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The Short-Term Impact of Brexit: more exaggeration by the Treasury?


As Project Fear rolled on, and with purdah looming on the horizon, the government turned its attention to the short term and issued a final economic salvo. The Treasury’s report published on 23 May, one month before the referendum, sought to supplement its long term forecast with analysis for the immediate impact of leaving the EU.

The report opened with the following claim:

To inform the decision that the British people will make on whether the United Kingdom should remain a member of the European Union, this document provides a comprehensive, rigorous and objective analysis of the immediate impact of a vote to leave.

Indeed, the report paints a very gloomy picture of a post-Brexit economy. As with their report on the long-term economic impact, in which the treasury claimed Brexit would mean a loss of £4,300 per household, its short-term partner piece has been heavily criticised for exaggerating the risks, taking no account of potential benefits or changes in policy, and misrepresenting its findings to imply a greater negative impact of leaving than the evidence suggests.

It is clear that there will be some short-term uncertainty as result of Brexit due to market volatility, and this is acknowledged by both sides. However, the impact of this is itself uncertain and any attempts to give concrete estimates of the immediate impact on the economy are deeply questionable.  As Open Europe have pointed out, short term forecasting is even less reliable than long term, since it has to be based on very unpredictable market movements rather than more predictable long term policy decisions. Despite this the Treasury pressed on with their analysis.

Here is our take on the key issues with the report’s findings:

Missing EEA option:

Perhaps the most surprising aspect of the report was that it modelled only two immediate exit scenarios – ‘Shock’, if leaving with Bilateral Trade Agreements; and ‘Severe Shock’, if trading under WTO rules.

This is intriguing. The previous long-term report looked at three exit options; the EEA, Bilateral Trade Agreements, and under WTO rules. When defending the credibility of the report, George Osbourne and Mark Bowman made much of the fact that their estimates had been taken from the middle of this range of three.

Yet this new report ignores the EEA exit option – the option which, incidentally, is expected to have the least impact on the economy – and retains only the two with the most negative potential impact. It is unclear why the Treasury decided to abandon their three exit scenarios. Surely a ‘rigorous and objective’ analysis by the treasury would have taken a consistent approach.

How severe are we talking?

Despite this weighting towards the negative end of the scale, the report shows that in the shock scenario, the economy would enter an extremely mild recession with four quarters of -0.1 per cent growth. Here the Treasury is flirting with the boundary of what defines a recession. David Cameron and George Osborne’s claims of a ‘DIY recession’ akin to 2008 are vastly overblown.  As a means of comparison, the 2008 recession was far deeper and longer than this, with 6 quarters of negative growth, the worst reaching 2.6 per cent – twenty-six times worse than this forecast.

Repeated assumptions:

The ‘shock’ scenario would mean thatAfter two years, GDP would be around 3.6% lower and unemployment would increase by around 500,000’.

In the ‘severe shock’ scenario the report suggest thatafter two years the level of GDP would be 6% lower, the number of people unemployed would rise by around 800,000.’

It is worth remembering, however, that just as with the long term report, both of these scenarios are calculated against a backdrop of continued UK growth – not the current level.

Indeed, a large part of the model is based on the treasury’s long-term impacts, with a central assumption being that people will adjust their spending due to an expected reduction in income. This is expected mostly due to the government’s previous predictions, which would lead to lower consumption and investment now.

Working heavily off of the assumptions of the previous report, it is hardly a surprise that these latest findings are as almost as alarmist.

Ignoring the potential benefits:

When analysing the potential impact of a change it would be normal to consider the costs and benefits of this change. However, the report on the immediate impact of a leaving the EU, as with the long-term report, only models the potential downsides of a Brexit, and assumes that neither the government nor the Bank of England would adjust policy, in an attempt to mitigate the uncertainty caused by the referendum.

This seems highly unlikely, as the Bank has already announced it will be releasing more cash around the time of the referendum to help maintain stability in the financial markets. It would also be highly unlikely that a government that will be facing an election in 2020 would not do everything in their power to boost economic performance, by cutting interest rates or taxes, and, more broadly, getting a good deal on a UK exit from the European Union.

The one future policy the report does allude to is an increase in public sector borrowing. This is a reasonable assumption since any government going through an economic crisis is likely to want money to invest in the economy and to promote further growth. It would also mean that the government would likely slow the rate at which they are imposing cuts to the current budget.

Misrepresenting the findings:

The claim that ‘the effect of this profound shock would be to push the UK into recession’ is both extreme and unjustifiably certain in tone. As we have mentioned already, the report does little to make it clear that these negative scenarios are relative to current estimates of growth, which, given the current instability of the eurozone economy, are highly uncertain as it is.

The ramifications of any revised growth figures are large and have the potential to radically change the Treasury’s conclusions. The ‘shock scenario’ predicts a maximum quarterly decline of 0.1 per cent of GDP. Yet forecasts for economic growth are often out by differences far greater than this, and therefore any slight change in the modelling or any effort to account for policy changes would likely offset this estimate or even push growth into the positive.

Further still, if you look at the estimated fall in house prices of 10 per cent by 2018, this is relative to the expected 10 per cent increase in house prices, meaning that, rather than a fall, the value of houses is likely to remain constant over the few years following a Brexit.

The same is true of the claim about job losses. The OBR predicts employment to rise by 300,000 by 2018, so the ‘shock scenario’ of 500,000 less jobs only equates to a reduction of 200,000 jobs in the next two years.


It has been generally accepted that there will be a short-term impact on the economy, and that this is likely to be driven by short-term uncertainty. As was true for the long term report, it makes sense for the Treasury to attempt to look at what the effects of this might be for the UK economy. This is arguably the sort of thing a responsible Treasury should be doing.

However, to estimate such a large impact, especially without considering the potential benefits and likely policy responses caused by an exit, is highly irresponsible. It is likely to be both inaccurate and to add to uncertainty in a way which could be damaging for the UK economy. Add to this the inconsistencies and wilful misrepresentation of the findings, and the result is a report that makes no credible or useful contribution to the debate.

With strong arguments on both sides, we are left with the real question: is a brief bout of uncertainty really a reason to remain?

  • Tom Adamson-Green and Justin Protts – EU Research Fellows

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