Brexit costing Britain £500m a week and rising, says report
Inevitably, this figure was set against the picture of the bus with the slogan about saving £350m which still sooo hurts
The costs were estimated by a thinktank the Centre for European Reform ('devoted to making the EU work better, and strengthening its role in the world. We are pro-European but not uncritical.') and it is, of course, based on one of those predictive models that we all trust. You estimate future growth if we had been in the EU, and make it as generous as you like, then contrast it with present growth. Present growth can still be actual positive growth, and is, but there is always a cost if you are an economist, of course. Work in a calculation of the extra borrowing required for Government spending to cover this cost and you get your figure.
The CER website explains the techniques:
The CER’s synthetic UK is constructed using quarterly real GDP data and other economic indicators from the 22 advanced economies starting in the first quarter of 2009. The countries the program has selected include the US(whose growth rate makes up 50 per cent of that of the UK doppelgänger), Germany (28 per cent), Luxembourg (11 per cent), Iceland (10 per cent) and Greece (2 per cent)....The cost of Brexit is the difference between the doppelgänger’s growth and the UK’s real growth data...It is possible to work out how much extra borrowing the UK’s foregone output implies [using the Government#s own data] ... The analysis found that 1 per cent of lost GDP resulted in £11 billion of extra borrowing. Since we have found that the cost so far is 2.5 per cent, that adds up to £26 billion additional borrowing (on an annualised basis). Our estimate shows there is no Brexit dividend: the Leave vote is now costing the Treasury £500 million a week....The UK has grown by 3.1 per cent over that period [since the referendum]. Compare that to the average of the 22 most advanced economies: 5.2 per cent – which amounts to a 2.1 per cent gap, not far away from our estimate of the cost of Brexit
Now I don't want to do down a noble profession, so perhaps I should also include the ways the CER tested its model:
[First] We gave our doppelgänger UK a ‘fake’ referendum, which took place two years earlier, in 2014. This means that the program would find the countries that best matched the UK economy up to 2014, and then project the synthetic UK forward from that date..the doppelgänger UK did not react to the referendum, which means that it is able to predict the future path of UK GDP accurately. [Second] We tested whether we can exclude certain countries that the computer program has selected from the doppelgänger – such as the US – and still get the same result....When we excluded each country in turn that made up the doppelgänger UK the results did not change much [from what I can see, 2%--3%,] showing that our model is robust.
It's not so much the model as the assumptions on which it is based, as ever. There is something odd about choosing 'advanced countries' rather than those in the EU. How could the relative success of the USA relate to the costs of Brexit except via a very abstract notion of global opportunity cost. I don't suppose many readers will get that far into the model, though -- the headline will do, perhaps to inform one of those confident assertions you hear on current affairs TV shows. It's still the sting of the slogan on the bus and the imagined effect on voters that upsets the Observer.
I also doubt if the analysis will carry much weight with the public who don't even read the Observer. What is GDP after all, to them? What is the opportunity cost to them of missing out 2% of growth of this mysterious category? It is the image of society you hold that counts. If GDP includes a large element of all the ludicrous bonuses, salaries and expenses of the very rich and the wealth they own, does it matter much if that only grows by 3%? By the time any of it might have trickled down it probably makes little difference --how much of the lost 2%--3%. would have appeared in the form of Universal Benefit?
Modern economists just work with abstractions, of course. I'm slightly surprised they didn't break down their figure and make it more useful by estimating the cost for the 'average citizen' or 'wage-earner'.
Meanwhile, there is a good analytic article on the assumptions behind estimates of lost productivity in the superb Briefings for Brexit blog. Another contributor examines the specific assumptions in the CER analysis and concludes:
...the majority of the 2.5% Brexit hit to GDP estimated by the CER was in fact a normal cyclical downturn in the UK economy. This occurred when other major countries, including the USA were experiencing accelerated growth. It is thus wrong in our view to simply ascribe to Brexit difference in growth between the UK and other major economies.
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