|
HOW THE TREASURY, BANK OF
ENGLAND AND CIVIL SERVICE HAVE LET US DOWN
 By Professor Patrick
Minford, 17 Feb 2019
Professor Patrick Minford is one of the
UK’s leading macroeconomists and holds the chair of Applied Economics at Cardiff
University. He has written extensively about the economics of the European Union
and is the chair of
Economists for Free Trade.
Soon after graduate school I joined the Treasury as an economic adviser and
worked alongside economists from the Bank of England and the rest of the Civil
Service. We were proud to be bringing economics into the public service. Many
years later in 1992 I served on the Treasury’s Panel of Outside Forecasters
(‘The 6 Wise Men’) to help guide monetary policy in the aftermath of ‘Black
Wednesday’ when we were driven out of the EU Exchange Rate Mechanism. The
Treasury chief economist then was Alan, now Sir Alan, Budd, and the Bank’s was
Mervyn, now Lord, King.
I am appalled that our equivalents today in the government have spent their time
issuing anti-Brexit propaganda – still hoping to reverse the referendum decision
– instead of dutifully planning post-Brexit policy, so necessary with Brexit
only weeks away.
THE WHITEHALL PROPAGANDA WAR AGAINST BREXIT
A few weeks ago, we had the latest Treasury and ‘Cross-Whitehall’ report,
arguing that any Brexit at all, including the government’s proposed deal, would
be worse than Remaining. Then the Bank weighed in with a ‘Brexit crisis
scenario’, an implied forecast of how bad No Deal would be, concealed as a
‘stress test’ of whether the economy could survive it – it could! Latterly, the
Bank has reiterated its forecast that No Deal would be bad, causing a
likely recession, and using it as an excuse for delaying raising interest rates.
These interventions are designed to undermine our efforts to persuade the EU to
modify the Government’s proposed deal by strengthening popular and MP concerns
over No Deal. They aim also to persuade Parliament to back amendments delaying
Article 50 and seeking another referendum. The sought-for prize in both cases is
the status quo, ultimately Remain. It should be unthinkable for our Civil
Service to play politics and conspire against the people’s 2016 decision so
nakedly, as demonstrated in Brussels last week by the Civil Service’s
chief negotiator.
This deceitfulness is bad enough but worse is that their propaganda efforts
would lead to terrible economics. My message to Brits is: unlike these
self-styled experts, you got this issue right. Yes, you were right to ask for
your democracy back, and yes, this is also good for the British economy,
contrary to all that Project Fear.
Let us remind ourselves about what Brexit means for economic policy:
-
Free trade with the non-EU world, bringing down prices,
boosting competition, and increasing productivity
-
Setting our own regulations across the economy, to ensure the
best approach to new technology, energy, and financial services – all areas
central to our future growth prospects. This is in contrast to the EU’s highly
interventionist, bureaucratic, protectionist approach
-
Ensuring that unskilled immigration is no longer subsidised by
the taxpayer at great cost to lower-income communities (£3,500 per annum for
each unskilled worker) and that it stops depressing wages to the detriment of
UK unskilled workers, whom businesses then have no incentive to train
-
Ending paying large amounts into the EU budget
Taken together, we calculate these policies will add about 0.5% a year to our
growth rate over the next decade and a half, cumulatively adding 7% to GDP by
2035.
As part of the EU, we have been unable to adopt these policies because we have
lost democratic control. Reasserting it through Brexit means we can move into a
post-Brexit world of better policies that will promote UK prosperity.
THE TREASURY’s ABSURD ANTI-BREXIT ASSUMPTIONS
How has the Treasury managed to argue precisely the opposite; that post-Brexit
our economy will decline by 7% or more of GDP? Answer: by making absurd
assumptions.
No Gains from Free Trade with the Non-EU World
First, the Treasury alleges that free trade with non-EU countries brings in
trivial gains because we would reduce our own trade barriers by only a little
and other countries similarly would do little to reduce theirs.
Aside from this refuting the most widely agreed principle in economics, we have
practical evidence from Australia to disprove this claim. Australia too had high
protection against the rest of the world but thirty years ago they did remove it
and did strike free trade deals with all and sundry. Their government now
estimates that free trade boosted Australian GDP by over 5%. If Australia can do
it, so can we.
