Analysis: Social Market Foundation’s report on coronavirus and Brexit

Analysis: Social Market Foundation’s report on coronavirus and Brexit
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On 31st May the Social Market Foundation (SMF) published a report, ‘Assessing the economic implications of coronavirus and Brexit’, which promised to offer ‘clear evidence-driven analysis of the economic impact of the two most pressing issues facing the UK economy today’.

Unfortunately, it proved to be no more than an uncritical and often confusing synthesis of existing work on these issues, and made only a weak attempt to think through the interactions between them.

For the record, the report was sponsored by ‘Best for Britain’, a lobby group whose mission is ‘to keep the UK strongly connected to our nearest neighbours by campaigning for the closest possible future relationship with Europe’. Best for Britain also backs an extension of the Brexit transition period. These positions were reflected in the presentation of the report on the Best for Britain website and elsewhere. To be fair, the report itself was careful not to express a view on these issues, and these are hard times for many think tanks. Nonetheless, even on its own merits, this is not a strong piece of work.

Any impact from the next stage of Brexit, whether positive or negative, will be dwarfed by the impact of coronavirus.

Let’s start with what the report does do. First, it presents a sectoral and regional breakdown of the economic impacts of two different Brexit scenarios at the end of the transition: a negotiated Free Trade Agreement (FTA), or leaving with ‘no deal’ and trading on WTO terms. This part of the report is based mainly on the official analysis done under the previous administration, when Theresa May was Prime Minister PM and Philip Hammond was Chancellor. Other sources include NIESR and the Centre for European Reform.

All this analysis is presented as gospel truth. For example, Table 3 ‘shows how trade volumes will be affected under different Brexit scenarios’. Not ‘might be’, or ‘could’, but ‘will’. This lack of objectivity might matter less if the numbers presented were more plausible. However, it is claimed that trade volumes will be between 40% and 65% lower than otherwise. Such huge hits simply fail the ‘common sense’ test.

Second, the report does the same for the economic impact of coronavirus. Again, this analysis is mostly lifted from other studies (as the authors acknowledge). The discussion of the issues here is relatively uncontroversial but the conclusions are even more speculative, given the huge uncertainties created by the Covid crisis.

Third, the report simply adds the two assessments together to show the ‘double impacts’ of the two shocks. I confess I was getting thoroughly lost at this point in the blizzard of detail and spurious precision about the sectoral and regional implications. For example, the results appear to depend on whether ‘banking and finance’ also includes ‘real estate’. But the main takeaway seems to be that those parts of the country most dependent on manufacturing and financial services would be those which are most vulnerable to the ‘double impacts’.

This whole approach is fundamentally flawed. For a start, the report fails to recognise the relative magnitudes of the two shocks. Any impact from the next stage of Brexit, whether positive or negative, will be dwarfed by the impact of coronavirus. Indeed, the swings in GDP due to the Covid crisis could easily be ten times as a large as any costs of leaving the EU’s single market and customs union (even ignoring any benefits).

What’s more, the report made only a weak attempt to think through the potential interactions between the two. Just two points were raised here, and both touched on ways in which the Covid crisis could actually reduce the costs of Brexit proper.

One is the report’s claim that the surge in public spending in response to coronavirus could make it more difficult to provide additional financial support to any industries or communities particularly hard hit by the next stage of Brexit. In fact, the government’s cost of borrowing has fallen as a result of the economic downturn and the prospect of an extended period of low interest rates. Indeed, gilts are now being sold with negative yields. If the government does need to borrow more because of Brexit, this might actually be a better time to do it.

The report’s other claim here is that the Covid crisis will increase the economic costs of any reduction in immigration under a points-based system, because there may be a shortage of workers looking to migrate internationally. But again, this could – and probably should – be argued the other way. The jump in UK unemployment due to the crisis means that labour shortages are far less likely to be a problem, even if the new points system does not prove to be flexible enough to cope.

A more rigorous and balanced study would have considered other factors too. Supporters of an extension to the transition period usually argue that the Covid crisis will both increase the costs and reduce the benefits of leaving the EU’s single market and customs union. This is debatable.

The main cost would be any increase in barriers to trade with the EU. But if economic activity is still depressed as a result of Covid, this might actually be a good time to implement any new arrangements, because reduced trade flows mean there will be less pressure on borders.

What’s more, there will be some value in ending the uncertainty about what the new arrangements might be. Many businesses will soon be rebuilding supply chains that have been disrupted by Covid and already incurring costs in doing so. Knowing what is coming should avoid the need to rebuild these supply chains twice. This may also help businesses to make other investment decisions that have been out on hold because of Brexit uncertainty; some of these decisions will go against the UK, but many will not.

There will be swings and roundabouts in other respects too. For example, it has been suggested that the Covid crisis will make it harder to recruit and train additional customs specialists. But the surge in unemployment could actually make that task easier.

There are also arguments either way on the benefit side. On the one hand, reduced trade flows and a more protectionist mindset may undermine or delay the gains from new trade deals with the rest of the world. But on the other, increased regulatory independence and any budget savings may be much more important when the economy needs all the support it can get.

In summary, any costs from a change in our relationship with the EU are likely to be trivial compared to the swings in GDP due to coronavirus, as well as potentially smaller during the crisis than they would have been otherwise. At the same time, the benefits may well be larger. Given that we will be leaving the single market and customs union eventually, it therefore makes more sense to stick to the existing timetable than extend the uncertainty even further.

That is at least what I would have written if Best for Britain had come to me. But I’m guessing that’s one reason why they didn’t.

The post Analysis: Social Market Foundation’s report on coronavirus and Brexit appeared first on Global Vision UK.

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