Project Fear was £100bn out

‘George Osborne’s scary referendum campaign rhetoric about a return of the Great Recession now looks preposterous’

Tim Congdon

Two years will soon have passed since the British people voted to leave the European Union. Since then the EU has itself changed radically enough to make renewed UK membership more unattractive and less likely. Most obviously, active steps have been taken to form a European army and President Macron has advocated greater fiscal integration, with the possibility of EU-wide taxes. Opinion surveys have shown that the key issue in the referendum debate was “who governs Britain?”. If there are to be a European army and European taxes, an application to rejoin the EU would — undoubtedly, and with much greater clarity than before — be an attempt to end the UK’s existence as an independent, self-governing nation.

Nevertheless, Tony Blair and others are plotting a campaign to hold a second referendum and reverse the tide of history. They aim to operate on a cross-party basis, with George Osborne a natural ally. Osborne, Chancellor of the Exchequer from 2010 to 2016, has become editor of the London Evening Standard and uses it to spin a pro-EU line. Blair once told the Andrew Marr show that Osborne was “a highly capable guy”. Famously or notoriously, one product of Osborne’s capability was Project Fear in the run-up to the referendum. It pushed alarmist forecasts about how the economy would behave outside the EU, capturing many headlines and provoking much comment.  Osborne cited detailed and allegedly rigorous research from the Treasury (in a White Paper, Cm. 9292, no less) on what would happen in the first two years after a vote to leave.

Time is now almost up for the predictions. We must ask, “How did Project Fear perform?”. Two cases were explored in Cm. 9292: a so-called “cautious” scenario in which a trade agreement with the EU would be negotiated, and a “severe shock” alternative where the UK would quit the single market and trade with our European neighbours on the same basis as other World Trade Organisation members (that is, just as the US or China trade with the EU). Talking in these terms was actually a bit odd. Ahead of June 23, 2016, it was well-known that a two-year negotiating period under Article 50 would be the inevitable sequel to a Leave vote. By implication, the precise trading relationship between the UK and the EU might still be undefined even in early 2019. (Indeed, the precise relationship is still undefined at the time of writing.) 

Anyhow, the Treasury did analyse its two cases, and it did not beat about the bush. The two years from a Leave result in the referendum would be a major setback in the “cautious” case, with a drop of 3.6 per cent in gross domestic product, and a disaster in the WTO case, with a tumble of 6.0 per cent. (Both these figures are relative to what would otherwise have occurred.) Jobs would be lost on a massive scale. Unemployment would jump by 520,000 in the cautious projection and by 820,000 in the situation where only WTO rules applied.

Osborne had no compunction about presenting these numbers on television and other media. In a visit to B&Q’s head office on May 23, 2016, he warned that voting to leave the EU would be “a do-it-yourself recession”. Specifically, Brexit would lead to a repeat of the Great Recession of 2008 and 2009, ruining all the subsequent work “to get our country back on track”. In other announcements the British public was told that the two years after a vote to leave would see falling house prices and a marked deterioration in the public finances. Indeed, the prospective deterioration was so severe that pensions might have to be cut and taxes raised.

In assessing the doom-mongering of Project Fear, we need to allow for the complication that the forecast of 3.6 and 6.0 per cent falls in GDP were “relative to what would otherwise have occurred”. Helpfully, we have official forecasts made in spring 2016 (by the Office for Budget Responsibility) of the quarterly profile for GDP from mid-2016 to mid-2018 on a no-change, continued-EU-membership basis. They were for GDP to rise by 0.6 per cent and 0.7 per cent in the last two quarters of 2016, by 0.6 per cent in the first quarter of 2017, by 0.3 per cent in each of the next three quarters, and by 0.4 per cent a quarter throughoout 2018. If the Treasury and Project Fear were right in general terms, and we apply an average of its 3.6 and 6.0 per cent Brexit shock effects, we would need to scale down the no-change numbers by 0.6 per cent per quarter (that is, cumulatively in eight quarters by 4.8 per cent, which is of course in the middle of the 3.6 and 6.0 numbers). 

Let us make a comparison between the Osborne/Treasury view (“the Project Fear assessment”) and the outturn. Even provisional numbers are not yet available for the first two quarters of 2018, but again we have a recent official forecast of the
quarterly profile from the OBR. (Both quarters are to see GDP rises of 0.4 per cent.) The box below gives the outcome of the exercise.