In fact, if we assume we get rid of the current EU protection of about 20% on
both food and manufactures, the gain to UK GDP is 4%. – calculated by using the
same World Trade Model now used by the Treasury. Moreover, we have further
calculated that virtually all this gain could be obtained by agreeing just one
key free trade agreement – i.e. with the US. This is because the huge US economy
can supply virtually all of our current imports and almost all at the lowest
world price.
‘War at the Border’ with the EU
Second, the Treasury assumes that we would become engaged in a sort of ‘border
war’ with the EU. The Treasury alleges the EU would increase inspections and
slow traffic down, that they would query whether our exports comply with their
standards. And, vice versa, we would do the same to them. The Treasury assumes
that such actions would be the equivalent of imposing 25% tariffs each way.
This is fantasy. Besides being against our own and their own interests, these
actions are illegal under WTO Rules. This does not just mean that there could be
legal action in WTO Appellate Bodies. More to the point, injured businesses in
the thousands would take the offending port authorities to EU and UK courts that
enforce acceptable and legal commercial practice – as defined by WTO law.
Practically speaking, such actions would represent economic suicide to European
port operators. Not surprisingly these authorities, including Calais, have
declared roundly they will not take any such illegal actions and inspection
regimes will remain the same as they are today. And HMRC has declared a policy
of prioritising flow over checks – i.e. waving through imports and worrying
about any customs aspects subsequently.
No Gains from Post-Brexit Tariffs
Under No Deal initially there probably would be tariffs both ways. Until a free
trade deal is agreed, each side would be forced by WTO rules either to impose
tariffs on all countries, or to abolish them entirely for all. For political
reasons, the UK is not likely to abolish tariffs universally in the short term.
Importantly, the Treasury has failed to acknowledge that tariffs would favour
the UK – we would receive £13 billion in tariff revenue from EU exporters versus
the EU Commission receiving £5 billion from EU importers (thus, a net loss to
the EU).
As soon as we have agreed trade deals with non-EU countries – especially soon
with the US – our home market would be dominated by lower world prices. EU
exporters would not be able to ‘pass on’ the increased costs of any UK import
tariffs because UK consumers would not pay the higher EU price. Similarly, EU
importers could not ‘pass back’ to our exporters the EU tariffs they are paying,
as UK producers would switch to selling at home. In practice, our export sales
to the EU would not suffer because EU prices are raised by EU protection to
the same levels as UK export prices plus these tariffs.
This means that, under No Deal, we gain at the EU’s expense. This should
encourage the EU to do a free trade deal with us after Brexit – which we of
course would welcome.
So in short the Treasury has it all wrong on trade.
No Gains from UK-Based Regulations
The Treasury attributes virtually no gains to us retrieving control of our
economic regulations, contrary to all the evidence of damage from EU
regulations. How ridiculous is that? Our own UK government saying it could not
do a better job of regulation than a foreign power with an expressed aim of
reducing our competitiveness!
A Mad Immigration Policy, Keeping Out Skilled Workers
To cap it all, the Treasury assumes we will pursue a self-harming immigration
policy of stopping skilled immigration, which all agree we need. Again, a bad
own goal.
To sum up, our own Treasury and civil service see no benefits from free trade
with the rest of the world while lamenting the loss of free trade with the EU,
imagines standard trade procedures as practiced all over the world will be
impossible with our EU neighbours, believes we are incapable of implementing
better home regulation, and thinks we will adopt an irrational immigration
policy. If this is truly what they believe, we will need another civil service
post-Brexit.
THE BANK’s TALK OF RECESSION FROM NO DEAL
Turn now from these crazy long term Treasury estimates to the short term threats
of recession made by the Bank, backed by regular remarks from the Chancellor
Philip Hammond.
As we saw during the referendum campaign, the Bank has form in predicting ‘Brexarmageddon’.
Then, the short term forecast was that the uncertainty triggered by only a Leave
vote would destroy consumer and investor confidence and so kill off
spending, creating a recession.
