There is a short memory in the public discussion about economics. If there wasn’t many players that get the wide platforms to express their views, opinions, forecasts, etc would burnout very quickly given how appalling their track records are. I was thinking about that while looking at the most recent Foreign Direct Investment data and reading UK Guardian articles about the demise of the most recent British Prime Minister. While it is very hard at present to trace the economic events in terms of individual drivers because Covid, the Ukraine situation and OPEC+ have certainly muddied the waters, there is some clear evidence available that demonstrates the mainstream anti-Brexit analysis and predictions was completely wrong. Given the same sort of characters and institutions are consistently given platforms in the media to proselytise and scare the b-jesus out of people about fiscal positions etc, one wonders why they retain credibility after being so wrong about Brexit, while commanding the floor of authority. My position is that they were wrong then and remain unreliable sources of information about what is happening now.
The most recent offering on what happened to Liz Truss and her short-lived premiership appeared in the UK Guardian (November 12, 2022) – Revealed: the £30bn cost of Liz Truss’s disastrous mini-budget.
This is meant to be a progressive news source with informed opinion but this article (and previous articles by these journalists is pure austerity economics of the sort the most conservative ‘sound finance’ voice would articulate.
It is full of the fictions that make it hard for us to have a reasonable debate about these matters.
The term “fiscal hole” is recurring despite it having no functional meaning in any reasonable understanding of the fiscal capacity of the British government.
The authors talk about a “staggering £30bn” in the same sentence as “cost the country”.
And apparently the “fiscal hole” has to be filled in immediately (“autumn statement”) with “a huge programme of tax rises and spending cuts”.
Now, I have been through all the flawed logic of this sort of framing before and so I won’t dwell on it here.
Suffice to say, there is no mention of the broader context within which the figures bandied around in the article are to be understood.
The logic presented to the readers is that a fiscal deficit is bad, a larger fiscal deficit is worse and governments should increase revenue and/or cut spending to rid itself of such a deficit.
The larger the deficit the larger the response required.
That is straight austerity thinking.
There is nothing that can be said about a fiscal position without discussing the context – the state of the external sector (an external deficit typically requires a higher fiscal deficit to ensure full employment), the state of the private domestic sector (how much saving overall, how much debt).
I am in no way providing support for the crazy fiscal announcements that the Truss-Kwarteng team tried to get away with.
Giving more public cash to the rich was neither warranted in the situation nor capable of ever being justifiable in my view.
The extent to which the Truss/Kwarteng duo wanted to increase net public spending was also, in the circumstances, too great and they should have concentrated their ‘cost of living’ response to helping the lower income groups while they rode out the transitory factors driving the current inflationary episode.
But that sort of reasoning is quite different to seeing a deficit as a ‘hole’ that somehow triggers anxiety and a massive reversal of government support for a very fragile economy.
The point of citing the article however is this.
The authors derive the estimates of the fiscal position from various external sources who also had a lot to say about the likely ‘costs’ of Brexit.
This is where the memory factor is relevant to assessing the credibility of commentary and input from different commentators and institutions.
Remember back in the years leading up to the June 2016 Referendum vote and the period after the decision was taken by the British people to leave the EU?
Remember all the hysteria.
Remember all the mainstream economists that were continually being given a privileged platform in the media to publish outlandish forecasts of all manner of disasters.
The fact that they made these forecasts was not objectionable.
It was the fact they held out that they were ‘scientific’ and aiming to help the ignorant British voter be better informed.
The reality was that the participants were anti-Brexit and used the chimera of their authority to hide their ideological preference for the neoliberal EU cabal behind claimed sophisticated economic analysis.
The formal policy institutions (Treasury and Bank of England) published scandalous predictions that have not been close to what has transpired.
The Office of Budget Responsibility should be scrapped given its appallingly inaccurate and irresponsible forecasts that were intended to influence the vote for the Remain camp and derail the process of exit after the vote.
