Paul Whiteley FBA, FSS, BA (Econ) (Sheffield), MA, PHD (Essex) is a Professor of Government at the University of Essex. His research interests include electoral behaviour, public opinion, political parties, political economy and methodology in the social sciences. He has held previous appointments at the Universities of Sheffield, Bristol, Arizona and the College of William & Mary in Virginia.
He is the co-author of eighteen academic books and has authored or co-authored 110 academic articles. He has acted as an academic advisor to the Home Office, to the Department of Education and to the Speaker of the House of Commons.
Speculation about the effects of Brexit on Britain’s economy reminds me of the comment by the famous Hollywood script-writer William Goldman when writing about what it takes to make a hit movie: ‘Nobody knows anything – Not one person in the entire motion picture field knows for certain what’s going to work’. We are in a similar position to this in forecasting the long term consequences of Britain leaving the European Union. Despite this, in April 2016 the UK Treasury produced a report on the long-term effects of Britain leaving the European Union and made forecasts about the financial consequences up to the year 2030 (HM Treasury, 2016). The report examined three alternative scenarios and one of them attracted considerable attention during the referendum campaign when Chancellor George Osborne quoted the estimate that the average family would lose £4,300 a year from Brexit by 2030.
The first of the three Treasury scenarios is referred to as the ‘Norwegian’ option and is based on the assumption that Britain would have a similar relationship to the EU as Norway. That country is not a member state but has full access to the single market, and has to pay for this by contributing to EU budget and accepting free movement of labour. This is now commonly referred to as the ‘soft Brexit’ option. The second scenario is based on the option of negotiating a bilateral agreement with the EU in a similar way to Switzerland and Canada. The Comprehensive Trade Agreement between the EU and Canada, for example, lowers tariff barriers, co-ordinates trade regulations and actively promotes cooperation between the two, but it does not involve free movement of labour. We might describe this as ‘middle-ground Brexit’
The third scenario is referred to as the World Trade Organization option in which Britain would leave the single market and create a new trading relationship with the EU and other countries based on tariffs negotiated by the WTO and which currently apply across most countries. On average, the tariffs are not large but this option involves raising tariffs and other barriers to trade between Britain and the EU. This is the ‘hard Brexit’ option and is increasingly favoured by the Conservative government, anxious to avoid accepting free movement of labour.
The Treasury report provided an overall evaluation of the costs of each of these scenarios based on some econometric modelling and they were all rather pessimistic. They suggested that the annual loss of household incomes for every family in Britain by 2030 would be £2,600 for the Norwegian option, £4,300 for the middle ground option quoted by Osborne, and £5,200 for the World Trade Organisation alternative. The report acknowledged that the estimates are subject to considerable uncertainty, but nonetheless argues that they are an accurate representation of the future. Thus the overall picture emerging from the report is one of significant long run economic losses resulting from the Brexit decision. At the present time a loss of £5,200 to the average family in Britain, for example, represents just under twenty per cent of their household incomes. If this happened it would be a threat not just to the coffee and hospitality markets, but to consumer spending and economic prosperity more generally.
The Treasury modelling represents state of the art econometrics, but it suffers from at least two serious problems, which cast considerable doubt on the validity of these forecasts. The first problem is uncertainty, something which has been known about for a long time. The point is that it is really impossible to project economic growth forecasts some fifteen years into the future with any chance of obtaining reliable results because there is so much uncertainty about how the economy will develop over that period. All forecasts are based on projections of what has happened in the past and these get more and more uncertain the further they look into the future. The great economist John Maynard Keynes, one of the first people to write about this said: ‘If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London, amounts to little and sometimes to nothing’ (Keynes, 1936: 149-150). To illustrate this point, if in 2005, a couple of years before the financial crash, forecasters had predicted that interest rates on savings would fall near to zero and remain that way for years, they would have been laughed at. However, that is exactly what happened.
The other problem is that the Treasury models are based on ‘General Equilibrium’ theory, which is a mathematical model of the economy. It assumes that economies are basically stable and adjust to any shocks which occur over time. Unfortunately the theory rules out the possibility of anything like the Great Recession of 2007 to 2013 happening. In contrast, the unorthodox economist, Hyman Minsky did predict the recession from a radically different perspective from that of the Treasury. Minsky’s argument is that modern market economies are inherently unstable and that conditions for a crisis are created during periods of prosperity. If Minsky is right then the basic assumptions underlying the Treasury forecasts are unreliable making projections fifteen years into the future highly problematic.
Given this can we say anything about the effects of Brexit on coffee sales and the leisure industry in Britain more generally as a consequence of Brexit? The Great Recession was the worst financial crisis since the 1930s, and it produced a rapid increase in unemployment rising from 5 per cent of the workforce in early 2008 to 8 per cent by the end of 2009. This shock to the system was much worse than any plausible loss of prosperity in Britain due to Brexit. The chart shows the effects of the crisis on total spending on coffee, tea and cocoa in Britain, according to the Office of National Statistics which bundles these all together in their database. Spending on these beverages grew in each successive year from about £550 million in early 1997 to about £700 million in the third quarter of 2007 when the financial crisis hit the economy. The effect of the crisis was to stop the growth in spending but not to significantly reduce it, and by 2015 the growth in spending was showing signs of recovery.
In the year 1700 London had hundreds of coffee houses, and so Britons have been used to drinking coffee for centuries even if in those days they didn’t all choose ‘flat whites’. This fact together with the trends in recent years means that it is doubtful if even the worst case scenario for Brexit will have any effect on coffee consumption in the long run. If as Boris Johnson argued during the referendum Brexit will stimulate economic growth, then coffee consumption is likely to rise further in the future.
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