The economic cost of the Brexit decision that Leaver voters do not get to see

Those promoting Brexit are fond of saying that it’s not about economics. Gary Younge in the Guardian tells us that there is nothing wrong with poorer people voting to be worse off, and of course he is right if that is what they knowingly do. But polling evidence suggests that only a small proportion of Leavers think the economy will be worse because of Brexit. Here are the results from three consecutive ORB polls (via here) where the respondents are only Leave voters.

As a result of leaving the EU, the UK’s economy will be
Date of poll	Better	Same	Worse
May 2018	42%	41%	16%
Nov 2018	39%	43%	18%
Jan 2019	26%	47%	27%

In May of last year, only 16% of Leave voters thought the economy would be worse off after Brexit, and incredibly 42% thought it would be better. As the table shows this view has only begun to shift in the last few months, and as John Curtice points out this has coincided for the first time with more Leavers than Remainers changing their minds about Brexit.

This tells us two important things. First, the Project Fear mantra worked. The Leave campaign, with the essential help of the Brexit press, managed to convince people that all this talk that the economy would be worse off after Brexit was false. Second, when the small percentage who think Brexit will damage the economy increases, support for Leave falls. Correlation does not prove causation, but this evidence suggests we should be sceptical about claims that Brexit is all about values and not about the economy.

So why are some Leave voters only now realising that Brexit will have a negative impact on the economy, and three quarters still think otherwise? After all, everyone was made worse off as inflation increased following the collapse in sterling immediately after the vote. According to one study, by the third quarter of 2017 the average consumer was worse off by £400 as a direct result of paying higher prices for imported goods following that depreciation.

The problem of course is that those price rises didn’t have a ‘made by Brexit’ tag attached to them. If you read the Financial Times of course you understood the connection, but if you read a Brexit newspaper and watched the 10 o’clock news those connections will not have been made, or if they were they would be muddled by Brexiters claiming the depreciation would be great for exports. It wasn’t great for exports, for straightforward reasons. I suspect some Leavers are only now changing their mind about Project Fear because they are seeing on the news iconic UK companies either cancelling investment projects or threatening to leave because of Brexit.

The problem is that there is no mirror image of the UK economy that didn’t vote for Brexit that voters can easily look at and see how much they are currently worse off. People cannot easily see that they are already paying a price for Brexit because firms and markets are anticipating what will happen after we leave. But it is possible to do the next best thing, and try to create a synthetic UK economy that didn’t vote for Brexit by looking at how other similar economies are doing. We know the UK has moved from around the top to around the bottom of the international growth league, but what does that actually mean for individual households?

That is the exercise that John Springfield at the Centre for European Reform is regularly doing, and he calculates that GDP was 2.3% lower in September 2018 as a result of the Brexit vote. That roughly translates into the average household losing almost £2000 worth of resources (mainly lower private consumption, but also lost public spending and investment). This number is broadly consistent with estimates the Governor of the Bank of England gave in May, using a different method.

To get a handle on how much public resources we are currently losing as a result of Brexit, Springfield calculates that GDP loss would amount to taxes being lower by £17 billion a year. Given the way this government runs its fiscal policy, that means we could have had tens of thousands more police officers and nurses if Brexit had not happened. This isn’t a forecast, but an estimate of what Brexit has already cost us.

Why has Brexit slowed the economy by enough to lose the average household resources worth almost £2,000 before we have even left? The answer is down to anticipation and uncertainty over what Brexit will mean. The foreign exchange markets had to anticipate the impact Brexit would have on future UK trade, and that was a major reason why there was an immediate collapse in sterling after the vote. Uncertainty about which kind of Brexit the UK would choose has mainly affected investment. In the chart below the Bank of England show how business investment has flatlined since the referendum, when the evidence from previous recoveries suggest it should have shown strong growth.

In addition the number of foreign direct investment projects coming to the UK, which was on a rising trend until 2015, has been falling since the 2015 election when it became clear there would be a referendum.

Will investment bounce back once Brexit uncertainty has been resolved? Certainly not if we leave with no deal, because industry's worst fears will have been realised. Even if we leave on the terms of the current Withdrawal Agreement there are two reasons to think the investment bounce back will be small. First uncertainty does not disappear. Will the government manage to agree a new trade relationship before the transition period runs out, or will we go over another No Deal cliff edge? Second, the decline in investment involves some anticipation as well as uncertainty, with a lot of service sector investment diverted towards investment in the remaining EU economies. All the time investment in the UK remains depressed this eats away at our ability to produce, at our productivity and therefore future living standards. As austerity showed, prolonged periods where the economy is depressed will have permanent negative effects.

