The OECD Brexit analysis: good economics but biased presentation

The OECD’s report on the economic impact of Brexit is probably the most comprehensive and analytically rigorous produced so far (NIESR's own contribution to this debate will be published on May 10).

Post Date
29 April, 2016
Reading Time
4 min read

The OECD’s report on the economic impact of Brexit is probably the most comprehensive and analytically rigorous produced so far (NIESR’s own contribution to this debate will be published on May 10). I have little to add to, or disagree with, Chris Giles’ summaries here and here.  The OECD’s economists, who as Chris says have an excellent reputation in the relevant technical issues, can rightly take pride in their work. However, the way that the report has been presented and publicised has been blatantly political, in a way that could potentially could do serious damage to the OECD’s deservedly good reputation.

First, the report’s title “The Economic Consequences of Brexit: A Taxing Decision”. The description of Brexit as a “tax” is highlighted in the document, and even more so in the press release, which talks about a “Brexit tax”. But Brexit, and its economic impact, is not a tax in the common understanding of the word, nor is it like a tax in any meaningful economic sense. No serious economist would so describe it.  

It is entirely appropriate, based on their analysis, for the OECD to talk about Brexit having negative economic impacts. But, completely unlike a tax, the effect on household incomes will come via a number of indirect and highly uncertain channels (primarily the impact of trade on investment and productivity and hence on wages and government revenues).  It would make as much sense to describe, say, a broken leg (which might or might not affect your income, directly or indirectly, depending on who you are, what you do, and how quickly you recover) as a “tax”.  The use of the phrase “Brexit tax” is therefore unnecessary, inaccurate, and has a clear political motivation.

Second, albeit less serious, the repeated use of “per household” numbers to quantify the impact. This has already been extensively discussed in the context of the Treasury analysis, so I won’t go into detail here. Here the arguments are more nuanced, but I do find this usage confusing and often misleading, particularly when we are talking about 2030, when there is considerably uncertainty about the number of households in the UK.   

In particular, while I understand the need to put these numbers in pounds rather than percent of GDP, what is wrong with using per capita numbers?  Per capita GDP – unlike “per household GDP” – is a statistic which is generally recognised, and for which the OECD and other organisations like Eurostat publish official statistics. It is easy to understand, intuitive, and (unlike household GDP) not affected by future trends in household formation and dissolution which have nothing to do with the topic in question?  In any case, given the criticism directed at the Treasury on this point, the OECD would have been well advised to steer clear of this metric.

Finally, and perhaps worst of all, was the way the General Secretary of the OECD, Angel Gurria, described the report on the Today programme (he used similar language at his LSE speech, so this was not merely off the cuff):

Brexit is a tax.. equivalent to missing out on about one month’s income within four years, but then it carries on to 2023, 2030.   That tax is going to be continued to be paid by Britons over time….what they would have had in their pocket to spend, they would not have. Therefore it is as powerful, as real as tax.

This is nonsense. To repeat, the OECD report estimates, as a central scenario (subject to huge uncertainties) that Brexit would result in approximately a 5 percent loss of GDP relative to the base case. While this undoubtedly would make people worse off, it simply isn’t equivalent to “a tax.equivalent to missing out on one month’s income.”  Mr Gurria is an (international) civil servant, albeit a political appointee. If the Permanent Secretary to the Treasury had described the Treasury report using similar language, there would have been outrage at such overt politicisation;  Andrew Tyrie would (rightly) have called for his head.

The OECD is there to provide rigorous and politically objective economic analysis to governments and to the public In this case it has done just that. Unfortunately, that objective advice has been spun in a way which is clearly designed, not to inform voters in the referendum, but to support one side, in an explicitly political fashion.  That undermines the purpose and mission of the OECD. The General Secretary has done his own organisation a profound disservice.