HMRC’s ‘£20 billion’ hit claim
On May 23rd 2018, the head of HMRC Jon Thompson stated in evidence to the House of Commons Treasury Select Committee that the additional cost to UK companies of customs administration outside the UK Customs Union might be up to £20 billion: 1% of UK GDP, and around 6% of the value of UK trade with the EU.
These extremely high figures were jumped on by anti-Brexit MPs and the media as proof that Brexit would be hugely economically damaging, and in support of the May government’s plan to keep the UK in a customs union with the EU. At the same time, Briefings for Brexit argued that HMRC’s figures were wildly exaggerated and based on ‘shoddy calculations’.
Actual figures four to six times lower
So who was right? Well we now have actual data on one of the key elements of the HMRC estimates, which confirms that Briefings for Brexit was correct and HMRC’s claims were indeed wildly overblown. HMRC claimed that Brexit would lead to an additional 200 million customs declarations, but the official figures for 2021 show that this was embarrassingly wrong. Additional customs declarations for EU trade in fact totalled only 34 million, six times lower than HMRC estimates.
It is likely that this is an undercount, as firms were allowed to delay customs declarations in 2021 for 175 days to smooth the process of Brexit. But even if we assume there are another 15 million declarations that should be added to the 34 million, it would still mean that HMRC’s projections were out by a factor of four (and this is pretty much the best case for HMRC). This is a colossal forecasting error (Figure 1).
Source: HMRC, Author’s estimates
HMRC’s estimates for the breakdown of declarations between exports and imports were also totally incorrect. They suggested there would be over 100 million declarations for exports alone, but the actual figure turns out be 11 million – almost 90% lower. We stated that the HMRC figure for export declarations looked very strange at the time, since export declarations for goods sent outside the EU were much smaller than for imports. And it turns out that the split between export and import declarations for EU trade is indeed quite similar to that for non-EU trade (Figure 2).
Shoddy HMRC calculations
It is worth recalling just how shoddy HMRC’s calculations were in 2018. Aside from the massive overstatement of extra customs declarations, HMRC also double counted the impact on the costs of UK firms by adding in customs declarations from the EU which are not a cost for UK firms. They then added a very high estimate of rules of origin costs to produce their figure of a rise in costs for UK firms of around 1% of UK GDP.
The true cost
What is a more accurate estimate for customs costs post-Brexit? Based on 34-49 million extra declarations and a cost per declaration of around £30 (note this is a rough figure but similar to the one HMRC used) the costs would be £1.1-£1.6 billion per year, or just 0.05-0.07% of UK GDP. Importantly, this figure is very similar to alternative estimates of the cost of post-Brexit customs administration that we offered at the time. Swiss Customs estimated the costs of running their customs systems at 0.1% of GDP, and Tate and Lyle said that the annual customs-related costs of importing raw sugar were around 0.04% of the value of the product. John Mills of retail firm JML also said the HMRC figures were much too high: he estimated customs costs per container at around 1% of the value of the goods, around a sixth of the HMRC estimate for additional costs as a share of UK trade with the EU.
Rules of origin costs are an additional burden under the UK’s free trade agreement with the EU. But as we argued at the time, HMRC’s estimates of these were also inflated, being at the top end of estimates in the literature. Interviews with UK firms by the University of Sussex Trade Policy Observatory found UK firms see rules of origin as ‘a relatively minor bureaucratic process to go through when exporting but not generally a particularly time-consuming or costly one’. Extensive research by the WTO suggests that many rules of origin cost estimates are much too high: the high rate of utilisation of trade preferences in free trade deals renders claims that rules of origin costs total 4% of trade value (as HMRC assumed) implausible. Using transaction level data, the WTO found that rules of origin costs tended to be of a fixed rather than variable nature, and that ‘in many cases these costs appear to be negligible’. Based on all this, we doubt that rules of origin costs for EU trade post-Brexit can be much more than £1-2 billion, or another 0.1% of UK GDP – a cost that will probably fall over time given the fixed cost element.
What can we learn from all this? The main takeaway is that estimates of the ‘costs of Brexit’ need to be treated with extreme caution, even when they come from official UK sources. The HMRC’s shoddy calculations on customs costs are far from the only example of this. HM Treasury’s estimates of both the short and long-term costs of Brexit also featured hugely exaggerated figures. None of the Treasury’s main short-term predictions – soaring interest rates and unemployment, collapsing GDP and asset prices – proved accurate. And careful analysis by Gudgin et al. (here and here) suggests that the Treasury’s claims about the long term negative impact of Brexit on UK trade and GDP were around four times too high (a similar margin of error to that of HMRC). Other recent independent research has been scathing about the Treasury’s approach and results and suggests that the Treasury’s results for trade impacts may even have been out by a factor of eight. No government policy decisions should be made on the basis of these kinds of sloppy and skewed estimates.
Importantly, it is not just the estimates of Brexit costs from several years ago that seem to be subject to these enormous upward biases. The same pattern can be seen in more recent work too, including the embarrassingly amateurish calculations by ex-Bank of England Governor Mark Carney and the widely-quoted ‘doppelgänger’ studies which show high impacts on UK GDP, trade, and investment from Brexit by magicking up an alternative world where the UK would have grown implausibly quickly over recent years if not for Brexit (a lengthy critique of these can be found here). Unfortunately, even if the Treasury and HMRC have gone quiet, the ‘Brexit cost inflation industry’ is still firing on all cylinders.