Imagine if someone came to every Leavers door demanding nearly £2,000 for their household’s current contribution to Brexit. The evidence suggests that Brexit would quite quickly become about the economics. One of the reasons Brexit can happen is that its economic costs are not immediately visible. It is experienced but not isolated as a Brexit effect. It can be estimated to a reasonable degree of accuracy by experts, but the Brexit press keeps going on about the pre-referendum Treasury forecast and the broadcast media prefers a quiet life to routinely quoting these expert assessments. Brexit is not about the economy only because Leave voters are being kept in the dark about the impact Brexit is already having.

Labour MPs are keeping Corbyn in power

If the title seems weird, remember that Corbyn only got onto the ballot in 2015 because some MPs felt it would be good for Labour party democracy if the left was represented. The current rule is that 15% of MPs and MEPs have to nominate you if you want to stand as Labour leader. That rule can preclude anyone from the left getting onto the ballot given the current composition of MPs and MEPs. Corbyn’s team want to turn 15% into 5%, but the great majority of MPs will do what they can to stop that happening.

It is this that is keeping Corbyn in power. A majority of Labour party members want to be able to vote for someone from the left in any future leadership election. If the 15% stands, that seems almost impossible. These members therefore want him to stay in power for as long as it takes to change the 15% rule. But Labour MPs have no intention of giving way on this, because they believe that if the rule is changed the left will have a stranglehold on the leadership, given the current composition and views of members. That is how Labour MPs are keeping Corbyn in power.

Corbyn’s popularity among the membership has changed significantly since the 2016 election. Then he won easily. Since then his popularity has decreased substantially, in part because of his poor handling of Brexit and also because it has become more difficult to claim that his unpopularity in the polls is due to Labour disunity. But MPs will not put up a challenger, because they suspect the challenger will fail. It will fail because by voting for someone who supports the 15% rule members believe they will be voting for their own disenfranchisement. This has become a power struggle between MPs and members, and Corbyn is becoming just a pawn in this game.

If that seems fanciful to you, just consider what happened last time round. In an emotional response to the referendum defeat, MPs passed a vote of no confidence in Corbyn. It was a challenge that was far too soon, giving the impression among members that Corbyn was only doing badly because Labour MPs were out to get him. The challenger that MPs chose for the subsequent election contest, Owen Smith, adopted virtually the same policy proposals as Corbyn/McDonnell, but crucially did not back changing the 15% rule. As a result, the members understandably responded by saying if you do not trust us, we do not trust you.

Owen Jones has called for a deal whereby Corbyn would step aside in return for someone from the left being on the ballot to replace him, but I cannot see MPs agreeing to that. Their strategy is to exhaust Corbyn and the membership, and preserve the 15% rule at all cost.

This is not so much a battle about policies as a battle about power. MPs intend to win it by keeping the 15% rule, and waiting for Corbyn to go through sheer exhaustion, or waiting for members to give up and hand power back to MPs. Labour members hope Corbyn can hang on long enough to change the 15% rule. Events like Brexit, Scottish independence and a general election just pass by, only mattering if they have implications for who achieves final victory in this war.

Now many in the political commentariat will assume that of course Labour members cannot be trusted, and so the strategy of Labour MPs is correct. Their pleas for Corbyn to ‘for pity’s sake go’ are just for show. But if that is also your view, consider two points.

The first point concerns MPs. The current decline of the Labour party as an effective opposition did not begin with Jeremy Corbyn. It began, as Larry Elliott clearly delineates, with the global financial crisis that happened on Labour’s watch. The unforced errors began when Ed Miliband, and the team around him, made the fatal mistake of not challenging the Tory narrative about the previous Labour government. That mistake meant that Labour was blamed for austerity, Labour were not trusted with the economy, and Miliband’s poll ratings just got steadily worse, even though many voters were experiencing an unprecedented decline in real earnings.

