Brexiters choose to target the messenger

Posted on November 24, 2016

The future is always uncertain. But sometimes it is more obviously so. A big question to be asked of the British government — and of Philip Hammond, the chancellor, in particular — is whether it is grappling with the uncertainties wisely.

The biggest worry is also the chief uncertainty: productivity growth. The Office for Budget Responsibility forecasts that rising hourly productivity could contribute 9.4 percentage points to overall growth of real gross domestic product between the second quarter of 2016 and the first quarter of 2022. This assumes stagnation will cease but also that lost potential output, relative to pre-crisis expectations, will never be recouped. The UK is, as a result, far poorer than was expected pre-crisis, as a Resolution Foundation analysis of the Autumn Statement explains: GDP per head is now expected to rise by a mere 6.8 per cent between the onset of the financial crisis and 2021.

To make the future still more unpredictable, voters decided on Brexit. Virtually all forecasters believe this will have a negative short-term impact through reduced investment and immigration; and negative long-term impact through reduced openness to trade. The OBR expects immigration to fall and so the growth of aggregate GDP to be lower. It also expects weaker investment in response to greater un­certainty, slowing growth in the short term. It has ignored, however, the possibility that lower trade intensity would reduce productivity in the long term. Furthermore, it assumes any hit from uncertainty to growth would disappear quite soon.

Both assumptions are heroically optimistic. In particular, the UK’s new trading relationships are unlikely to be settled before the middle of the 2020s.

Brexiters hate this message and so have decided to attack the messenger. But two points are worth bearing in mind. First, like any forecaster, the OBR has got things wrong in the past. But it has, if anything, tended to be too optimistic on future output rather than too pessimistic. Second, the OBR’s assumptions now put it among the more optimistic forecasters. The ideologically driven assault on the OBR’s sober and cautious professionalism is disgraceful.

Mr Hammond was quite right to base his view of the future on these forecasts. But he was also wise not to respond with fiscal tightening in the short run. Indeed, he could (and should) have loosened further. It is sensible, given the uncertainties, to let public deficits and debt now take the strain. The UK is, happily, still able to do so. While the ratio of net public debt to GDP will be high by recent standards, it will remain below its average since the early 18th century. But to let borrowing take the strain, the chancellor had to abandon his predecessor’s fiscal rules. He did so with aplomb. His new rules provide substantial room for manoeuvre, should the outcome be worse than the OBR’s forecast suggests. That makes great sense. He might yet need all of it.

The big question raised by the Autumn Statement concerns neither the forecasts nor the chancellor’s decisions on fiscal rules and the path of deficits and debt. It is whether the government is doing the best it can to dispel the clouds of uncertainty now hanging over the economy. The answer to that is: no.

Two failures are particularly significant. First, it is absurd that we still have no idea what the government will be seeking in its negotiations over Brexit and the subsequent trading relationships with the EU and with other trading partners. This is the most important set of policy decisions to be taken by a British government since the UK entered the EU more than four decades ago. It cannot remain a state secret.

Second, the UK has to have an immigration policy that strongly supports economic dynamism. The crucial element will be to make skilled workers highly welcome — those here now and those to come. The UK economy cannot thrive without such people. This must be understood and loudly declared.

The government also needs policies that are pro-prosperity and seen to be fair. While Mr Hammond’s productivity agenda is attractive in principle, it is far too small to offset the likely weakening in private investment. Moreover, despite all the rhetoric about “just about managing” households, the impact of tax and benefit changes announced in this parliament will harm those in the bottom half of the income distribution, especially the poorest decile, while planned rises in tax thresholds also favour the richest decile.

The rhetoric looks cynical. That is perilous, especially when living standards are to take another hit. It would be better not to promise than to promise and not deliver.

martin.wolf@ft.com

You must be logged in to post a comment Login