next year. Put simply, the Committee has confirmed that the Government have failed to show leadership at this time of immense uncertainty and fear in our country.

 

I have just a couple of questions for the right hon. Member for Loughborough (Nicky Morgan), the Chair of the Treasury Committee. First, is it not true that none of the Government’s proposed options will be good for the economy, to the tune of at least a 4.9% hit? The Chancellor described that hit as being “slightly smaller”, but I must admit that a hit of more than 4% does not feel small to me. I would like the right hon. Lady’s view on that issue.

 

Secondly, as there is no analysis of what happens if we remain with the backstop, we can only conclude that the Government either do not know what the effects of that option are or that they do not want us to know what the effects are. Can the right hon. Lady enlighten us and say which of those she thinks is true?

 

Finally, given that the Bank of England considers that a no-deal scenario could be worse than the 2008 financial crisis, and given that the Government think that a no-deal scenario would cut as much as 11% from our economy, does the right hon. Lady agree that it is utterly irresponsible to threaten something that no responsible Government would ever consider allowing in their own country?

I thank the hon. Lady for her questions, and it is good to have this debate—I am sure we would have had it on the Floor of the main Chamber if it had continued, but now we have time to reflect on all of this.

 

The hon. Lady is right to say that the first thing the Chancellor admitted—I think both publicly, when the analysis was first published, and before the Committee as well—was that none of the scenarios shows that there will not be a negative impact on the UK economy. A 4% hit is substantial, if we think about that figure in the context of the financial crisis, and we as MPs all know that many of our constituents still feel the effects of that financial crisis 10 years on. Wages are now growing, but it has taken some time for them to do so.

 

Another of the hon. Lady’s questions was in relation to no deal. I know the Minister will not answer now, but he will be more than capable of answering for himself at some point in the future. However, I have been a Treasury Minister myself, and to be fair to the Government, they have dropped the “No deal is better than a bad deal” language. Parliament has already made it very clear that we are not going to sign off on any kind of no-deal arrangement, although we all have to debate among ourselves how we will head that proposal off at the right time. It is very clear that the Government do not want there to be a no-deal scenario, and I am glad that the analysis has shown why a no-deal scenario would be so very damaging and why it is of such concern to businesses, importers, exporters and those employing our constituents.

 

The hon. Lady also asked about the backstop modelling. Members will see in the report and in the transcripts of our sittings that we asked all our witnesses and the economists who gave evidence whether it was possible to model a backstop. With any modelling, it is all about the underlying assumptions. Some assumptions would have to be made about the way the backstop would operate and how long it would last. The Government told our Committee that, because they do not want to be in the backstop and because the backstop is not the preferred Government policy, it did not have to be modelled.

 

I think we all hope that that is the case and that the backstop is an insurance policy not to be called upon. Undoubtedly, however, on the basis of how long it takes to negotiate free trade agreements, there is a possibility that the backstop will be needed. That would then have an impact on those relying on importing to and exporting from this country. There is time now, and it might well be that this is something the Government Economic Service might want to consider, although its staff also deserve a Christmas. They might want to consider how they might give some more evidence to the House on this issue before we get to the meaningful vote.

I congratulate the right hon. Lady and her Committee for producing this report, which could be summed up in one sentence: Brexit makes the country and every one of our constituents poorer. We see that when we get to the conclusions.

 

However, my question is about financial services. I have tens of thousands of financial services jobs in my constituency, and under all the models examined in the Treasury Committee’s report, the financial services industry shrinks, by anything between 9% and slightly less than 1%. That would have a disproportionate impact on Edinburgh, because of the way its financial services sector is set up. Was any modelling done on how many jobs would be lost and on what the Government need to do between now and 29 March next year to put in place a system, mechanism or part of a deal that would mean that the financial services industry would not shrink but, indeed, grow?

I thank the hon. Gentleman very much for his question. I am pleased that he has mentioned financial services, because the view among those in the financial services industry is that they have not really had quite as much attention devoted to them as they should have, given that they are such a significant taxpayer and employer. I am also glad he mentioned Edinburgh, because we tend to think sometimes just about the City of London. He is of course absolutely right to say that there are many financial services jobs in his constituency and in other constituencies around the country.

 

Before I get on to his point that all scenarios will make us poorer, one interesting thing about the economic modelling for the Treasury is that it is done purely on the trading impact. It is fair to say—it is both a negative and a positive—that there is no domestic policy assumption made at all. Of course, it is possible for any future Government to consider how they might respond to the scenarios as they unfold.

 

There was not specific modelling of jobs. There have been estimates, and again we asked the chief executive of the Financial Conduct Authority for some, as we have asked other financial services witnesses. The initial estimates of jobs moving overseas have not come to pass, but we are still looking at between 5,000 and 10,000 people being impacted.

 

The financial services sector now talks about “day one” and “day two” impacts. As for day one, we know that a lot of financial services firms are already putting in place contingency arrangements and that they are trying to keep job moves to a minimum. Depending on the deal that is eventually arrived at—this relates to the hon. Gentleman’s question about what deal could be put in place to help this process—the impacts of “day two” and beyond on jobs being lost or moved could be very significant for the financial services sector. Obviously, we could be talking about thousands of jobs. These are often well-paying jobs, and they are not something that any of us here today want to see disappearing from our constituencies.

 

Let me answer the hon. Gentleman’s question, though, which is actually about the deal on the table at the moment. The political declaration refers to a system of equivalence, but a lot of work needs to be done to work out the equivalence regime. Andrew Bailey, the chief executive of the Financial Conduct Authority, went through with our Committee how he thought the equivalence regime needs to be enhanced, and I think he is right on that issue.

 

I do not think it is any great secret for Members of this House that I am in favour of a Norway-plus type of option, whereby we would retain access to the single market. I know that there are other objections to that proposal, but for financial services it would keep the passporting regime in place, which would be of significant benefit to financial services firms, and therefore in terms of the numbers of people they can employ going forward.

I join in thanking my right hon. Friend and her Committee for the work they have done, together with their advisers and the witnesses. In conclusion 6, there is a reference to the backstop, which leads to paragraphs 35 to 40 in the report. There, Professor Nickell says that it is possible to model the backstop, and then says that the backstop might be in place for 15 years. I do not think that is a very serious kind of modelling to do, because we do not know what change there would be. Am I right in saying that, unlike most trade agreements, the ones we will need to make with the EU27 are based on equivalence now, rather than trying to bring people together?

I thank my hon. Friend for his question. Of course, one of the issues is that it is not known how long the backstop might be needed for. One would hope that 15 years is probably a wild overestimate, but it is true that the Canadian-European trade agreement took eight years; however, as my hon. Friend says, they were starting from a very different position from the UK and the EU, given the trading relationship that we have at the moment and very much want to maintain.

 

My understanding, which I think comes from evidence that the Secretary of State for International Trade gave to the relevant Select Committee and to the Exiting the European Union Committee, is that significant progress has been made in rolling over existing trade agreements. It is not just the new trade agreement with the EU that has to be negotiated; the UK then needs to separate out, and become a party to, the trade agreements the EU has with other countries. Progress has been made on that.

 

However, my hon. Friend is right: the point about modelling the backstop is not that it is impossible, but that it is possible, with very clear explanations of how it has been done. Generally, the comment on all of this—we saw this with some of the reporting around the Bank of England scenarios—is that it is easy to overestimate or overinflate the damage. The Bank of England was very clear that these were scenarios, not forecasts. Again, that could be done with the backstop: we could set out some scenarios that can be modelled, while making it very clear that they are not predictions of what is going to happen in the future.