Published:

217 comments

“The cliché that Britain stands at a crossroads is, for once, true. The decision we take in Parliament in a couple of weeks’ time will shape the future of our country for decades to come. To borrow a line from the Prime Minister, Brexit is within our grasp but perhaps not as she intends it.

If we reject the Prime Minister’s proposed agreement, we can take back control and set ourselves on the path to reclaiming our independence.

If we accept her agreement, we would repudiate the declared wishes of the majority of the British people. Wishes expressed in a referendum in which more voted than at any time in our history. The damage that would do to our democracy is incalculable. Trust in the political process and politicians would be dealt a cruel, crippling blow.

It will come as little surprise to you to learn that I will be voting against the Agreement. From the beginning of the year there has been a long struggle, in government, between two views of Brexit. On one side, there are those who hope that extreme conciliation would buy a cooperative response from the EU. On the other stand those of us who take a more robust view of the economic freedoms needed to crystallise the benefits of Brexit. Much of this surfaced in the first clash at Chequers, in February, when the Cabinet Committee agreed we should insist on the “right to diverge.” I strove for a deal that would respect the outcome of the referendum.

After the decision at Chequers in July – Chequers 2 if you like – I knew that was not possible. I resigned to continue the fight on a different battleground. I acted to ensure that Brexit did indeed mean Brexit, and that Britain would resume her place in the world as an independent nation state free to shape its destiny.

I do not dispute that Theresa May has fought tirelessly and genuinely for what she believes is a good deal for Britain. 

But the Government’s favoured road away from this crossroads is a denial of the restoration of sovereignty that underpinned the vote to Leave. It keeps us in the customs union potentially indefinitely. It makes us subject to the rules of the EU’s single market while denying us any power to influence those rules. It annexes Northern Ireland, part of our sovereign territory, into the Single Market regulatory structure. It will cost us £39 billion and rising. It sets the European Court of Justice, a foreign court, superior to our own.

It deprives us of one of the chief economic benefits of Brexit by preventing us striking free trade deals with fast-growing countries and markets across the globe.

Worst of all – it makes us prisoners of a Hotel California customs union. We can check out any time we like but we can never leave. This gives them unbelievable negotiating leverage on every single issue – as the EU negotiators have bragged to Brussels ambassadors

And the other road? I will not pretend it is free of bumps and turns. But these are essentially short-term obstacles. We should press for an exit on a Canada-plus-plus-plus free trade basis. If that is denied to us by the intransigence of Brussels, we will have to leave on World Trade Organisation terms.

At this point all the choking tentacles of the EU fall away. No Customs Union. No backstop. No Single Market. No denial of new trade deals. No money paid over. No threat to the integrity of the Union.

These are the two main choices facing Members of Parliament as they prepare to pass judgement on the Government’s proposals next month.

Today, I want to look into the critical few weeks ahead, offer my view to the British public and to my parliamentary colleagues of what to expect, and urge them to stand firm in the face of the propaganda onslaught that is about to be unleashed.

The Government cannot currently expect to win the meaningful vote on their deal. To date, over 90 Conservative MPs have publicly declared an intention to oppose the agreement. With Labour, the SNP and the Liberal Democrats also lined up against – and with the DUP infuriated by the threat to the Union – defeat for the Government seems inevitable.

This may be so. But a couple of weeks in politics are a long time. And as Charles Moore observed in the Daily Telegraph at the weekend, parliamentary rebellions have a habit of melting away.

And, of course, Downing Street, the whips, the Treasury and the rest of the establishment have yet to do their best – or worst.

We are on track for a condensed version of the referendum campaign of 2016, along with all the lies, half-truths, exaggerations, spin and scare tactics. 

Ultimately, this time, the decision rests with Parliament. This includes a Commons and a Lords that was overwhelmingly for Remain a couple of years ago.

Nor are the public to be left out of the propaganda operation. Downing Street has noticed that many of its troops are deserting to the Brexit camp, so the Prime Minister has headed for the airwaves. She’s doing more phone-in programmes than Nigel Farage.

Her aim is to appeal over the heads of recalcitrant Tory MPs in the hope that the public will pressure dissidents into backing the deal. The first shots came at the weekend with headlines about a new post-Brexit crackdown on unskilled migration from the EU.

