LONDON — Governments dont usually say their policies will leave the economy worse off, but these are not normal times for Theresa May.
As the U.K. prime minister attempts to sell her Brexit deal agreed Sunday in Brussels to MPs at home, her government produced analysis showing all Brexit scenarios would hurt the economy but the impact of leaving under Mays plans would be significantly less than exiting with no agreement at all.
The government analysis was echoed later in the day by a separate report from the Bank of England, which warned economic output in the U.K. could drop by as much as 8 percent if Britain drops out of the EU without a deal in place, compared to expectations had the U.K. stayed in. That compares to a 6.25 percent drop during the 2008 financial crisis.
May defended her government at her weekly question-and-answer session in the House of Commons, saying that her deal is the best available to protect the economy and “honor” the 2016 EU referendum result. She was met with widespread criticism, both from the Labour opposition, who dubbed her plan the “worst of all worlds,” and from Brexiteers, who questioned the validity of the reports assumptions.
Brexit-supporting MPs were also quick to dismiss the Banks analysis, recalling its (so far incorrect) pre-referendum warning that a Leave vote could result in a recession — a prediction that was linked by Brexiteers to an anti-Brexit campaign by the David Cameron government that they branded “Project Fear.”
Jacob Rees-Mogg, chair of the Euroskeptic European Research Group of backbench Conservative MPs, said BoE Governor Mark Carneys new warning about the no-deal Brexit scenario had “turned Project Fear into Project Hysteria.”
Likewise, the opposition Labour Party was quick to attack the government. John McDonnell, Labours shadow chancellor, said: “The Bank has confirmed what other independent reports this week have been telling us: A no-deal Brexit could be even worse than the financial crisis of 10 years ago, and the country would be much worse under Theresa Mays deal. Instead of plowing on with this discredited deal the government should set new priorities that would protect jobs and the economy.”
However, MPs supportive of a second referendum said the Banks analysis strengthens the case for a fresh vote.
Labour MP Wes Streeting, a member of the House of Commons Treasury committee, said: “No responsible government — on either side of the negotiations — will allow no deal. Time for the [prime minister] to drop the pretense and put her Brexit deal to the country with an option to remain [in the EU].”
The governments 83-page document sets out a range of scenarios and makes a number of assumptions, reflecting the uncertain nature of the U.K.s future relationship with the EU and post-Brexit immigration policy. It makes comparisons with projected GDP growth if Brexit does not go ahead.
In all the versions of Brexit considered by the government, the report concludes the U.K economy would continue to grow. Brexits effect is predicted to be a check on growth, rather than leading to a downturn. The biggest projected hit would happen under a no-deal Brexit, where GDP growth is predicted to be 9.3 percentage points lower over 15 years compared with a continuation of the status quo, again if migration from the EEA is reduced to net zero.
In their separate report, the Bank of England also found that a no-deal Brexit scenario could witness an increase in unemployment of up to 7.5 percent, with inflation potentially rising up to 6.5 percent. However, in stress tests published at the same time, the Bank concluded British banks are strong enough to withstand a global recession or disorderly Brexit.
“If you look at this purely from an economic point of view, there will be a cost from leaving the European Union because there will be impediments to our trade” — Philip Hammond
However, May is unlikely to achieve a full Chequers-style settlement in the negotiations over the U.K.s future relationship with the bloc, and analysts also set out predictions for an alternative scenario falling halfway between the Chequers prediction and one based on a Canada-style free-trade agreement.
Impact of migration
The government predicts that Mays proposals for the post-Brexit relationship with the EU, as outlined in the July white paper — better known as the Chequers plan, after the prime ministers country residence — would leave U.K. growth 2.5 points lower, if migration from the European Economic Area is reduced to net zero.
If EEA migration remains unchanged, the cut in growth would be just 0.6 points under this scenario, the analysis predicts.
Under this scenario, arguably a more likely endpoint for negotiations, U.K. growth would be 2.1 points lower if there are no changes to EEA migration, but 3.9 points lower if EEA migration is reduced to net zero.
Hammond acknowledged that Mays Brexit deal would entail a cost to the economy | Ben Stansall/AFP via Getty Images
May has pledged to end freedom of movement from the EEA, so it is likely migration numbers will fall.
Impediments to our trade
Speaking on the BBCs Today program this morning, Chancellor Philip Hammond acknowledged that Mays Brexit deal would entail a cost to the economy compared with staying in the EU.
“If you look at this purely from an economic point of view, there will be a cost from leaving the European Union because there will be impediments to our trade,” Hammond said. He said the prime ministers deal “minimizes those costs.”
May, speaking in the House of Commons following the publication of the document, said it shows the U.K. is “a strong economy that will continue to grow.”
The documents projections for the 15 years immediately after Brexit assume that the U.K. will have replicated all the trade deals with third countries via the EU, and will have negotiated its own trade agreements with 17 countries, including the U.S., Australia, New Zealand, China, India, the Mercosur countries and the Gulf Cooperation Council countries.
However, the overall benefit of new trade deals is estimated to be a maximum of 0.2 points extra on GDP growth.
Regionally, the northeast of England would be the hardest hit economically in a no-deal or Canada-style free-trade agreement scenario, according to the document. Under no deal, the regions growth would be more than 10 points lower than it would have been inside the EU.
Under Mays plan, London would be the worst-hit region, with a 1 percentage point hit to growth, reflecting the fact that trade in goods with the EU would remain relatively frictionless under the plan, while trade in services, which are dominant in the capital, would be more restricted.