The new project fear shames Whitehall
The latest doom-laden post-Brexit forecasts by the Treasury lack all credibility and confirm its unfitness to advise on such a critical issue
Claim and counter-claim about Britain’s economic future outside the European Union have led to bewilderment. Undoubtedly, the scariest short-term forecasts in Project Fear have been refuted and, in that sense, the Leavers have won the opening stages of the debate. However, that has not stopped organisations which issued the scary short-term forecasts — notably Her Majesty’s Treasury and other Whitehall departments of state — from remaining pessimistic about the long-term consequences of Brexit.
Buzzfeed, the internet media service, has reported an official assessment, EU Exit Analysis: Cross Whitehall Briefing, dated January 2018, which reflects work conducted by senior government economists in the Treasury and elsewhere. It looks remarkably similar to the gloom and doom about Brexit in the Project Fear documents of spring 2016. Specifically, the assessment said that the growth of national output over the next 15 years would be 5 per cent lower than current forecasts (that is, with the UK remaining in the EU), even if we completed a comprehensive free trade agreement with the EU once we had left. More fundamentally, we would be no less than 8 per cent down in a “no deal” scenario, with the UK reverting to World Trade Organisation rules and having no special arrangements with our neighbours.
Buzzfeed notes that the report is being “tightly guarded inside government”. Apparently, the Prime Minister would not make the analysis public, because “it’s embarrassing”, because — in other words — it purports to demonstrate that the British government is making a capital error in accepting the result of the 2016 referendum. However, the revelation that Project Fear was full of fake forecasts has increased doubts about the value of this sort of Whitehall work. Are civil servants well-informed and high-minded Platonic Guardians? Or can they be attacked as conspirators against democracy? The larger issue is, “how seriously should the British people take prognostications from their country’s government machine?”
We have been here before. In 1975 a referendum was held on whether the UK should stay inside the European Economic Community, then known as the “Common Market”, with the government issuing a leaflet on “the new deal” that Harold Wilson, as Prime Minister, had negotiated. Membership was commended, as its purposes were “to raise living standards and improve working conditions”, and “to promote growth and boost world trade”. And what would happen if voters said “no” to Wilson’s new deal and decided to leave the Common Market? Allegedly, “the effect could only be damaging” with an inevitable “period of uncertainty”, in which “businessmen who had made plans for investment and development on the basis of membership would have to start afresh”. Even worse, “we would have to try to negotiate some special free trade arrangement” in “a new treaty”, and “its conditions might be harsh”. By implication, “Britain’s exports to the Common Market would be seriously handicapped”.
The 1975 referendum is now history, and so are the economic outcomes of the periods before and after the UK’s accession to the then Common Market on January 1, 1973. Was the government’s enthusiasm for membership vindicated in practice? The first item in any discussion must be the growth rates of output and productivity (that is, output per head), since advances in productivity are vital to living standards in the long run. After that numbers on trade and exports give a more comprehensive picture.
In the decade to the start of 1973 the UK’s gross domestic product climbed at a compound annual rate of 3.3 per cent, whereas in the subsequent decade the comparable figure was 1.2 per cent. So the pace of expansion in national output dropped by over 60 per cent. On the productivity front, output per head in the whole economy advanced at a compound annual rate of 3.0 per cent in the decade before Common Market accession and by 1.5 per cent in the decade afterwards. Trade is no more help for the Common Market’s supporters. Joining the Common Market was supposed to give a special boost to exports, since British companies would acquire new rights to sell tariff-free products in the neighbouring vast European market. In reality, the growth of the UK’s exports of goods and services in real terms was 6.2 per cent a year in the decade to 1973 and only half of that, 3.1 per cent a year, in the following decade. The weakness in exports was pervasive and included exports to European states. Astonishingly, the growth rate of UK exports to the Common Market countries declined in the decade after becoming a member.
Do cynics about government propaganda need to labour their point? There is a large, obvious and disturbing gap between the British government’s statements about the Common Market in a document delivered to every household in 1975 and what actually happened to the relevant macroeconomic variables in the next few years. Common Market membership was puffed up as an economic elixir which would promote living standards, trade and investment, but on the key metrics it had no such effects. The UK’s growth performance was plainly worse — much worse — after Common Market entry than before.
Let it immediately be conceded that the above discussion does not prove a direct cause-and-effect relationship between Common Market accession in 1973 and the deterioration in the UK’s economic fortunes from then until the early 1980s. It is possible that the deterioration had other causes, such as the abuse of power by trade union leaders, and foolish policies of industrial subsidisation and intervention under the 1974-79 Labour government. All the same, the statistical information just presented puts the advocates of Common Market membership on the defensive. An opponent of European integration could, with some justice, slam the leaflet sent through millions of letter-boxes as a pack of lies.
The political campaigning of the early 1970s had been foreshadowed in a scholarly debate among economists. Most economists believe in free trade between nations, adhering to one or another version of a case developed by Adam Smith and David Ricardo 200 or more years ago. In 1950 Jacob Viner published The Customs Union Issue, the first book on the theory of customs union. This was a new intellectual departure made topical by the early hints that leading European nations might want to create their own trade club. Viner was a member of the Chicago School of Economics, which regarded free trade as the first-best choice for all nations. Customs unions were viewed with suspicion, as they erected a common external tariff, and to that extent were discriminatory and unsatisfactory. Viner and other influential economists, including Harry Johnson, Richard Lipsey and James Meade, all of undoubted liberal-internationalist leanings, deemed a customs union as “second-best” compared with free trade.
