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Evening Standard
Evening Standard
Comment
Jack Kessler

OPINION - All models are wrong (except the Office for Budget Responsibility's Brexit forecasts)

"All models," the British statistician George Box observed, "are wrong, but some are useful." To which we now turn to the Office for Budget Responsibility, whose Brexit forecasts seem to be holding up remarkably well.

Hidden within its 168-page report following the Budget, the fiscal watchdog noted that its long-term assumptions about the negative impact of Brexit on the UK economy appear to be "broadly on track". That is, a 15 per cent drop in trade intensity and a 4 per cent decline in potential productivity compared to if Britain had remained in the European Union.

It is still early days. Indeed, it took many years for the impact of the UK's entry into the then European Economic Community to fully percolate. The OBR also acknowledges that it is difficult to disentangle the significance of other major developments on the UK economy, such as the Covid-19 pandemic and Russia's full-scale invasion of Ukraine. Revisions are inevitable.

Still, we can say with some confidence of Brexit: so far, so damaging. And that is even before the commencement of physical inspections on imports from the EU, which begin in April, with further declaration requirements from October.

Take trade. The OBR finds that trade intensity (that is, exports plus imports as a share of GDP) in advanced economies fell dramatically during Covid. However, UK trade intensity "has not recovered in line with other G7 countries since then." Specifically, it is 1.7 per cent below its pre-pandemic level from 2019, compared with a rise of 1.7 per cent above on average in the rest of the G7. 

The issue becomes clearer still when broken down by composition. While growth in UK goods trade has fallen behind, services trade has been the strongest in the G7. This divergence can be explained in a few ways. First, Britain enjoys a relative comparative advantage in services. But second, post-Brexit trade barriers have, the OBR notes, "created more significant frictions for goods than services." And third, the UK is less reliant on the EU for services exports than goods.

Perhaps a little esoteric for the majority of us who don't need to fill in export forms for a living. But it has a real-world impact. While all high-income nations spent freely to fight Covid and the related recession, the UK's reduced trade intensity and potential productivity act as an additional handbrake on growth. This drives taxes, already on the way up, higher still.

The reasons this sort of thing gets under-reported are fairly obvious. Slow punctures are by definition not breaking news. The government denies Brexit is anything other than a roaring success. The opposition has spent years attempting to de-activate the issue of Europe. And voters – even Remainers – are tired of the whole thing.

Might that change, not least with the next parliament likely to see a large influx of generally pro-EU Labour MPs? Perhaps, but that doesn't solve the problem of what is sometimes called the cakeism of remainers. That is, Labour's red lines include no membership of the EU's single market or customs union. In practical terms, this severely limits what closer relationship London could conceivably negotiate with Brussels. We all remember Michel Barnier's stepladder slide of doom.

Perhaps Starmer will get lucky. Artificial intelligence doesn't destroy the world and instead boosts productivity, leading to higher wages without hard decisions. But it is difficult to imagine how a Labour government dedicated to securing the strongest growth in the G7 can do so – at least with a straight face – without moving, at some point, on Europe.

Having said all that, the shadow cabinet's ability to avoid uttering the word 'Brexit' is equalled only by the European Research Group's desire to discuss nothing else. In which case, Labour in office will come to own the Trade and Cooperation Agreement, one tedious declaration form at a time.

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