The SNP's economic analysis of Brexit, not worth a hill of beans!

The SNP's economic analysis of Brexit, not worth a hill of beans!

by William Ross
article from Tuesday 7, March, 2017

IF YOU COULD call a Brexit panic phone-line set up by the SNP Government I am sure the automated response would be the well-trodden words: "SNP will protect us from a Hard Tory Brexit catastrophe costing us up to 80,000 jobs…". This line has reached levels of "Big Feartie from Fife" co-ordination.

The 80,000 job loss figure comes from a paper published on 6 October, 2016 by the Fraser of Allander Institute, which is part of the University of Strathclyde. The paper was commissioned on behalf of the Culture, Tourism, Europe and External Relations Committee of the Scottish Parliament by its Convenor, Joan McAlpine MSP. In her introduction, Ms McAlpine takes the opportunity to warn of "disastrous consequences" arising from a "hard" Brexit.  "Hard" Brexit refers to our impending departure from the Single Market and the Customs Union. The October 6 Report plays an important role in justifying the SNP's economic analysis of Brexit and is thus worthy of consideration.

I start by emphasising that I have great respect for the Fraser of Allander Institute. The October 6 Report is not "fake news". Nonetheless, the Report does not present a fair picture of this country's prospects post-Brexit. The problem arises not with the Report's methodology but with its underlying assumptions. Employing complex economic modeling, the Report examines three different scenarios post-Brexit, which include a Norway type arrangement (EEA), a Switzerland type arrangement EFTA) and a World Trade Organisation (WTO) arrangement. For the WTO option, the Report assumes that tariffs will average 2% – so to that extent some success in trade negotiation is factored in. The modeling of the WTO scenario leads to a conclusion that after ten years Scottish GDP will be down 5% and exports down 11%. Real wages will be down 7% and there will be 3% fewer people employed meaning 80,000 fewer jobs. Not being an economist, I cannot critique the modeling process itself, but neither can the majority of Remainers.

Given that Theresa May is intent on leaving the Single Market and the Customs Union, the SNP naturally latch on to the WTO results.

The problem with this modeling is that its own assumptions  almost totally exclude the economic upside of Brexit. 

For a start, as the Report itself makes clear (See Para. 39, pages 7 to 8) it takes no account of our being able to negotiate our own trade deals. The EU has an appalling record on concluding trade deals with significant countries as it requires 28 countries to agree on the non-tariff elements. Written in early October 2016, the Report could not have foreseen that instead of being "back of the queue" with the US we are now "front of the queue".

Secondly, the Report fails to take into account that outside the Single Market we can re-jig trade regulation to suit our requirements in the normal democratic way without having to obey the EU Commission oligarchs. Around 90% of our GDP has no relation to AT ALL to the EU but at present it is ALL subject to EU regulation.

Thirdly, the Report takes no cognizance of the fact that outside the Customs Union we can lower our tariffs on selected imports. This can reduce for example, food costs and help Third World farming, a cause that we should support against EU protectionism. Neither does the Report take into account the fact that after Brexit we can take action at the UK level to amend our immigration strategy to get us the right immigrants that help economic growth.

Fourthly, apart from the concession on tariffs at 2%, the Report rules out the UK reaching a favourable free trade agreement with the EU. Assuming that sterling exchange rates remain lower, did the Report take this into account? It is not clear. 

Nor does the Report take into account that, as argued by Brian Monteith on this site, Brexit will allow for much more efficient corporate tax collection, and we will off course save our huge contributions to the EU. 

In short, the Report is a prisoner of its own assumptions, and looks only at Brexit's possible downsides.  

The Report also treats the EU as being a static entity. It fails to recognise that the Single Market has had little impact on services, which is the large majority of our economy. It fails to heed the EU's own forecasts that its global share of World trade will continue to decline. The proportion of our exports going to the EU has been precipitously declining for well over a decade. Assuming we were to stay in the EU, we should ask the question – what would happen if this decline continues while we are powerless to agree our own free trade agreements?

The Greek tragedy has now re-appeared. What if Greece exits the Euro? What if the Italian banking system collapses? What if Wilders wins in Holland or Le Pen wins or comes close in France? What if the refugee disaster intensifies? What if the EU follows the demands of Guy Verhofstadt and centralises further? The EU is, to put it mildly, no safe haven. Not for nothing is Verhofstadt's new book called "Europe's Last Chance".

Nearly six months have passed since the Report was issued and the expected bad news over Brexit is showing no sign of happening. Project Fear predicted mayhem immediately. That cannot be got around. If I do something NOW that will obviously ruin my business in two years, it is hard to understand why investors and employees will be willing to enthusiastically support it in the short term

The argument that the consequences will ONLY be felt when Article 50 is triggered or when Brexit happens is unsound. After all, there has been a consequence. The highly fickle, nervous money markets have driven sterling down to levels targeted by the IMF. Major constitutional change tends to spook money markets. There is nothing surprising about that. 

Economists have loads of egg on their face. Was that so apparent on 6 October, 2016 when the Report was issued?

Nonetheless let's look at the headline figure of 80,000 jobs lost over ten years. That means that Scotland loses 8000 jobs a year. Compare that to my own industry, the oil industry. According to Oil & Gas UK, the industry trade association, up to the end of 2016 there have been 120,000 jobs lost in the UK from the oil price high point in 2014. Let us assume that half the losses are in Scotland. There has been a massive fall in supply chain costs of up to 50%. Compare that to a 2% assumed tariff! What do we hear from the SNP about the pain in the North East of Scotland? Practically nothing. Oil workers are a bit like SNP Brexiteers, they just don't meet the right profile for the SNP hierarchy.

Despite its hard landing the oil business has picked itself up and hopefully we have hit bottom and are on the way up. We will pursue the best markets and the best technology. This is what Scottish industry would do if trading with the EU became a little more difficult. If the sixteen men of Tain find it relatively harder to sell Glen Morangie in France they might market harder in the US or Brazil? They all have good Scots tongues?

Finally, despite my respect for the Fraser of Allander Institute I just have a "wee bit of doubt" that any economic institute can sensibly tell us what will happen ten years hence? George Osborne tried to tell us that we would all be £4,300 poorer in 2030 but he actually did not even know what would happen in July 2016.

Take the SNP's economic analysis of Brexit with a pinch of salt.

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