Trade clubs like that emerging in Europe would encourage trade liberalisation among member states, creating extra trade, but they might discourage trade between member states and third countries, diverting trade into other less than optimal channels. The balance between trade creation and trade diversion was the net effect for the UK of entering the Common Market. On the whole the estimates of the likely gain were small. This was partly because the resources saved by buying newly-cheap industrial products from the rest of Europe rather than from the rest of the world were not huge, and partly because trade was only part of national output. Given that the UK would have to pay a significant fiscal contribution, and that its agriculture and food manufacturing would become grossly distorted by the Common Agricultural Policy, a strong economic argument could be made for staying out.
The tone of the economic discussion about the Common Market in the 1960s was more level-headed than that which came before and after the 2016 referendum. Given that accession certainly was not followed by a step jump in economic performance, the kind of analysis pursued by Viner and his contemporaries deserves respect. In particular, they kept things in proportion. By contrast, the results of the material reported on Buzzfeed are not just misguided and disproportionate. Arguably, they have even lost touch with common sense.
Exports of goods and services to the EU are important to the British economy, accounting for about 12 per cent of total demand for our output. But these exports are now somewhat less than exports to nations outside the EU, and anyhow both are overshadowed by domestic production to meet home-grown demand. Suppose that the 27 other EU members were wiped off the face of the earth, so that no further trade with them were possible. How much worse off would Britain be?
It is beyond question that Britain would be worse off to some extent. Trade creation and diversion would be on an enormous scale, as we tried to secure roughly the same living standards as at present. For example, the British people could have a car fleet of the same quality and size only if they sold more of a range of products to, say, the United States, Japan and Mexico, and perhaps to such countries as Turkey and Serbia (which are starting to become significant car producers). It could then import cars from these nations on a larger scale than at present, making up for the loss of German and French products. Transport costs in importing the cars (from Japan, Mexico and so on) would of course be higher.
After a few years new trade patterns would have settled down. The disappearance of the EU 27 would result in trade diversion losses well in excess of trade creation gains. Net, some loss of welfare would certainly have to be endured. But it is inconceivable that the loss of welfare could be 12 per cent of national output or even any figure near it. Why? The answer is simple, that the 160 or so countries of the non-EU world would both generate supply to meet continuing British demand and constitute markets for British products. The EU 27 can be replaced as trade partners. The UK would no longer send motor components to Germany, whisky to Spain and legal advice to French companies, which is a pity because they are nearby. But it would have virtually the same supply capacity as before, and the motor components, whisky and legal advice would instead be directed to North America, Asia and so on.
What might the eventual loss of welfare be? Surely, it would be at most 2 or 3 per cent of national output. The Germans, French, Spanish and so on are productive by global standards and compete hard with high-quality, well-priced products. But everything we buy from the EU can in fact be made elsewhere. (Holidays on the Continent, and the enjoyment of Europe’s magnificent culture, would be the only big items that cannot be substituted by alternative non-EU suppliers.) To repeat, in the most cataclysmic imaginable circumstances the loss of the UK’s welfare and output could not approach 12 per cent of their future potential value. It could not approach that figure even if the EU 27 ceased to exist altogether. But, if the Buzzfeed reports on the contents of EU Exit Analysis: Cross Whitehall Briefing are to be believed, Whitehall departments in their collective wisdom — with the Treasury to the fore — have persuaded themselves that the loss would be no less than 8 per cent down in a “no deal” WTO-only Brexit scenario. Obviously, something has gone wrong.
The discussion of the last few paragraphs may have seemed over-the-top and hypothetical. But Britain and the nations we now happily characterise as “our European partners” have been through a full-scale dress rehearsal for the cataclysm being conjectured. The six years of the Second World War caused trade between the UK and the nations of continental Europe to come to a virtual halt. Trade diversion was massive and undoubtedly welfare-reducing. But — surprisingly perhaps — no economic historian has talked about or estimated the loss of long-term UK supply capacity due to the trade disruption. The statistics show that UK output was much higher in the 1950s than in the 1930s, despite the horrors of the Second World War in the middle. Given this precedent, the claim that in a peacetime, semi-free-trade context the UK could lose 8 per cent of its supply capacity 15 years after leaving the EU — and purely as a result of leaving it — is preposterous.
Lord Armstrong, Cabinet Secretary from 1979 to 1987, wrote a letter to The Times of February 12 insisting that civil servants do not allow “personal bias to infect their findings”. But — if senior civil servants have not let bias enter their research on Brexit and the consequent presentations to ministers — more serious questions have to be asked. It is far worse for the UK’s top mandarins to be intellectually incompetent and devoid of judgment than for them to have opinions and prejudices of their own. The doorstep leaflet of 1975 was a dry run for Project Fear in spring 2016, and both that leaflet and Project Fear came from British officialdom. They have been thoroughly discredited by events. Sadly, the Civil Service cannot learn from its mistakes. Assuming that the contents of EU Exit Analysis: Cross Whitehall Briefing has been correctly reported by Buzzfeed, the document is indeed embarrassing. It is embarrassing not because it undermines the policies being pursued by the British government in response to the Brexit referendum result, but because it confirms the unfitness of the Whitehall official “machine” to advise ministers on economic issues critical to Britain’s future.