And then there was a host of economic think tanks and individual economists predicting the worst.
Since then, the UK Guardian has given the platform to William Keegan to continually claim all manner of evil about Brexit without coming to terms with the data.
The editors think it is good journalism to have him twist every bad piece of news as a symptom of the disaster that befell Britain when it left the EU.
Somewhat offsetting the anti-Brexit bias of the UK Guardian was the reasoned input from Larry Elliot (November 6, 2022) – Brexit isn’t to blame for our current problems; it is still an opportunity – which presents a view that is close to the view I have made public since 2015.
1. It is ridiculous to blame the current economic malaise in Britain (as far as it is) on Brexit.
2. The wild predictions of doom were wrong and were deliberately designed to give the Remain side more votes than it deserved.
3. Brexit just puts the onus on the government now to deliver sensible policy without being hampered by the extreme neoliberalism and austerity mindset of the EU.
Whether it turns out good or bad depends on the decisions of the government. It certainly provides that government or future governments with, in the words of Larry Elliot – “an opportunity to look at an under-performing economy in a new light and to do things differently”.
4. And concuring with his final thought: “Whether that opportunity will be seized or squandered remains to be seen, but there is no gorilla in the room, just a mouse with a loud squeak.”
I have deliberately avoided writing about Brexit in the last few years because there has been so much ‘noise’ in the data that is is impossible at this stage to separate all the elements.
The global pandemic has distorted the data so much that time series analysis (a branch of econometrics that I specialise in) is very difficult now.
We have major breaks in the time series data which has to be treated as outliers and expunged. But that introduces new problems.
Compounding the difficulty in assessing the impacts of the Brexit decision so far has been the OPEC+ moves and the Ukraine situation, both of which have distorted the picture in ways that are yet to be fully understood.
Suffice to say all these factors have worsened the economic outlook for all countries.
But we do know some things.
We have clearly moved on from the ‘sky-will-fall-in’ predictions that dominated the early period around and after the Referendum.
1. There wasn’t a major recession in 2017 as predicted by Goldman Sachs who had apparently provided half a million pounds to the Remain campaign.
Other commentators predicted similar negative GDP outcomes.
The Office of National Statistics data showed that GDP growth was 2.2 per cent over 2016, rising to 2.4 per cent in 2017, By 2019 it was still growing at 1.6 per cent per annum and rebounded to 7.5 per cent in the aftermath of the pandemic (Source).
Research by the Briefings for Britain group – What impact is Brexit having on the UK economy? (published October 13, 2022) – shows that:
(a) “growth in UK GDP since 2016 Q2 had been above Germany and Italy and only modestly behind France”.
(b) “there is no evidence that UK growth has underperformed since either the Brexit referendum or the period outside the EU’s single market and customs union since January 2021.”
(c) “Our view is that the UK economy has performed largely in line with its main comparator countries since the Brexit referendum. Over the entire post-WW2 period per capita GDP in the UK has grown at about the same rate as the US or (since 1973) as the G7”.
(d) Further, counterfactual studies try to overcome the implausibility of the previous ‘collapse’ scenarios, by claiming that the UK may not have collapsed but would have stronger growth if they had have remained in the EU. The Briefings group conclude that these studies use flawed methodology and assume that previous recovery periods (after recession) would continue “indefinitely”.
2. The Treasury Department produced its – HM Treasury analysis: the long-term economic impact of EU membership and the alternatives – in April 2016.
It gave its authority to this prediction, for example:
Unemployment effects have generally not been reported in these studies. PwC’s report for the CBI estimates unemployment would reach 7% to 8% in 2020, compared with a projected rate of 5% if the UK remained in the EU. The impact on total UK employment is estimated to be a fall of 550,000 to 950,000.
At the time of the Referendum, British unemployment was 5 per cent.
It reached a low of 3.8 per cent just before the pandemic began.
