2 min read

Why is the Treasury ignoring arguably the most likely post-Brexit deal?

Why is the Treasury ignoring arguably the most likely post-Brexit deal?

If you follow these things, you may recall that last month, when the Treasury produced its analysis of the long-term impact of Brexit, it furnished us with three potential scenarios: 1. that Britain leaves the EU and remains in the European Economic Area (the EEA, or single market), a little like Norway; 2. a bilateral agreement option (a bit like Canada) and 3. following World Trade Organisation rules.

You probably recall that the EEA option was the least damaging, with GDP in 2030 3.8% weaker than it would otherwise have been, followed by the Canada option (-6.2%) and the WTO scenario (-7.5%).

Roll forward to today’s short-term analysis of Brexit and you might have noticed that there are only two scenarios mapped out by the Treasury. There is the “shock” scenario, which projects a 3.6% hit to GDP over two years (relative to where it would be otherwise), and the “severe shock” scenario which projects a 6% hit.

As you can see from this chart, the “shock” scenario is based on the Canada path in last month’s paper. The “severe shock” scenario is based on the WTO path (you’ll notice that the colours correlate, and this is not accidental).

comparisonscenarios

But there is no line to simulate the EEA option.

This is odd. For while many members of the Leave camp have indicated that they would not want to remain inside the single market, this is hardly a final decision, and is, for many, still the most likely option.

Either way, it is odd and inconsistent for a respected institution like the Treasury to simply change the terms of its analysis so abruptly. And it leaves one wondering whether the short-term impact of the UK leaving the EU and following the Norway path might actually not be all that harmful at all.

Might it have excluded the Norway option because, dare I ask, it didn’t result in a recession at all?

 

PS I’ve written a longer piece of analysis on the Treasury document on the Sky News website

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