How bad could it get?

DURING the Brexit referendum campaign in 2016, gloomy economic forecasts by the Treasury were dismissed by Leavers as “Project Fear”. Many now gleefully note that, at least in the short run, they proved spectacularly wrong. Ministers like Boris Johnson, the foreign secretary, insist there are no downsides from Brexit.

It is thus odd that, unlike then, the government refuses to produce any official forecasts for Brexit. In December David Davis, the Brexit secretary, who had boasted of his department’s rigorous impact assessments, told the Commons Brexit committee that they did not in fact exist. Yet early this year he had to share a leaked confidential draft of the government’s own EU exit analysis with the committee, which has now published it on its website.

The analysis is comprehensive, looking at tariffs and non-tariff barriers as well as migration effects. It is based on three models for post-Brexit trade relations. These are the European Economic Area (EEA), which means staying in the EU’s single market like Norway; a free-trade agreement (FTA) similar to the EU’s with Canada; and trading only on World Trade Organisation (WTO) terms. Cumulative GDP growth in 15 years’ time is trimmed in all three cases, by an average of 1.6 percentage points for the EEA option, 4.8 points under an FTA and 7.7 points on WTO terms (see chart). These numbers are similar to most outside forecasts.

The sectoral and regional effects of the models are striking. The industries that suffer most include chemicals, food and drink, cars and retailing. The areas of the country hit hardest include the north-east, the north-west and the West Midlands, all of which voted heavily for Brexit. London escapes relatively lightly. The public finances suffer too. The FTA option will add £55bn ($75bn) to annual public borrowing in 15 years’ time.

The analysis also finds that offsetting gains from putative trade deals with third countries are relatively small. It concludes that an FTA with America would increase GDP by 0.2%. Free-trade deals with China, India, other Asian countries and Australia and New Zealand add only a little more. The model also finds that unilateral British trade liberalisation, a policy favoured by many Brexiteers, may mitigate losses under the WTO option by only 0.2% of GDP.

Ministers offer two responses to these gloomy figures. One is that the work is incomplete and forecasts 15 years out are unlikely to be accurate. This is a fair point. Yet revisions are just as likely to make the results worse as better. In addition, the analysis does not include knock-on effects from lower productivity growth. It also assumes that Britain replicates all the EU’s free-trade agreements, which may not be easy.

The second response is that the analysis does not model the government’s preferred Brexit outcome, set out in Theresa May’s Mansion House speech, for a more comprehensive free-trade deal than Canada’s, including services as well as goods, with extra benefits from managed regulatory divergence. This too is a fair point. Yet in its draft negotiating guidelines for the future relationship, the EU rejects Mrs May’s proposal. Instead, it suggests an FTA like Canada’s, although it does propose to avoid any tariffs on goods.

The damage from Brexit is also highlighted in a new joint study from Oliver Wyman, a consultancy, and Clifford Chance, a law firm, that looks at business costs from tariffs and non-tariff barriers under a WTO-only option. The annual extra cost to British exporters is put at £27bn, or 1.5% of gross value-added. The burden falls mainly on chemicals, cars, food and drink, consumer goods and financial services. The hit to the EU is significant but lower, at 0.4% of gross value-added.

Sir John Major, a former Tory prime minister, has said he knows of no precedent for a government enacting a policy that makes the country poorer. Those talking up Project Fear would be more honest if they conceded that Brexit will do this, but argued it is a price worth paying.