It peaked during the early waves of the pandemic at 5.1 per cent and is currently at 3.5 per cent (Source).
At the time of the Referendum, total employment was 31,779 thousand.
By the end of 2019, it was 32,985 thousand, a net increase of 1,206 thousand.
In July 2022, it was 32,754, slightly down on the pre-pandemic level (Source):
So the 550 to 950 thousand loss projected was obviously grossly inaccurate.
FDI will decline substantially
The H.M. Treasury noted that in formulating their forecasts:
The judgement must be based on evidence.
Well, we do have some evidence that we can consult.
The Treasury quoted a number of research papers that suggested Foreign Direct Investment inflows would fall variously by 22 per cent to 27 per cent as a result of leaving the EU.
In summation, they concluded:
The HM Treasury analysis in this document is consistent with the results in these papers.
A recent study by neoliberal institution Peterson Institute for International Economics and authored by a former member of the Monetary Policy Committe of the Bank of England – The UK and the global economy after Brexit (published April 27, 2022) – claimed that “Between 2017 and 2020, average UK FDI inflows as a share of GDP plummeted to its lowest level since the 1980s”.
Plummeted is one of those descriptors that authors use when they want to shock and modify the reality in their favour.
The data shows that inward FDI flows have been declining for the last 20 years in Britain and there has been no acceleration after Brexit.
Here is the aggregate FDI inflows (USD millions) for Britain from the March-quarter 2013 to the June-quarter 2022 (OECD data).
In fact, taking out the volatility in the series, the trend is fairly flat after the Referendum.
Certainly not plummeting.
However, the Briefings for Britain analysis argues that:
… these analyses typically focus on measures of overall FDI which are heavily influenced by large mergers and acquisitions flows …
Which means that it is hard to discern anything from that level of aggregation in the data.
If we examine what are referred to as Greenfield investments the picture is quite different.
These are new projects that are attracting FDI inflows and presumably reflect confidence that competitive returns will be achieved once operations begin.
Here is the total value of Greenfield FDI inflows from 2003 to 2021 (USD millions) with some of the major EU countries as comparisons (UNCTAD data).
The Briefings for Britain report concluded that:
Looking at greenfield investment trends we can see that the UK since 2016 has continued to attract more greenfield investment than any of the large EU countries … Moreover, from 2016-2021, the volume of greenfield investment into the UK rose from US$32 billion to US$44 billion, i.e. by over a third … This was the fourth best year since 2003, despite the pandemic – and ‘despite Brexit’.
So the doom predictions have not been borne out.
The most recent report from the British Department of International Trade (DIT) – Inward Investment Report 2022/21 – provided detailed estimates of new FDI by region and jobs created.
They conclude that:
1. “the UK economy, supporting Foreign Direct Investment (FDI) projects that yielded over 47,000 new jobs, almost 3,000 more jobs than the year before”.
2. “UK FDI projects were expected to dip 30-45% in 2020 compared to 2019, as a result of the impact of COVID-19 … The UK, however … recorded only a 17% decrease in FDI projects”.
3. “Nearly 74,000 jobs were created or safeguarded in the UK last year thanks to foreign investment. 55,319 new jobs were created in 2020/2021, which is comparable to 2019/2020”.
The Report provides much more detail on the growth of greenfield FDI in Britain in recent years.
The outcomes appear to be at odds with the anti-Brexit narratives.
This sort of evidence permits Larry Elliot to write:
Britain continues to attract more foreign direct investment than any other European country.
While it is still too early to make definitive claims about the impacts of Brexit – and may never be possible given the interruption in the data from the other multiple disturbances (Covid, war, OPEC, etc), the evidence to date – tentatively examined – suggests that Brexit has not undermined the British economy in any way remotely consistent with the predictions from the anti-Brexit lobby.
And returning to the supposition at the beginning – if they were so wrong then why trust their forecasts now about fiscal positions, etc
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.