Carney left with only bad options if Brexit crashes economy

Mark Carney has warned that a no-deal Brexit could lead to an economic crash on the scale of the 2008 financial crisis. This deserves to be taken seriously, and it is noteworthy that The Times reports even the Cabinet’s ardent Brexiters didn’t challenge his assessment. That does not mean, however, that we should heave a massive sigh of relief if Theresa May instead negotiates a miserable deal. There is a better option: a People’s Vote at the end of the talks, whether we have a deal or not.

The Bank of England governor’s most eye-catching warning was that three years after a no-deal Brexit, house prices would be 35% lower than they would otherwise have been. No deal would mean a massive disruption in trade, a contraction in economic activity, higher unemployment, rising inflation – and most likely rising interest rates too.

Unlike the financial crisis, this self-inflicted collapse in growth would be driven by a shock to supply rather than demand. This puts the Bank of England in an awkward position: if it raises interest rates, they further repress economic activity; but if it fails to do so, inflation could soar – further disrupting economic activity.

It might be thought that, faced with such a unique shock, the government could change the law and tell the Bank to stop trying to control inflation. However, such an action would not be free. It would damage the Bank’s credibility – causing it to face harsher trade-offs between inflation and unemployment in the future. It’s not clear the government could spend money to ease the pain either, as a no-deal Brexit would already blowing a hole in the public finances.

Of course, our economy is already suffering from the impact of Brexit uncertainty, with a big hit to our currency, inward investment and economic growth. And the government’s own leaked impact assessments show that any form of Brexit will lead to an economic downturn and a hit to the public finances – meaning less money for the NHS and public services.

By far the best course of action is not to put the country having to choose between the devil and the deep blue sea. If Britain faces a no-deal Brexit, then the people should be able to reject it. And if May negotiates a deal, they should also be asked to decide if they prefer that to our current EU membership.

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Edited by Hugo Dixon