I’ve finally finished the IFS/Citi Green Budget published on Tuesday. All 253 pages of it. Like every IFS reports this is a serious piece of work. But it also deserves a far more critical assessment than most journalists have managed so far.
Let’s begin with the headline that even a ‘relatively benign’ no-deal Brexit would push UK public debt to its highest level since the 1960s. This isn’t actually the shock revelation that it might sound. For a start, this forecast should be gauged against a new baseline where there is already some additional fiscal stimulus and debt (as a share of national income) is no longer falling.
The report’s no-deal Brexit scenario, while more credible than the IMF analysis on which the OBR’s earlier assessment of fiscal risks was based, is also still pessimistic. In particular, the economy does not grow at all over the next two years, and by just 1.1% in 2022, leaving it 2.5% smaller than otherwise.
What’s more, even if you take the numbers at face value, they would be far from the fiscal disaster that some have claimed. Despite the assumption of substantial tax cuts and additional spending to support the economy, public sector net borrowing is forecast to peak at 4.6% of GDP in 2021-22, then start to fall again. This measure of the annual deficit was around these levels as recently as 2014-15, and more than 10% in 2009-10, so this isn’t breaking new ground.
The debt projections are more worrying. Rather unhelpfully, the IFS report chops and changes between different measures. The detailed tables focus on net debt excluding the Bank of England, which is forecast to rise from about 73% of national income now to 86% in 2023-24 in the no-deal scenario. Elsewhere the report refers to total debt including the Bank of England, which is currently around 81% and forecast to rise above 90%. Either way, a big increase.
Nonetheless, these would not yet be crisis levels. There is nothing magical about the figure of 90%, despite some previous academic work (just google Reinhart and Rogoff, ‘Growth in a Time of Debt’) which had suggested that 90% is a critical threshold. What really matters is future economic growth, debt dynamics, and demographics, and difficult decisions still to be taken in the UK on the financing of health and social care. Significantly, though, the IFS report also includes projections over much longer horizons. These generally have debt falling again as a share of GDP, even in the no-deal Brexit scenario.
It would also have been good if more journalists had challenged the claim in the report that the UK economy is now between 2.5% and 3.0% smaller than it would have been if the public had voted to remain in the EU – ‘the cost of Brexit so far’. This is similar to other estimates using the same methodology – and just as dodgy.
In short, the report picks a group of countries (a ‘doppelganger’) whose growth best matched that of the UK economy before the 2016 referendum. It then compares the actual performance of the UK economy since the referendum against this group. Any difference is assumed to be due to Brexit.
How useful is this? In my view, not very. This is partly because there are many good reasons why the UK might have under-performed its peers over the last three years, regardless of the outcome of the referendum. In particular, the US economy has benefited from the substantial fiscal boost under President Trump. The euro-zone was long overdue a period of catch-up. UK consumer spending was also already looking over-stretched.
At least as importantly, these numbers tell us very little about the longer-term impact of Brexit once the UK has actually left the EU, especially if sterling and business investment rebound as uncertainty clears.
Finally, I would be most wary of claims that the IFS/Citi report demonstrates that a Corbyn government would be less damaging than a no-deal Brexit. This result is partly just a consequence of the pessimistic view of a Brexit itself, which Labour is assumed to cancel altogether. It also depends crucially on the assumption that the economic consequences of a Labour administration would be dominated by the near-term boost from spending increases.
Above all, though, it reflects the fact – acknowledged in the report – that the potential costs of a Corbyn government are much harder to quantify than those of a ‘no-deal’ Brexit. In particular, Labour’s more extreme plans – including a sustained attack on property rights, widespread state intervention in the setting of wages, prices and rents, and restrictions on freedom of choice in education, health and employment – do not easily lend themselves to the sort of dry economic modelling undertaken by the IFS and Citi.
If they did want to go down that route, I’d suggest they factor in much bigger falls in sterling and much larger drags on the economy via falling asset prices, investment and confidence than in the no-deal Brexit scenario. The example of the unravelling of the socialist experiment in Venezuela is sometimes overused, but I wonder if Citi’s forecasts had correctly anticipated the scale of collapse there. I think it’s safe to assume not.
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