Monday, 18 April 2016

Treasury economic model of Brexit - can we trust the modellers?

The release of Treasury figures for the projected impact of Brexit on the British economy have inevitably been dismissed as rubbish by the 'Outers'. In some ways they might be right. My limited experience of economic forecasting is based on ten years dealing with projections of growth in demand for port capacity. I was left less than convinced about the models!

Whilst dealing with Dibden Bay, I asked the modellers working for ABP why the projected demand forecasts for container capacity were continuously upwards; surely they must reach an asymptote? The response was that this is how growth had largely developed since the introduction of the 'container' and there was no reason to suppose that this would change in the foreseeable future. Like a fool, I failed to ask the more searching questions about the impact of major recessions or other shocks to the country's economy. I remember thinking 'but what about recessions' but decided that they had better experience than me and that my questions would be naive. I was wrong (I have been on many occasions!).

Rolling on 15 years, Dibden Bay has not been built and the port of Southampton is now handling about double what it did in the late 1990s using reconfigured existing quaysides. Conversely, the port of Felixstowe has grown with the development of what was called 'Felixstowe South' at the time - and it needs new berth configuration to handle today's 'mega ships'. London Gateway, often considered to be a white elephant by those in the know, has been partially completed but whenever I visit that part of the world it seems to be largely without ships (things are improving I understand).

Meanwhile, Bathside Bay has not been built; nor has Bristol Riverside Terminal. All of this capacity was consented on the grounds of need and on the basis of economic projections that forecast a huge rise in demand between now and 2030. Those forecasts start to look a bit optimistic now! I never quite believed them, but I did believe the basic economic model that almost nobody would build a major container terminal unless the economic case was sitting at the end of their nose. So, it really did not matter if consent was granted - nothing would happen if the money did not stack up.

Of course my thesis is somewhat flawed because there are long-term investments such as London Gateway by Sovereign Wealth Funds that throw spanners in the works. But, my basic economic model is right. Conversely, the forecasts of container capacity are clearly well off the mark. They have parallels with the projections the SNP made for oil revenues (I'll bet a fair few Scots are quietly relieved that they did not leave the protective economic umbrella of England even if they don't like us and are fearful of Brexit).

So, where does this leave the Treasury figures? Well, I don't believe them! Nor do I subscribe to the views of the 'Outers' who argue that things will be much more rosy. The one thing that we can be sure of is that all commentators seem to be in agreement that Brexit will cause a dip in economic growth (in other words a recession). That in turn will trigger a need for more cost savings by Government. It may also trigger the departure of some economic migrants and those recent arrivals who are fearful of being marooned in the UK! It may also trigger the return of some Expats - who of course will then place a different burden on society as they are largely an aging population with health care needs and limited economic productivity.

This is a theme that needs to be explored in greater detail. Savings on our contributions to the EU will clearly be something to be considered - I shall look at these in due course.

Today's question for the 'Outers' is: 

 If the Treasury model is fanciful, please give me some hard evidence that your model is right. I don't recall seeing any costed model - just an awful lot of hot air saying that we will be able to make much more by having the freedom to trade elsewhere. The 'out' model has parallels with the Scottish oil model and the port demand forecasts of the late 1990s and early 2000s.

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