Maybe, or maybe not, I think. Migration policy is a matter to be decided after the Withdrawal Agreement has been enshrined in law. It is covered by the non-binding – and decidedly woolly – Political Declaration. It is also almost certainly destined to become a bargaining chip, used by the EU after the legally binding part of the deal comes into effect.

“Want to protect your fishing grounds? Then relax the cap on Romanian workers.” This is the kind of haggling we can confidently expect.

In any case, I have my doubts about the wisdom of Downing Street’s strategy. Of course, our inability to control EU migration was a significant factor in the vote to leave. But it was not the fundamental reason – that was all about reclaiming national independence from Brussels. This was never just about immigration. It was always about control. It was always about democracy.

Like last time, the decisive battle will be fought on the economy. The bullets will fly fastest when we come to argue about the relative merits of the Government’s Brexit in Name Only approach and the Clean Brexit favoured by those, like me, who are determined to respect the referendum result.

Downing Street and the Treasury believe that they are on their strongest ground when they are lined up alongside Big Business and the City. These multinationals and big corporations, led by CEOs with multi-million pound bonuses riding on the next couple of years performance, unsurprisingly favour absolute stability in the short term over long-term opportunity. And, of course, they find that the current EU arrangements work splendidly for them – not least because they help to freeze out competition from smaller, more nimble firms.

Project Fear is set for a last hurrah. 

The Treasury and the Bank of England will later today be issuing new forecasts comparing the Government’s Fake Brexit deal with a WTO exit.

I don’t often quote the Financial Times, but I will do it this time: “Theresa May is preparing to use an economic assessment of her much-criticised Brexit deal to try to win over sceptical MPs.”

The FT makes no comment about the reliability of the Treasury’s last attempt at playing Mystic Meg.

My point is simple enough. The Treasury’s forecasts in the past have almost never been right and have more often been dramatically wrong.

The Treasury forecasts for the effects of a Leave vote made in May 2016 are these. They said that in the 18 months after the referendum the economy would contract by at best 0.1 per cent and at worst 2.1 per cent. What happened? It grew by 2.8 per cent.

The Treasury was wrong to the tune of between 2.9 – 4.9 per cent. This is a sum of up to £100 billion. Quite a lot of money. Quite a big mistake.

Of course, not all of us are brilliant at computing percentages of GDP, so George Osborne spelled out the numbers in starker terms. Unemployment would jump by 520,000 under the “cautious” projection and by 820,000 if the exit was on WTO terms. Voting to leave the EU would, over time, render the average UK family £4,300 a year worse off.

Osborne also used a visit to B&Q’s head office to predict a “Do-It-Yourself” recession as a result of a Leave vote. He prophesised falling house prices and severe damage to the public finances. A “punishment Budget” featuring tax rises and spending cuts was on the cards immediately after a Leave vote. Astonishing idea, of course, to respond to an expected downturn by clamping on a tight fiscal squeeze.

Needless to say, none of this spine-chilling nonsense came to pass. Families are no worse off and the economy has since grown by around four per cent. Unemployment has fallen by hundreds of thousands.

Earlier this year, the Treasury leaked its “Cross-Whitehall Brexit Analysis” in the shape of 24 PowerPoint slides to the website Buzzfeed. It caused quite a buzz – not least because it now predicts a huge 7.7 per cent of GDP hit to the economy in the event of a WTO exit. An exit with a Canada-plus deal was forecast to be painful, too, with GDP 4.8 per cent smaller than would be the case if we stayed in the EU.

Quite why the Treasury and its offshoots get things so wrong is an intriguing question. 

The truth is that the Treasury is more often wrong than right. And the same goes for the OBR. They missed reality in 2009 by almost 6 per cent. That is equivalent to a miss of £120 billion today.

George Osborne was initially predicted to be more than 50 per cent likely to eliminate the deficit. The productivity growth forecasts of 2010 were six times larger than reality. The UK was supposed to enter a recession if there was a vote to leave the EU.

And just this year it emerged that the OBR’s previously predicted borrowing for 2017/18 would be £16 billion more than the out-turn. It is amazing the amount of money Whitehall finds down the back of the sofa.

Unsurprisingly, the dramatic numbers take the headlines, and people fail to notice that they are caused by forecasting errors.

