The UK’s economic relationship with the European Union: The Government’s and Bank of England’s Withdrawal Agreement analyses Contents



1.After an extensive exchange of letters and with discussion at various oral evidence sessions, the Committee expresses its disappointment that the Treasury did not provide all evidence that the Committee requested. The Treasury did not produce short-term analysis of any scenarios. The Committee is also disappointed that the Treasury modelled scenarios that have been rejected by the EU (i.e. Chequers) yet did not model scenarios that are considered probable and have the potential to be persistent over the medium to long term (i.e. the Backstop). And while the Office for Budget Responsibility now undertakes this sort of short-term analysis for the Budget and other fiscal events, the OBR can only forecast based on stated Government policy; the political declaration is only a statement of intent. Therefore, there is no short-term analysis of the deal upon which Parliament will vote. (Paragraph 10)

2.Notwithstanding this objection, the Committee is grateful that all institutions responded to the request in good time to enable the challenging programme of scrutiny and to allow a report to be produced ahead of the “meaningful vote”. (Paragraph 11)

The Government’s EU exit scenarios

3.CGE models are widely employed in economic analysis of international trade. The Government’s model has the advantage of analysing decisions about trade at a significant level of sectoral detail. It also analyses the economy in the long term only, assuming there is full employment of capital and labour. As such, it does not show how the economy will transition to the new trading relationship, the path taken by inflation and unemployment, and whether the transition could result in increased structural unemployment. (Paragraph 18)

4.The White Paper scenario represents the most optimistic and generous reading of the Political Declaration, insofar as it is consistent with it at all. It certainly does not represent the central or most likely outcome under the Political Declaration, and therefore cannot be used to inform Parliament’s meaningful vote on the Withdrawal Agreement. (Paragraph 25)

5.Parliament may prefer to draw from the range of the scenarios in the Government analysis, additionally informed by external analysis and comment, in order to assess the economic impact of the Withdrawal Agreement. (Paragraph 26)

6.Trade agreements can take four years to agree, and previous EU negotiations, have taken longer. The CETA deal took over eight. Therefore, the Committee believes it is feasible that the UK could enter the Backstop, despite it being neither the UK’s nor the EU’s preferred position. And it believes that the Government should have modelled the Backstop, making some broad-brush assumptions. (Paragraph 40)

7.The Government has provided long-term regional and sectoral analysis of a number of EU exit scenarios. However, the Committee notes that it did not include analysis of the Backstop nor did the Committee receive short-term regional and sectoral analysis showing where losses and gains in jobs are most likely to be located as the economy adjusts to a new trading relationship. (Paragraph 50)

8.It is worth emphasising that the Treasury analysis makes no allowance for any other dynamic, domestic policy responses, such as policies developed under the Industrial Strategy, that could affect the impacts of the EU Exit scenarios on regional and sectoral growth. (Paragraph 51)

Key assumptions in modelling the economic impact of withdrawing from the European Union

9.The Committee finds it hard to fathom why the traders who currently trade only with the EU were not written to long before this time. And it is of the view that these and other preparations should have started sooner. (Paragraph 100)

Fiscal implications of EU withdrawal

10.The Committee notes that the Government’s economic analysis does not include any fiscal policies that would be required in response in any scenario. The Chancellor told the Committee it would be implausible for the Government not to respond in a No Deal scenario with automatic stabilisers and additional discretionary fiscal fire power. The debt-to-GDP figures in the Government’s No Deal scenario therefore cannot be quantified. (Paragraph 114)

Published: 11 December 2018