Yet again, listeners to the Today programme awoke this morning to hear a dire forecast for the economic consequences of leaving the EU – with no critical analysis nor even explanation of how the forecast was arrived at.
This morning’s horror story came courtesy of the National Institute for Economic and Social Research (NIESR), a think tank which claims the economy will be 3.5 per cent – or £70bn – smaller in 10 years’ time than if we had never voted to leave the EU.
The NIESR claims the economy is already 2.5 per cent smaller than it would have been had we voted to remain in 2016 and that this loss will last ‘in perpetuity’.
Well, there it is. Given that it comes from what the BBC would likely regard an ‘expert’ source, the figures cannot of course be questioned. They are fact and that it that.
Except no, they are not fact. They are guesswork, built on presumptions which reflect the prejudices of the forecasters when they built their models.
There is a very straightforward reason why forecasts by the NIESR and others keep coming up with negative economic forecasts for post-Brexit: they are only analysing negative outcomes and make no allowance for the possibility that leaving the EU could in any way boost the economy through such things as an increase in trade with non-EU countries or the potential deregulation of the UK economy.
This paper from 2016 explains in detail how the NIESR built its model for forecasting the economic consequences of leaving the EU. It set out to measure just three things:
Firstly, the effect of a reduction in trade with other EU countries under various scenarios.
Secondly, the decrease in foreign direct investment which would result form our departure from the single market.
And thirdly, the reduction in our budget contributions to the EU.
But what about the possibility that a post-Brexit Britain might be better at negotiating free trade deals around the world than has been the EU – which has so far failed in its attempts to sign deals with the world’s two largest economies, the US and China?
The NIESR model makes no allowance for this whatsoever – even though there is plenty of evidence that independent countries like Chile and Switzerland have been much better at freeing up trade compared with the regional trade blocs of which they could, but have declined to be, members.
And what of regulation? True, it might be politically difficult for the UK government to diminish workers’ rights, yet there is no denying that Brexit presents an opportunity to do so – an act which, whether you agree with it or not, could propel us more on a higher, US-trajectory of economic growth.
Again, the NIESR modelling takes no account of this – it simply ignores the possibility that leaving the EU will provide the UK with any regulatory advantage.
There is a practical case for leaving both deregulation and non-EU trade out of economic forecasts – no economist knows what to measure because they have no idea how future governments will use the freedoms they gain from leaving the EU. There are simply too many factors, too many unknowns. So they end up only including what is relatively easy to measure: the potential negative consequences of losing our existing trade arrangements with the EU.
But that is what makes these economic forecasts pretty well useless – and why a BBC which was more committed to impartiality would not report them in the way that they do.
By the way, in common with other forecasters, the NIESR’s record at trying to predict the near-future is pretty dismal. After the 2016 vote, for example, it forecast that the UK economy would grow by one per cent in 2017. In the event, it grew by nearly twice as much, 1.9 per cent.
Yet that has not stopped the organisation claiming to be able to predict the eternal future by stating in today’s study:
“GDP will be 3% per cent smaller each year in perpetuity than it would have been had the UK stayed an EU member.”
Some might call that expertise; I call it hubris.