It was MPs reaction to the 2015 defeat, and a general belief among many of them that Labour had to move further to the right, which ensured a victory for the left in the subsequent leadership elections. Corbyn and McDonnell tried to create an opposition of all the talents (or at least those that were willing) and reach a consensus on policy. But at each turn they were met by a small group of MPs that constantly briefed against them, and other MPs that did nothing to stop this. Anyone with a clear head could see this strategy by rebel MPs was totally unproductive: Corbyn had to be seen to fail on his own account.

The most recent misjudgement by MPs was over Brexit. Again Corbyn gets all the attention, but it was the majority of MPs that decided they should focus on the challenge from UKIP and vote to give May total authority over the negotiations. I think this misjudgement epitomised almost a decade of bad decisions all of which involved an element of appeasement. John Curtice has explained why, with most Labour voters choosing Remain, voting through Article 50 was a very odd decision. As I’ve argued here, the referendum placed no obligation on MPs to vote to allow May to choose a Hard Brexit. If you are unconvinced about this, imagine the referendum had been to do nothing about climate change. Would MPs have been obliged in that case to follow the ‘will of the people’? Would it have been right to ignore a clear consensus among experts that their implementation of the vote would be disastrous? The actual EU referendum has the same ingredients as this imaginary case.

The second point is about membership. There is one clear Labour achievement since 2015, a huge increase in membership which numbers more than all the other parties combined. Is it really healthy that this should be regarded by most MPs as a problem? Arguments that half a million people are either Trots or under the influence of Trots are nonsense. Although it was Corbyn who inspired the increase in membership, it was not the left that wrote the rules that allowed the leader to be chosen by the membership alone. Having tried to make the leadership election more democratic, it is not plausible to then turn round and say you got the wrong half million.

There is a legitimate concern in allowing members to have almost complete control over which MP they choose as leader. It is not that they will choose a leader who is too left wing, but instead that they will underrate the importance of being able to win general elections, or at least not fully appreciate what it takes to win these elections. To this I would add that the membership may be insufficiently ruthless in getting rid of a leader who is failing to win, particularly when this failure is often very unfair (given our media, for example). But with questions like this we have also to ask whether MPs would be much better at judging success and punishing failure, and the experience with Miliband plus the constant attempts to appease the right suggest not. [1]

Elliott describes how many of the policies that Labour currently put forward - Brexit aside - are broadly popular when tested with the public. However if you attach the name Labour to these proposals, their popularity decreases sharply. Those who say Labour have become unpopular because they have ‘moved too far to the left’ misunderstand what is going on, or have more questionable motives. Elliot describes it as Labour becoming a toxic brand. Corbyn is part of that, but only part. The record indicates MPs are also responsible for the current mess.

As John Curtice explains, the question is not will the brand survive, but how and when it will recover. I can see two ways forward. The first way is for MPs to trust their membership, change the voting rules, and allow Corbyn to resign sooner rather than later. If he does not resign, the left has to bring forward a challenger. With good judgement, the new leader can lead from the left but with policies that the broad church that is Labour can live with, combined with a strategy for convincing the electorate that would make Owen Jones happy. The second way is that MPs keep the 15% rule, wait for Corbyn and the membership to give up exhausted, and then hope for a Macron type figure to emerge from among their number. The key question is which of those two do you think is more likely to give us a plausible candidate for Prime Minister?

[1] The Conservative Party shows that members can learn. They chose Cameron not because they wanted to modernise, or be green, or hug hoodies, but because (after 2 defeats) they realised the party needed to bury the image of the nasty party and they saw in Cameron a person who could achieve that.

Where Labour went wrong

When the New Statesman asked me to write something on Osborne’s budget surplus law, they also suggested I talk about what Labour’s attitude should be. Space constraints meant that I could not say much on the second question, so let me amplify here.

Let's start in 2009. The Labour government's policy at the time was absolutely right. They provided fiscal support for the economy in the midst of the recession even though it meant increasing the deficit. Given the belief at the time that the recession might be short lived their policy was also quite clever, using a temporary cut in VAT as a close proxy for looser monetary policy.

What line should they have taken in 2010? I remember reading some reports that Gordon Brown initially wanted to continue placing the recovery above the need to reduce the deficit. If true, he was right. However it was perhaps inevitable that Labour began to also focus on deficit reduction: the recovery looked like it had begun, the debt problems in the Eurozone were constantly in the news, and the Conservatives and much of the media were saying we could become like Greece. So they instead fell back on the idea that recovery could be achieved at the same time as implementing policies designed to reduce the deficit. We can call this the ‘too far, too fast’ period, from the mantra Ed Balls used to criticise George Osborne’s policy.