Take Osborne’s £27 billion windfall in 2015, for example. The Chancellor hurriedly moved to spend it on tax credits and departmental budgets.

But, just a year later, he had to take it back. The OBR had undershot their borrowing forecasts by some £58 billion. As the OBR boss, Robert Chote, said at the time, “what the sofa gives, the sofa can also take away.”

But don’t take my word for it. I see from the Prime Minister’s interview with the Sun that she also has doubts about the Treasury and its forecasts. After all, and I quote, “they don’t always reflect every factor that can be taken into account… these things are always based on a set of assumptions.

And it is notable – and frankly disgraceful – that the Chancellor has done his studio round today without publishing the underlying assumptions. Remember: forecasts are not facts: and theses are just polemical projections.

Professor Minford, of the Economists for Free Trade, has sought to explain the forecasting errors. First, he believes that the Treasury’s past reliance on the gravity model of trade has led it astray. A word on the gravity model, this assumes that trade flows are highest – and the economic benefits are greatest – when trading partners are in close geographical proximity. Europe is on our doorstep, ergo trade deals with the EU are of more value than those with more distant lands. This was possibly true when the commodities were bulky, heavy and of moderate value – coal, steel, wheat, sugar, for example – and the cost of transport was a significant proportion of the product cost. But not today.
 
The alternative model, the classical one developed by Ricardo in the 19th Century, assuming high competition across world markets, better fits the modern facts and predicts bigger gains from global trading on WTO terms. Transport costs are a tiny fraction of the cost of, say, an iPhone – or a near zero fraction of trade in services. This has the effect of making the entire globe the market in which we exercise comparative advantage.

Other things matter more than distance – a common language, for example, or communication links.

The good news is that – following strong criticism – the Treasury claims to recognise the limitations of its gravity model and has now switched to an improved alternative. But it has undermined its own work. If they are the same as previous work this year the assumptions it has fed in to this new model are faulty for three crucial reasons.

Firstly, the Treasury’s cross-Whitehall analysis has made pessimistic assumptions about the positive effects of free trade on UK growth. If the UK were to adopt global free trade, the forecast predicts modest long-term gains of as low as 0.3 per cent of GDP.

This is extraordinary. One of the few things upon which economists agree is the great beneficial effect of free trade. Australia’s trade liberalisation delivered a 5.4 per cent long-term boost to GDP.  This figure corroborates the Economists for Free Trade calculation of a four per cent boost for the UK.

The Treasury seems to assume that free trade matters when it is with the EU, but not when it is with anybody else.

The second flawed assumption in the Whitehall analysis is that there will be high border costs, from processing customs declarations and rules of origin certificates. They believe there will be extensive physical inspections at the border, even under a UK-EU free trade arrangement. This belies the way modern computerised pre-declared border procedures actually work. After all, only two to three per cent of goods are ever inspected.

Unlike the 6 per cent cost assumed by Whitehall, modern border costs are typically well under 1 per cent of the value of goods – and Switzerland measures its actual cost to be only about 0.1 per cent.

Finally, Whitehall’s third flawed assumption is the belief that various non-tariff barriers will spring up immediately after Brexit. But after decades of integration, it’s absurd to suggest the EU will suddenly decide that our regulations aren’t good enough.

Whitehall assumes the cost of such NTBs will be equivalent to a 16 per cent tariff if we have a free trade agreement and 20 per cent if we leave under WTO rules.

These figures are truly massive. The total effect of Whitehall’s assumptions is that the UK – beginning with identical product standards and regulations – would face an effective EU tariff of about 30 per cent under WTO rules. This is about one and a half times the actual tariff faced by the US. Of course, given that we currently have shared product standards, this would be illegal under WTO rules.

These flawed assumptions have led to Whitehall’s central forecast – a 6 per cent loss of GDP under WTO rules. Using the same modelling approach but with more reasonable assumptions, Economists for Free Trade calculates a GDP boost of about 3 per cent.

This helps to explain why the Treasury’s latest stab at forecasting produced a result fully in line with the 2016 version of Project Fear.

The Treasury insists that leaving the Single Market and Customs Union would do grave damage to the economy due to the loss of trade. However, it also insists that signing FTAs with other major world economies would do little good. Talk about facing two ways at once.

