Assume for a moment that a Brexit deal is struck soon. Then, one of the next steps towards ratification will be two official economic assessments, from the Bank of England and the government, of the effect of any agreement on the UK economy. The good news is that I can already reveal what these assessments must say if they want to be seen as plausible.
We already know the rough outlines of the withdrawal agreement and political declaration on a future economic relationship. As was obvious as early as the summer, Britain will stand ready to join a “temporary” customs union with the EU after the transition period, which will last “unless and until” both sides can agree on something better. The proposed long-term relationship will remain vague and will assume the Irish land border question has been resolved.
The BoE will take on the challenge of assessing the short-term implications of any agreement over the three-year forecasting horizon of the Monetary Policy Committee. That requires little more than a judgment on the uplift to business investment the deal will generate and what its monetary response will be.
A punchy estimate would be almost to double the BoE’s existing business investment growth forecasts, suggesting companies would raise real capital spending by 5 per cent in 2019, 9 per cent in 2020 and 8 per cent in 2021. I’ve chosen these figures not through any special insight, but because similar ones underpinned BoE governor Mark Carney’s assessment of the scale of “improved sentiment about progress on Brexit” in his speech on the topic.
Projected UK economic growth would rise to just above 2 per cent a year from the current 1.7 per cent forecast. This additional demand would push inflation well above the BoE’s 2 per cent target. All this was also in the governor’s speech. What Mr Carney avoided saying was that, on the usual BoE rules of thumb, which the MPC applied religiously in its November inflation report, such extra growth would require roughly six interest rate rises over the next three years, not the three currently pencilled in. That would be sufficient to snuff out most of the unwanted inflationary pressure, but would also remove growth. In short, a plausible short-term Brexit deal forecast is dull as dishwater.
Government officials across Whitehall have a more difficult task with the long-term assessment, precisely because the end state will be highly uncertain. The analysis must, however, be consistent with the cross-Whitehall briefing paper leaked earlier this year. That work was detailed and provides everything needed.
From it, I can confidently say that a Canada-style agreement would present a long-term hit to the economy of almost 5 per cent of national income. A very close relationship, effectively retaining EU goods regulations and the customs union, would imply roughly a 2 per cent hit. This comes from stiffer migration controls and some additional behind the border barriers, particularly in services. If Britain never escapes the bare-bones UK customs union backstop arrangement and accepts the consequent frictions at the Dover-Calais border, the briefing model suggests a hit to the economy of around 4 per cent compared with remaining in the EU.
The leaked suggestion that the government would only publish assessments comparing long-term options with the much worse outcome of no deal would destroy the legitimacy of the whole exercise. And any analysis outside the rough range I have given would similarly suggest government economists have fixed the forecasts to fit political needs.
When the Treasury last published short-term forecasts predicting a recession after a Leave vote, the analysis appeared made up to many neutral observers. If ministers want to retain credibility, they should avoid repeating that sorry episode.