The dog that didn’t bark in the Budget

At the Autumn Statement in November, the Office of Budget Responsibility (OBR) seemed to betray a certain frustration with the lack of information available about the government’s plans for Brexit. As I noted in my blog, flagging up a change in the OBR’s remit, the OBR confessed in its Economic and Fiscal Outlook (EFO) to being left “little the wiser as regards the choices and trade-offs the government might make” – not to speak of the cloud of uncertainty around any assurances given to Nissan.

Three-and-a-half months on, in the Budget EFO, there are no such glimpses of behind-the-scenes frustration. But the OBR seems to be no further forward in assessing the impact of Brexit on the economy.

Unlike the Chancellor – whose speech, as Ian Dunt has pointed out, was strangely silent on Brexit – the OBR can’t be accused of ignoring it. The EFO is peppered with references to the uncertainties it creates. But the OBR regards the uncertainties as so uncertain – in terms of policy, outcome and quantification – that they can’t be meaningfully quantified and built into the forecast. The assumptions therefore remain unchanged since November:

“3.3       While the Government has now set out some of its objectives more formally, there is understandably little detail about how it intends to achieve them. In many areas the policy outcome will depend not just on decisions made by the UK Government, but also on those of the parties that will be negotiating with it on behalf of the EU and other countries with which it might wish to establish new trading arrangements. …

3.4         Given the uncertainty regarding how the Government will respond to the choices and trade-offs with which it will be confronted in the negotiations, there is no meaningful basis for predicting the precise end-point of the negotiations as a basis for our forecast. There is also considerable uncertainty about the economic and fiscal implications of different outcomes, even if they were predictable. So we have retained the same assumptions that underpinned our November forecast, which are consistent with a range of possible outcomes.”  [Emphasis mine]

Given the developments since 23 November, this seems astonishing. Surely the direction of travel is much clearer? In November, the government’s line had barely developed beyond “Brexit means Brexit”, and it was primarily the noises coming from Europe that warned the Cassandras among us of the likelihood of a hard (or, worse, chaotic) Brexit. Since then we’ve had Theresa May’s 17 January speech and the White Paper. We know the government is seeking a “new customs arrangement” and intends to leave the Single Market; and the Prime Minister’s new mantra is “no deal is better than a bad deal”.

The EFO does consider some of the technical implications of a new customs arrangement, in terms of flows between the UK and the EU, describing this (box 4.4.) as a relatively complex area where they have made a fiscally neutral assumption as in November. But the document doesn’t refer at all to leaving the Single Market, nor does it mention the prospect of “no deal”.

What of Britain’s “€60bn Brexit bill”? The EFO recognises the possibility of one-off or ongoing payments related to Brexit – the “divorce settlement” – and it even refers to Alex Barker’s recent report on the “Brexit bill” for the Centre for European Reform (CER). But once again this is part of the unquantified and unquantifiable uncertainty: “no allowance can be made … until more information becomes available” (4.7), and “there have not been any developments that would allow us to make meaningful assumptions about future transfers to the EU” (4.129). So the assumption is the same fiscally neutral one made at the Autumn Statement: that any reductions in the UK’s net expenditure, forecast to be £12-13bn a year by the time we leave the EU, would be fully recycled into extra domestic spending (table 4.27).

In addition to the direct impact of any “divorce settlement” on the fiscal forecasts, the indirect impact is perhaps even more important as it’s closely linked to the question of “no deal”: will negotiations break down over this issue? Indeed, the CER report referred to above describes the potential €60bn bill as the “single biggest obstacle to a smooth Brexit”. But the possibility of the UK leaving the EU in a chaotic Brexit, with no deal, is not acknowledged in the EFO – nor was it in November. So its consequences for the fiscal forecasts remain unexplored.

One is left with the impression that, faced with an impending singularity, which is unprecedented, potentially chaotic and unquantifiable, the OBR has concluded that the consequences of Brexit are beyond its ability to forecast.

 

 


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