Instead we have seen the UK economy continue growing fairly steadily, reaching
extreme lows in unemployment and record employment. Wages are now growing faster
than prices. Also the economy has absorbed a large devaluation that has had a
tonic effect in improving our balance of payments. It did this with a minimal
effect on inflation. Nothing here to worry about at all.
For their latest scary Brexit No Deal scenario, the Bank has again invoked a
crisis based on uncertainty and plunging confidence – heavily focused on what
happens with the Dover-Calais ferry route.
But No Deal – as we have explained – will not disturb the border, as that would
be illegal and there are alternative ferry routes available. As for shortages of
vital foods, medicines, or vital components, they depend on the same story, now
discredited by the EU port authorities who are worried about losing market share
to competing ports.
With border procedures changing, there will be some short run hiccups, as some
firms may fail to adapt quickly. But firms will soon learn, and will get extra
support and credit to tide them over.
Has investment been hit? I show below the chart of UK total business investment
up to the most recent available figures.
What the chart shows – following the Financial Crisis – is the usual irregular
behaviour of most economic series around a rather smoothly moving upward trend.
It is true that the latest data points to a weak and declining growth of
investment as shown below in more detail from the latest ONS release. This is
not surprising, given the long deferral of positive Brexit prospects due to the
Government’s failure to provide a clear route to Brexit and to explain its
benefits.
Therefore, it is likely that some investment is being delayed until Brexit has
happened; but it then will be implemented. This is the essential point about
investment; that it is delayed, not lost.
One can see from these two charts that, although investment growth is weak, its
contribution to the economy is fluctuating around a stable trend. Meanwhile we
can see that the economy is fully employed so that demand growth overall is
continuing to create jobs; growth is fluctuating as the latest GDP figures show,
but this is quite normal. The fourth quarter was slower after an unusually
strong third quarter – and subsequent revisions often are higher. So from the
point of view of demand, the weak investment is not preventing full
employment, with an economy well at the limits of productive capacity.
Of course, EU countries would love to have our results – Germany’s just
announced Q4 GDP growth is half of ours, while Italy has been in recession for
six months.
NEGATIVE FORECASTS REFLECT POOR UNDERSTANDING OF BREXIT ECONOMICS AND PEOPLE’S
EXPECTATIONS
The truth is that ‘uncertainty’ as a factor is much overdone by commentators.
Change is a continuous feature of any economy. The ‘uncertainty’ argument
depends on a belief that rational market participants will somehow not be able
to cope with future change thereby freezing their activities.
In reality, businesses need to make money quickly as markets are constantly
changing; households need to pay bills over the foreseeable future, and having a
job is the best guarantee of being able to do so. So the ‘here and now’
situation, especially with employment, dominates their actions. As for future
shocks, there are many; and predicting them a fool’s game. Of course, we can
insure the obvious things.
So it is the UK’s flexible labour market that has kept the economy fully
employed, full of short term confidence therefore, and growing steadily – Brexit
has made little difference. It is a good lesson in the importance of market
flexibility.
Whatever the short-run effects of Brexit uncertainty, they soon will give way to
post-Brexit reality. It is here that official forecasts fail most seriously
because they do not factor in the gains explained above. The economy,
particularly investment, will respond to the prospects of these gains. That is
how rational expectations of the future stimulate entrepreneurs to
take advantage of unfolding new opportunities. Officials do not understand this
process and, consequently, do not include such effects in their forecasts. Add
in some uncertainty nonsense and out pop their doom and gloom forecasts –
particularly if such forecasts support a biased perspective.
What we need now is for Brexit to occur and usher in the new opportunities from
free trade and better regulation.
CONCLUSION
We see here an astonishing catalogue of bad economics coming from a
determination to reverse the people’s referendum decision. This from our own
Ministers and Civil Service who are supposed to support policies the people have
voted for. Our civil servants must now get behind Brexit and reflect its
opportunities in their forecasts.
It is time that the Bank and the Treasury stopped making arbitrary assumptions
that our flexible firms and households will suddenly behave like headless
chickens. Instead they should assume rational expectations, by now a widely
supported assumption in economic forecasting.
My advice to the British people is: make it known to MPs that you will not stand
for their bad economics, stick to your previous thinking, ignore the ongoing
Project Fear as you got it right and these ‘servants’ of yours got it all wrong.
|
