£90bn Worse Off (Under Certain Assumptions)

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When our Pro-Remain current Chancellor declares “The UK Government will be £90bn a year worse off under No Deal” it should automatically raise some questions.

When?
The £90bn is the forecast tax take difference for 2035.

Worse off than today?
No, this is comparing one growth forecast with another. The economy, and hence government take, will be bigger in both cases. It’s a “bigger” vs “even bigger” comparison.

What Compared To What?
This is comparing a forecast with a set of “No Deal” assumptions against one with “Status Quo” assumptions.

How much is £90bn to the Economy?
What he is actually talking about is the Economy growing but by around 8% less.  At this point we should note that Exports make up around 30% of UK GDP. Less than half that – say 14% goes to the EU.

What Sort Of Annual Growth Is That?
A standard benchmark GPD growth forecast would be c 2% a year (i.e. +34% by 2035).  If that is “Status Quo” then to get the lower “No Deal” figure it would be growth of about 1.5% a year (+25% by 2035).

How Good Are We At Forecasting?
Forecasting the economy is a tricky business.  Exactly what would happen if we did this, or that, is chaos incarnate.  The 12 month forecasts are revised every 3 months, often by +/- 0.5%.  Although the short term lumps and bumps do even out, 18 years is a long, long range forecast.

How Do They Model It?
Reportedly they use a “Gravity Model” where trade with physically closer nations is more favoured. The logic is that the cost of physically moving goods over distance means you are more likely to develop larger trade with closer markets. The UK economy is highly service based, where freight costs mean little compared to language and culture.

What Are The Assumptions?
Amazingly(!) not published, but apparently:

“No Deal”
No trade deal at all with the EU
No side agreements
We struggle to roll over existing EU trade deals
No trade deals with anyone else either
We still pay the EU £39bn
The annual £10bn we stop paying to the EU has no economic impact
No changes to common external tariff
Mirroring EU legislation
No change to taxation
Reduction of immigration and consequent negative effect on UK economy

“Status Quo”
No change to our EU contributions
We keep the rebate
EU signs some biggish trade deals including USA
No trade war with the US or China
Continuation of immigration and consequently a positive effect on the economy
No instability in the Euro
No issues with Greece, Italy, Catalonia, Switzerland

Whether or not that “£90bn” is a credible figure or a bag of unwashed underpants is now left as an exercise left for the student.

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