This was when they made their first big mistake. Both Coalition parties had developed their own mantra, which I can call the ‘clearing up the mess Labour left’ line: Labour profligacy had maxed out the credit card, and so difficult measures would be needed. This is what Bill Keegan calls the big lie. Apparently Alastair Campbell advised Ed Miliband to get an independent figure to do a report on Labour’s fiscal record in an effort to counter this lie, but this advice was rejected. (The paper I wrote came out in 2013, but still to my knowledge Labour has never used it.)

I have seen two reasons given for why Labour chose not to defend its record: Miliband wanted to establish his independence from a government that had lost an election (to ‘move on’), and it was thought that the Coalition strategy of blaming the last government would lose its potency after a year or two. The second argument proved horribly wrong. Instead the ‘clearing up the mess’ line was used to blame Labour for damage caused by 2010 austerity. It was complete nonsense, but it worked. 

In a way 2011 and 2012 were too easy for Labour: the economy was stagnant and Osborne looked vulnerable. But Labour should have anticipated that growth would return at some point before the election - if I could, surely they could. They will not have anticipated the stagnant productivity that allowed unemployment to fall so rapidly, but in political terms growth would have probably trumped high unemployment anyway, as I suggested back in 2012.

What should have happened in 2012 is that the ‘too far, too fast’ line should have changed to become a full blown attack on austerity: that was their second big mistake. By 2012 it was obvious that fears about a UK debt crisis had been completely overblown. The problem with ‘too far, too fast’ is that it sounded like austerity-lite: the need to focus on the deficit was conceded. Labour could have easily got away with changing its line at this point. They could have said that we thought there was a debt funding problem, but now we know there wasn’t. The argument that austerity should be postponed until the recovery is assured (i.e. when interest rates are well away from the Zero Lower Bound) was right in terms of the macroeconomics, but it would also have allowed Labour to combat the ‘clearing up the mess’ line, and profited from Osborne’s move to plan B.

Instead Labour seemed to be constantly triangulating between sensible macroeconomics and what the focus groups were telling them, and thereby producing a policy that failed to convince. Their fiscal policy proposals going into the 2015 election were much more sensible than George Osborne’s, but instead of attacking his renewed austerity they tried to pretend that they too were ‘tough on the deficit’. It was left to the SNP to argue against austerity.

The problem was that instead of presenting a clear alternative vision, Labour looked like it was always playing catch-up with Osborne. As John Curtice writes: “the Achilles’ heel of Labour’s campaign appears to have been a failure to convince those who were sceptical about the Conservatives’ economic record that Labour offered an attractive alternative.” As Lord Ashcroft’s polls show, and as I noted sometime before the election, by 2015 around half the public were against the continuation of austerity, yet Labour’s message on this was confused.

Today Labour continues to think that triangulating on the deficit, or worse just copying Osborne, is the answer. I think this tells us a great deal about the Labour party. That it is light on good macroeconomic advice and expertise, of course. But also that it spends too much time listening to people in the Westminster bubble and fails to spend time thinking about basic electoral strategy.

What Labour needs to ask now is what will prevent the Conservatives convincing the electorate in 2020 that Labour just cannot be trusted on the economy? Admitting their past fiscal mistakes when in government now, however much that is partial and hedged, will just give ammunition to their opponents in five years time. (Just read this, and extract the quotes.) More serious still, by allowing the focus to remain on the deficit, it lets Osborne get away with the damage he inflicted in 2010-2012, and the continuing social costs of austerity. What is the point in talking about the record on growth or productivity, when you appear to have conceded that reducing the deficit is all important, and Osborne is doing plenty of it?

In my New Statesman piece I say it is still not too late to change tack, stop triangulating and try something new - to start telling the truth. But I think there is a danger that this sentence frames the discussion in the wrong way, so it appears to be a contest between pursuing the right policy and winning elections. This post is all about the best way of regaining economic credibility, which means taking a strategic view rather than looking at what sounds good to today’s focus group. Put simply, if around half the electorate already think austerity should not continue, why on earth are Labour giving in to deficit fetishism? In electoral terms, the fact that attacking austerity is also good macroeconomics is just a bonus.