Economists of the Treasury have been accused of being ‘overly pessimistic’ with their estimates on the potential impact of Brexit on the British economy.
The Treasury’s Gravity Model had estimated that trade in goods is currently 115 percent higher with the UK in the European Union than it would be post-Brexit. It had also predicted that the impact of Brexit would cause a crash to UK GDP by up to 9.5 percent if the UK was to default to standard WTO rules for trade once it has left the bloc. A more detailed analysis of the model conducted by think tank Policy Exchange denounced this, finding that ‘the estimated loss of UK trade is only 23 percent.’
The Gravity Model based its findings on Europe-wide economic averages without taking into account the differing sizes of the economies. It also over-emphasised the importance of UK exports to the EU. ‘The Treasury’s models did not take into account that not all economies are created equal and the UK is a significantly larger and stronger economy than many of the smaller countries which were given equal weight in the model,’ said Graham Gudgin, Policy Exchange’s chief economic advisor and economist at the University of Cambridge.
The think tank’s paper said that ‘a smaller economic impact is in line with our view that the small average external tariff of the EU, together with the fact that most UK firms are already compliant with EU regulations, will mean that the impact will be more limited than the Treasury estimated.’
Gudgin has said that ‘the overall conclusion that the effect of leaving the EU on economic growth, while negative, will be small, and any associated knock-on impacts will similarly not be large.’
The Gravity Model—dubbed ‘Project Fear’—was commissioned by former Chancellor George Osbourne. The pessimistic predictions were used by the Remain campaign during the referendum in 2016 to solidify their position hat the impact of Brexit on the British economy would be detrimental.