There is another problem with the Whitehall analysis that must be considered.  There is a consistent overestimation of the positive impact the Single Market has on the British economy.

The Single Market was touted as a “vital national interest” during the referendum campaign. Project Fear constantly pushed doom-laden messages of economic ruin following a Leave vote.

However, this belief has no basis. The Single Market’s regulations are much less beneficial than assumed for the British economy.

Its rules are rigged in favour of big corporations. It suppresses innovation, competition and growth.

Sober analysis of the trading relationship between the UK and the EU spectacularly dispels the myth that the Single Market is vital for the British economy.

The researcher Michael Burrage demonstrates that growth of UK exports to the EU has been lower during the era of the Single Market than it was during the common market decades between 1973 and 1992. Our export growth to the EU lags far behind much of the world. We are surpassed by many countries that trade with the EU on WTO terms.

Moreover, UK exports to non-EU countries under WTO based rules have grown four times faster than UK exports to the EU.

As Burrage’s work shows, EU-UK trade has been steadily declining whilst UK trade with the rest of the world has been rapidly increasing. The future of the UK economy does not lie with the European Union but with the wider world.

Contrary to the Whitehall dogma, the Single Market has not been the accelerator claimed for the British economy. We must stop worshipping at the altar of false gods.

Everyone supports evidence-based policy-making, but only the Treasury supports policy-led evidence.

Of course, apocalyptic Treasury forecasts of the grim effects of leaving the EU’s orbit are only part of Whitehall’s armoury of intimidation.

Plenty more will be hurled in the direction of MPs considering voting against the Government’s deal. Cheered on by the establishment media, we will be warned against “crashing out” of the EU and tumbling over a “cliff edge”.

They’ve claimed that planes will be grounded, and hauliers will suffer unprecedented delays. There’s been vehement insistence that Kent will become a lorry park, and hysteria over the rationing of food and medicine. Even Mars Bars will apparently become a thing of the past.

For example, the Healthcare Distribution Association has claimed that the UK will run out of insulin. However, when Channel 4’s Fact Check spoke to the UK’s leading suppliers (Sanofi, Novo Nordisk and Lilly) the companies all said that they don’t expect significant problems in the event of a no-deal Brexit.

Another foolhardy claim is that the UK will run out of food “within days”. Allegedly this would be because of a paralysed Port of Dover. Nothing, apparently, would be able to get into the country.

We’ve had long-term stoppages before, such as 26 days through the summer of 2015. Whilst this was costly, it was not as crippling as the wilder claims have inferred.

As my colleague John Redwood has pointed out, this is all nonsense. The EU is running a near £100 billion a year trade surplus in goods with the UK. The implication of this is just as we work to eliminate problems at the border, so will our European colleagues in Calais, Zeebrugge, Antwerp and Rotterdam.

If Parliament rejects the Governments’ current proposal, then the Government can press for a Canada-plus free trade deal backed by technical solutions on the Irish border. If intransigence from Brussels denies this, we should announce an exit on WTO terms and accelerate preparations for such an outcome.

I am afraid we must be ready for Project Fear 2.0. In a desperate attempt to reverse the result of the 2016 referendum, we are undoubtedly going to hear the most hair-raising stories and improbable forecasts.

Let’s remind those who might waver that we have heard this all before. Let’s expose the glaring weaknesses of the Government’s Fake Brexit. Let’s highlight alternative analyses showing that a World Trade Deal can work for us as it does the vast majority of countries.

“Trust the people” is an old Tory adage. Well, the people were right in 2016 and they are right today.

The task facing the Conservative Party, the governing party, is to deliver the will of the people as set out in June 2016. That means Brexit – and it means a clean Brexit that ensures a decisive break from the influence of a foreign power.

Downing Street and the Treasury will argue they are delivering a clean Brexit. But the facts point in the opposite direction. The Withdrawal Agreement and the Political Declaration are a bogus prospectus. They will keep Britain in orbit around the EU. We will be nothing more than a satellite state ruled from afar.

It is our duty to reject that prospectus and genuinely take back control.”

This speech was delivered today to Economists for Free Trade.

217 comments for: “It is frankly disgraceful that the Chancellor…has not published the underlying assumptions.” Davis’ speech on forecasting. Full Text.

Leave a Reply

You must be logged in to post a comment.