Here are the slides (with a few tweaks and additions) from a presentation I made recently to an audience of economists in London. The presentation covers some strengths and weaknesses of the OBR’s Brexit analysis and of ‘doppelganger’ models, and attempts to correct some common misunderstandings. It also includes some of my favourite charts!
Plain-speaking Economics 
Julian
Most interesting presentation.
I watched your presentation to the IEA on the 31st January last.
i had some points you might find useful but wanted to check first that this comment submits ok.
LikeLike
Thanks Paul, fire away!
LikeLike
Sorry about the delay. I did make some notes, below:
30. Some Conclusions
1. ‘ … 4% just an assumption …’
Sort of, but calculated by 13 independent bodies. It’s from the OBR report supporting the Government’s 2020 Spending Review (below), driven by lower trade (15%) per 2021 Spending review. The chart below shows that UK-EU goods exports, 2019 prices, is lower by 15% by Q2 2024 – but this is not total trade.
2. ‘… weakly supported by actual trade since Brexit’.
The 15% above if defined by UK-EU goods category, real prices, is strongly supported. There is no doubt that such a contraction would result in a ‘hit’ to GDP, just that the extent is unknown. A -3.4% compromise as ‘average of averages’ is suggested below.
3. ‘ … negative impacts are already fading …’
Not necessarily. The chart below shows consistent consecutive quarterly declines for UK-EU goods trade real values 2021 to Q1 2024.
2. Key OBR assumptions – trade
1. … UK imports and exports … 15% lower than if we had remained in the EU
This is from the OBR’s October 2021 Economic and Fiscal Outlook, page 58, supporting the Chancellor’s Spending Review, same month. It refers to (a) an OBR forecast of UK-EU imports ‘eventually’ being 15% lower post Brexit (b) a CER forecast of 15.8% lower for the same (c) actual UK-EU imports and exports being about 15% lower as of Q2 2021.
There was, however, a recovery through to Q3 2022. After that consecutive quarterly declines giving a -4.4% CVM UK-EU goods exports real values annualised decline through to Q2 2024, amounting to a total of -14.6% to date. So, at this stage, close to the forecast if defined as UK-EU goods exports.
ONS Trade UK EU to Q4 2024.png (703×730) (e-brands.co.uk)
2. … a 4% reduction in the potential productivity of the UK economy …
From 5. Below. Suggested ‘average of averages’ of -3.7% reduction.
3. This drag will build over time and the full effect will be felt after 15 years (this is just a guess!)
Yes, 15 years (per OBR’s March 2020 paper, below) isn’t very scientific, likely just using the OBR’s normal forecasting horizon.
4. New trade deals … will have little impact
Since Brexit the new FTA’s have been with Australia, New Zealand and the CPTPP.
The CPTPP was initially reported via the DBT 2021 IA as estimated to add 0.08% to UK GDP by 2040. An error in an algorithm, corrected in the July 2023 version of the IA, corrects this to +0.066%. Australia FTA IA saw a 400% upgrade to +0.08% GDP in 2021, NZ is +0.029%. Additive all 3 equals 0.18%.
+0.18% falls far short of -3.7% so proposal that ‘new trade deals will have little impact’ thus far is correct.
This doesn’t account for the new trade deals taking effect long after the commencement the UK-EU TCA and losses have to be carried at marginal UK borrowing rates in the interim.
5. Problem 1 – continued
Table A Long run effect on productivity of trading with EU on FTA terms is taken from the OBR’s March 2020 Economic and Fiscal Outlook, page 26. It was reproduced wholesale on page 199 of the November 2020 Economic and Fiscal Outlook, page 199, supporting the Chancellor’s Spending Review, same month. The average effect across the 13 third-party estimates is -4.0%
The 9 smallest of the 13 have been highlighted. Not sure why this has been done. It would give a new average of 2.82%.
An alternative statistical approach would be to exclude the outliers eg smallest and largest here. This would give a new average of 3.71% for the remaining 11.
6. Problem 1 – (continued)
Section 2.3 Effects on GDP of additional trade barriers on trade with the EU Is taken from the OBR’s October 2018 Discussion paper No.3, Brexit and the OBR’s forecasts, page 39. It lists 16 third-party estimates of which 5 are common with the above 2020 Spending Review report. The average effect of the 16 is -3.0%.
This paper precedes the spending review by over two years so has less relevance.
But suggest an ‘average of averages’ (-4.0 + -2.8 + -3.7 + 3.0)/4 = -3.4%
LikeLike
“consecutive quarterly declines for UK-EU goods trade real values 2021 to Q1 2024.”
should read:
consecutive quarterly declines for UK-EU goods trade real values Q4 2022 to Q1 2024.
LikeLike