Should-Read: Simon Wren-Lewis: The OBR and the Impact of Brexit

Should-Read: I want the opinion of Sherman Robinson of IFPRI and PIIE on this: Sherman?

Simon Wren-Lewis: The OBR and the Impact of Brexit: “The debate about whether the OBR is being too pessimistic about the impact of Brexit…

…lower immigration from the EU and lower productivity. The two are linked…. The OBR also assumes that Brexit will reduce the trade intensity of the UK: less exports and imports. This is pretty obvious to anyone who has looked at international trade: transport costs may not be as high as they once were, but gravity equations tell us that geographical distance is still a key factor in influencing whether trade takes place, which means that reduced trade with the EU will not be matched by new trade outside the EU. The Treasury analysis of Brexit assumed that this lower trade intensity would also reduce productivity. The OBR do not include this effect, calling it too uncertain. This is a slightly surprising judgement….

None of these transmission mechanisms from greater trade to higher productivity are particularly fanciful: they all make common sense (at least as seen by an economist). They are all one directional, which means assuming an effect of zero is an extreme point in every case. In this sense, the OBR is being rather optimistic about the impact of Brexit on the UK economy.

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