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Brexit and Forecasting

01 June 2016

In this blogpost, Professor Robert Fildes from the Centre for Forecasting offers his thoughts on the various forecasts offered by both the Remain and Leave campaigns. 

The debate around the referendum has been a mixture of bluster, assertion and counter-assertion. But some of these claims have better foundations than others. And these foundations are often forecasts, shaky though they often are. Let’s look at just some of the areas where the two sides have clashed over the forecast future post-Brexit.

For many if not most voters the economic consequences of leaving the EU are the most important issue. “It’s the economy stupid”. The Institute of Fiscal Studies’ forecasts are perhaps the most authoritative. They look to a disastrous short term effect and not much better for the longer term Their approach was to use an average of the GDP forecasts from other sources including the model-based National Institute’s forecasts, translating that into the implications for austerity using a simple multiplier mode. The Treasury agreed, forecasting a recession and an increase in unemployment. Only the group ‘economists for Brexit’ could see a positive economic future. Other estimates of the long term damage to GDP varied from -0.3% to -7.9% with median -2.9%. Effectively the approach adopted of averaging economic forecasts from a range of sources and methods has proved best in many appraisals of macro growth forecasts. But often the shared assumptions are where forecasts fall down – and this is quite likely here given the heat of the campaign.

Not content with rising inflation and unemployment, house prices are expected to fall – but that’s perhaps a good thing! The latest ‘scare’ is the forecast effect on pensions from a declining stock market. In summary, the economic arguments favour staying in with the leave campaign offering nothing more than wishful thinking that it will be ‘alright on the night’. Only a limited number of groups who share the conclusion that leave is the correct policy are sanguine about the likely economic effects. That’s no way to select a group of economic forecasting experts. Norman Lamont, the UK’s ex-chancellors warns that such forecast of doom could be self-fulfilling. True, but not a reason to suppress the discussion and pretend there are no foreseeable consequences of the alternative policies.

Where it comes to security and defence, both sides have been mustering their own experts. We can’t really judge which are the more plausible – but again, the reliance on experts committed to one side of the campaign or the other delivers only low credibility and low accuracy forecasts. Perhaps the key is to ask what those doing the job now say?

Finally, the migration forecasts: these are the heart of the leave campaign. The leave campaign has raised the prospect of Turkey joining the EU and having open access to its labour markets. This then translates into a high influx of Turks – but the two assumptions Leave makes are implausible. The high level of current immigration would potentially be controllable if we were to leave – but that does depend on the treaty that is agreed with the remainder of the EUR. It hasn’t been achieved by countries such as Norway and Switzerland who wanted trade agreements. So both sides have little evidence to support claims that migration will be better controlled.

This is my appraisal of the forecasts used so extensively as a part of the referendum campaign. Many of the stories around the forecasts aim to scare. But are these all scares or is there substance behind some of the arguments. While certain of the groups of forecasters are biased (as in any group forecasting exercise) the effect of averaging will to a certain extent wash these biases out. In the short-term (two or three year) economic arguments behind the forecasts (from independent bodies) have credibility. Chancellors and ex-chancellors are always happy to rubbish the forecasters when it suits them– but these independent forecasts are the best we can arrive at, and they are certainly better than the biased readings of entrails that the two campaigns provide themselves.