David Davis, the Brexit Minister, shocked many recently when he informed the House of Commons “Exiting the EU Committee” that "no systematic impact assessments" of the likely impact of EU withdrawal on different sectors of the UK economy had been made.
His rationale was that the usefulness of an assessment of this kind would be "near zero" because of the scale of change which Brexit is likely to cause, and his view that economic forecast models are unlikely to be "informative".
Given that commentators consider the agreements reached in the negotiations to date to be ambiguous at best, and with no tangible information on what a trade deal might look like, are the Minister’s comments fair?
The economic impact assessments to which the Minister referred are a specific form of analysis technique which calculate direct, indirect and induced benefits from projects or, in this case, a change. A key feature of the economic impact assessment is the consideration of multiplier effects to provide an estimate of the overall effect.
Using a construction project as an example, the Direct benefit of a project, or change, would be the creation of X construction jobs; the Indirect benefit would be Y jobs created to produce construction inputs (eg concrete); and the Induced benefit would be Z jobs created in other industries from money spent in other areas of economy as a result of the direct and indirect benefits (eg luxury goods).
At each level the assumptions become less and less reliable, and in the context of Brexit it would be virtually impossible to get the right answer – but in reality, as business leaders will know from their own business planning processes, the right answer was never the objective!
When businesses prepare forecasts, be they financial or otherwise, the real value is often achieved from the process rather than the output. The process of developing an effective financial model requires the business to establish a deep understanding of the relationships between revenues, costs and available resources within its operations, and to develop a range of assumptions that reflect the business strategy. Where ‘unknowns’ are included in the initial assumptions the model can be updated as those matters are determined, and the information generated by the model can become more reliable.
One of the key benefits of a strong financial model is that numerous scenarios can be modelled. By doing so, the key resources in the business and the key constraints to achieving the business strategy can be identified. Where a negotiation on the future of the business is imminent, knowledge of such information would be a valuable asset.
As business owners consider the impact of Brexit on their own companies they may be wise to forego the approach adopted by the politicians, and to stick with the business and scenario planning models that have served them well in the past.
Models that allow a business to consider different post-Brexit trading models (factoring in, for example, the potential impact of dealing with EU suppliers versus non-EU suppliers or the impact of adverse foreign exchange rates on the business) will be better placed to make better decisions as the shape of Brexit begins to emerge.