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Brexit: Bank of England Report

Volume 794: debated on Thursday 29 November 2018

Private Notice Question

Asked by

To ask Her Majesty’s Government what is their response to the Bank of England’s report, EU Withdrawal Scenarios and Monetary and Financial Stability.

My Lords, the Bank of England’s analysis has been produced for the Treasury Committee and Parliament, and it is rightly produced and presented by the Bank independently of government. The analysis shows that under an economic partnership similar to the Government’s deal, there could be an improvement in the economy’s performance for the next five years compared to the Bank’s latest forecast. Over the long term, our economy will remain fundamentally strong. We are confident that the deal we have agreed provides certainty, is the best available for jobs and prosperity and allows us to honour the result of the referendum.

My Lords, in its scenario looking at terms closest to the May deal, the Bank of England analysis actually shows that GDP by 2023 will be nearly 4% below the pre-referendum trend—below what it would have been under remain. Will the Government now tell the British people very clearly that their chosen deal leaves the country not just marginally but significantly poorer, less productive and with a smaller economy than remaining in the EU? Will the Government now treat the country fairly and allow the people to vote with this full information at hand?

Similar claims were made before the referendum took place. The choice that will be faced by Parliament—by the House of Commons on 11 December —is between the deal that the Prime Minister has negotiated and no deal. The focus should be on that. The Bank of England analysis and that produced by the Government yesterday to inform that debate show that the deal proposed is overwhelmingly better than no deal. That is what we will work towards.

My Lords, in producing the report, the governor is fulfilling his obligation in preparation for the Treasury Select Committee, as the Minister has indicated. So let us have no nonsense about the fact that the governor is exceeding his powers in any respect. We would expect the Bank of England to be well informed about the present situation and to be in a position to offer warnings to the Government. The basis of the warnings is the preparedness of British industry and commerce to adjust to the catastrophic position of a no-deal Brexit and to the Government’s proposed position. Is it not clear that the Minister needs to convey to his colleagues that there is enormous anxiety about the lack of preparation for the development of deals, which will be far below the level anticipated when the negotiations began? The governor is quite right to have identified in his report the Bank of England’s anxieties.

The noble Lord is absolutely right: the Bank of England has a statutory duty to inform its own analysis and to look at the worst-case outcomes to ensure that the economy is resilient to meet them. That is for the Financial Policy Committee and the Monetary Policy Committee to undertake, and they do so routinely. What is different about this analysis is that it was prepared at the request of the Treasury Committee in another place to inform the wider debate that it will have. Next week, the committee is taking evidence from the Chancellor of the Exchequer, and that will all be thoroughly debated ahead of the vote on 11 December.

My Lords, I greatly admire the economic acumen of the noble Baroness, Lady Kramer, and I agree that these long-term projections for GDP are a bit scary—but they are probably not very accurate. However, is she not, along with many other people, confusing the narrow and misleading measure of GDP with the real drivers of our welfare and prosperity? Does my noble friend agree that many economists today realise that, to measure our welfare and prosperity, we have to look at much wider factors that assess our national dynamism and innovation? Economists today are facing an economics revolution, and are putting in its place the wrong-headedness of focusing just on the old GDP figure, which frankly belongs to another age.

We do indeed need to look at a range of figures. The most reliable measure is what business is doing. Businesses are hiring people, which is why we have record levels of employment; businesses are exporting, which is why we have record levels of exports; and businesses from overseas are investing in Britain, which is why we have the largest stock of FDI in Europe. That is the true evidence that we need to look at.

My Lords, is it not surprising that someone should say that by using the measure of GDP, which is consistent with the OECD and every other major nation’s measure—one could discuss reconciling income, output and expenditure at some other point—the Governor of the Bank of England is inventing some sort of false crisis? Is it not the case that the charge concerning Project Fear has been replaced not by evidence and forecasting for the future but by decisions by industry, which are now being announced? In Britain, FDI decisions—not forecasts—are down 80%.

The noble Lord has great expertise in economic analysis. He will recognise, therefore, that what we are discussing today is a scenario: it is a tool that is used to assess and stress-test risk. What is being put forward here is a worst-case scenario. I am not a pessimist; I am an optimist and a believer in the best possible outcome. I believe that that is the Prime Minister’s deal, which I hope will be supported.

My Lords, is my noble friend aware that the report assumes that imports into this country will decline by 15% because of what it calls additional customs checks? However, customs checks are carried out on the basis of risk. The customs computer selects 1% of consignments for physical checks. The head of Customs and Excise and the head of sanitary and phytosanitary services have said that there will be no additional checks post Brexit because there will be no additional risk attaching to imports into this country. We were told that the Bank of England was acting independently of the Government: is it acting in ignorance of the Government’s own policy?

We do not want to detract from the fact that the Bank of England has a duty to stress-test the economy against a range of possible outcomes. Normally those scenarios are considered in private to inform the work of the various committees of the Bank in reaching their decisions. Perhaps uniquely in this case, they have been made public along with the assumptions which underpin them, as my noble friend has highlighted. However, these are worst-case assumptions. It is right that the Bank should look at a range of outcomes, but it is also right that we should consider other analyses, such as the analysis the Government produced yesterday.

My Lords, in answering the first question the Minister referred to the mismatch between predictions made prior to the referendum about the growth of the economy and what happened subsequent to the referendum—not subsequent to now but subsequent to the referendum. There were numerous forecasts. Will he helpfully put the various forecasts that were made—including from the Treasury and the then Chancellor, for example—in the Library so that we can see the evidence that the Liberal Democrats’ spokesman was asking for and have the facts about the colossal mismatch between previous economic forecasts on this issue and what has actually happened?

We were covering that very point when the Office for Budget Responsibility produced its forecast along with the Autumn Budget. This showed that the forecast made in April about what would happen was underscored, and actually we achieved more. It increased its forecast going forward because it believed there would be more employment, more taxes and less debt.

My Lords, in defence of the Governor of the Bank of England, can my noble friend confirm that these are not forecasts but scenarios whereby the Government think of three impossible things that could happen before breakfast and then ask the banks to plan accordingly to show that they would have the capital required to meet those extreme conditions? To present these as forecasts is misleading and undermines the Bank of England in carrying out its responsible activities.

My noble friend has immense experience in the financial services sector and banking. What he sets forward is precisely the position. These should not be misinterpreted. They should be placed in the wider debate going forward and not taken out of context. I wholeheartedly agree with him.