It turns out that Project Fear was wrong by almost 5 per cent of GDP. The consequences of this giant error for the rest of the Osborne/Treasury prognosis have been drastic. Instead of employment falling by hundreds of thousands, it has risen by hundreds of thousands. Instead of house prices going down, they have gone up. Instead of the public finances lurching more heavily into deficit, they have been better than at any time since the Great Recession, making the prospect of an eventual surplus far from silly. Above all, Osborne’s scary rhetoric about a return of the Great Recession now looks preposterous. Despite all his supposed capability, he could not have been more wrong. Further, the grotesque misjudgment was not about something distant from his department’s area of responsibility. This was a subject where Osborne had direct ministerial accountability and which was perhaps the defining public-policy issue of his career.

The failure of Project Fear raises wider constitutional questions, particularly about the role of the Civil Service in modern government. In 2013 Anthony King and Trevor Crewe wrote a book, The Blunders of our Governments, which surveyed a list of cock-ups of various kinds from the poll tax to the Millennium Dome. The list included mistakes in economic policy, notably the Treasury’s complicity in the fiasco of UK membership of the European exchange rate mechanism in the early 1990s. Was Project Fear yet another cock-up? One interpretation is that civil servants operated so closely to politicians that they lost their objectivity and saw themselves as serving those politicians. This should not have happened. An obvious risk is that serving one particular set of politicians slides into favouring one or another political party. The constitutional position is that the UK Civil Service is not political and answers to the Crown, understood as “the Queen in Parliament”, where it is made effective by parliamentary questions, select committees and the like. If the Civil Service has been politicised and corrupted, Project Fear could be regarded as uninteresting. On this view it was never to be seen as high-quality, seriously-intended analysis. Rather it was the result of the hijack of the Treasury’s resources by an unscrupulous Chancellor of the Exchequer.

Osborne himself is not and never has been an economist, and — to give him his due — he does not claim to have serious economic expertise. Nevertheless, at the time Project Fear was so widely reported that some people do seem to have believed it. To the extent that it was credible, it was credible because it had the endorsement not just of the Treasury, but also of a handful of UK-based research institutes, notably the National Institute of Economic and Social Research, and the Institute for Fiscal Studies. This suggests an alternative interpretation of Project Fear: that the economists deriving and articulating its pessimistic forecasts were acting in good faith. They did believe what they were saying and managed to convince Osborne about the iniquity of Brexit.

On June 28, 2016, Paul Johnson, then and now the Director of the Institute for Fiscal Studies, wrote a piece for The Times in which — with less than a week of evidence in support — he said: “We economists were collectively right about the economic consequences of leaving the EU. Sadly, as events are already proving, those consequences will be bad, possibly very bad. The UK economics profession had a good referendum.” The trouble — in Johnson’s view — was that either the public was not listening or it was too dim to follow the debate properly. To quote again, “Economists’ warnings were not understood or believed by many. So we economists need to be asking ourselves why our near-unanimity did not cut through . . . We need to understand the abject failure of our profession to persuade the public about the consequences of a Leave vote.” (The minority of economists favouring Brexit was later described by Johnson as “disappearingly [sic] small”, consisting of “a few mavericks”. Dear reader, you may have guessed that I am one of them.)

The only possible verdict on Johnson’s article is that he believed the Project Fear analysis hook, line and sinker. He really did think in the days following the Brexit vote that the next few years would be followed by a deep recession, just like most Treasury mandarins and such commentators as Martin Wolf on the Financial Times (whose position I discussed in my Standpoint column last September). The truth about contemporary economics and economists cannot be escaped. So many of these people — belonging to what they term “our profession” — were parroting each other, and persuading themselves of doom and disaster ahead, that Johnson’s reference to a “near-unanimity” has to be taken at face value. By extension, Osborne may not be a Svengali who corrupted the civil servants around him, but the innocent dupe of utterly incompetent and useless advisers who were carried away by their own tosh.

Project Fear was a gross miscarriage of government. I do not know which of my two explanations is right. It may be that Osborne breached the conventions of our unwritten constitution and abused the authority of the Treasury to give substance to lies. Or it may be that the only advice Osborne (and Cameron for that matter) received came from a “near-unanimity” of official economists who had no idea what they were talking about. Perhaps there was a mixture of malice and ignorance, of wicked politics and trashy economics, and that — as usual with other policy blunders in recent decades — it was more cock-up than conspiracy. At any rate, the debate about the long-run benefits and costs of Brexit is open. Some of us, whether disappearingly [sic] few in number or not, will remain optimistic. 

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