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Leaked government papers give us an excellent insight into Whitehall's latest thinking on the economics of Brexit. Now, before the referendum we had lots of figures coming out of government but that was dubbed as Project Fear. The question is, what does government think now Brexit is the policy? The first scenario is a hard Brexit scenario where Britain falls out of the EU and falls back onto World Trade Organisation rules. Then, Whitehall now thinks, the hit the economy over 15 years will be 8%. In April 2016, it thought 7 and 1/2%. But it's worse than that because now the government is assuming there will be free trade deals with the US, China, India, and other countries. In April 2016, it thought none of these things would happen.
The second scenario is a comprehensive free trade agreement. Call that a Canada model. Then it thinks there will be a 5% hit to the economy over 15 years compared with a 6.2% hit in April 2016. So on this model, it's a bit better than they thought before the referendum. But again, remember this time around, they are assuming free trade deals. Last time around, they assumed there would be none.
The third scenario is a soft Brexit, a Norway style remaining in the European Economic Area. Then, the government thinks there will be a 2% hit to the economy compared with 3.8% in April 2016. But this is politically highly unlikely. In fact, the government's policy is not to have a soft Brexit and to leave both the single market and the customs union. Put this all together, and Whitehall now believes that our hard Brexit is even worse for the economy than it thought in April 2016. But a soft Brexit, the hit isn't so large.
So the big political question is why is government policy much closer to the hard Brexit option when its own studies suggest this is really bad for the UK?