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Don’t bank on the '£1.1tn Brexit boost promise' backed by Jacob-Rees Mogg

Alanna Petroff
Senior Economics Correspondent at Yahoo Finance UK
Jacob Rees-Mogg, holds up the report that claims a hard Brexit will bring billions of pounds to the UK economy – a claim debunked by experts. Photo: Getty

Businesses, world leaders and economic experts have warned for years about the damaging impact of Brexit, leading to high inflation and a major economic slowdown.

But a new report published Tuesday by the pro-Brexit group – Economists for Free Trade – goes against the grain, claiming the UK economy could see a £650bn boost in the coming years if the UK breaks away from the EU without any free trade deal.

Newspaper headlines have gone a step further, incorrectly interpreting that the report’s estimated £650bn boost combined with a £500bn loss for the EU would ultimately mean a £1.1tn benefit for Britain. These articles seized on the fact that the wellknown British MP, Jacob Rees-Mogg, backed the report on Tuesday.

But don’t bank on these pro-Brexit promises.

“This [report] is quite, quite mad. But also fundamentally dishonest,” said Jonathan Portes, an economics professor at King’s College in London.

“No neutral model will find this result” of a £1.1tn economic boost, said David Henig, a former trade negotiator from the UK.

UK-based economists who have reviewed the report note that the researchers overlooked important global economic trends, including the shift towards a more services-oriented economy.

“The world has moved on from the 19th century,” said Paul Donovan, global chief economist at UBS Wealth Management. The report “ignores the realities of the modern world,” he said.

Here’s what you need to know:

The gist

The report argues that the UK could leave the European Union without striking a new free trade deal and instead fall back on global trading rules set by the World Trade Organization (WTO). This has been called a “hard Brexit” in the past, but the authors are calling it a “clean Brexit”. In this new scenario, the UK would set its own tariffs on the import of goods.

Big trade v big growth

The report, and previous papers from the pro-Brexit group, have noted that many countries operating on WTO rules have seen their exports to the EU rise significantly in the past while the UK has lagged behind.

But it’s important to note that it’s far easier for a nation to increase its exports when starting from a lower base.

As it stands now, the EU is the UK’s biggest trading partner, providing a market for about 44% of all British goods and services. In this reality, it’s hard to grow exports when the proportion of trade is already so large.

“I would highlight that comparing pure growth rates in trade of goods or services is an incomplete approach,” said Stephanie Kelly, a senior political economist at Aberdeen Standard Investments Research Institute.

Services quandry

Experts have widely criticised the report for overlooking the crucial services sector, which covers everything from banking to streaming music services to escalator repairs.

“My concerns is that [the report] doesn’t provide enough focus on the issues that matter for the UK economy,” said Dean Turner, an economist at UBS Wealth Management.

The services sector is not subject to tariffs, but relies on countries coordinating their regulations to ease the flow of business.

Current EU rules set common standards across the 28 member nations for services, including rules related to transferring data and accrediting medical professionals. This makes it easy to do business across a market covering more than 500 million people.

But after Brexit, British businesses could be restricted from exporting their services to the EU unless the country follows and replicates European rules and regulations.

Portes notes that the pro-Brexit report implies “removing UK health, safety, environmental [and] emission standards on all imports” to ease the flow of trade. This is certainly not the kind of situation British consumers would want.

Price predicament

The report argues that, in the long run, prices for consumers could go down instead of up. But experts aren’t convinced this is feasible.

The assertion that prices could fall contradicts the authors’ forecast that the UK pound will depreciate after Brexit, which would raise prices for international purchases.

Plus, there’s the issue of new WTO tariffs on goods after Brexit.

Any new UK-EU tariffs after Brexit will “have to be felt somewhere; either in profit margins or consumer costs, both of which will impact GDP negatively,” said Kelly from the Aberdeen Standard Investments Research Institute.

Trade talks take time

Economists also point to the fact that the report doesn’t consider how long it takes to set up new trade deals. The recent EU-Canada deal – CETA – took the better part of a decade to sign.

Plus, it will take time to simply begin identifying partners who are willing to slog through years of trade negotiations.

On top of that, Donovan notes that the UK doesn’t have skilled trade negotiators since the EU took care of trade talks for decades.