Crashing out of the EU without a deal could push the UK’s economy into recession and increase borrowing by £30 billion a year, the Office for Budget Responsibility has warned.
The OBR quantified the impact on public finances of a no-deal, no-transition Brexit scenario and concluded that debt would rise relative to GDP over the next three years.
But it said the stress test used in the fiscal risks report was “not the most disruptive one we could have chosen”.
The OBR warned that a no-deal Brexit could lead to a 2% fall in real GDP by the end of 2020 and a sharp fall in the pound.
Earlier this year, Sir Charlie Bean, a member of the Office for Budget Responsibility (OBR), warned MPs that the shockwaves that would be sent through the economy should the UK crash out of the EU without a deal would be as difficult to predict as those after the collapse of Lehman Brothers in 2008 , which unleashed a global financial crisis.
He said that, as with the collapse of Lehmans in 2008, the actual havoc wrought by the shock would only become clear as events unfolded.
Sir Charlie Bean, a member of the Office for Budget Responsibility (OBR), told MPs it was “almost completely impossible” to accurately predict the shockwaves that would be sent through the economy should the UK crash out of the EU without a deal.
He said that, as with the collapse of Lehmans in 2008, the actual havoc wrought by the shock would only become clear as events unfolded.
“It’s exactly like the aftermath of the collapse of Lehmans, in many ways,” he cautioned, “a lot of the linkages you don’t realise until you’re actually living through it and in that sense there’s a limit to how much a business can do to prepare for it.”
In a hearing with the Treasury Select Committee following the OBR’s Spring Statement forecasts, Sir Charlie said small businesses in particular were struggling to prepare for the various possible Brexit scenarios given that they do not have the management capacity or resources.
Sir Charlie – a former deputy governor of the Bank of England – also warned that uncertainty would continue to hold back business investment for several years, even in the event that the UK leaves the EU with a deal.
He said: “The thing about these disruptive events is it’s easy to talk about in an abstract, but actually working out how they permeate through the economy is almost completely impossible.”
Sir Charlie – a former deputy governor of the Bank of England – also warned that uncertainty would continue to hold back business investment for several years, even in the event that a deal is struck.
He said: “The thing about these disruptive events is it’s easy to talk about in an abstract, but actually working out how they permeate through the economy is almost completely impossible.
“It’s exactly like the aftermath of the collapse of Lehmans, in many ways.
“A lot of the linkages you don’t realise until you’re actually living through it and in that sense there’s a limit to how much a business can do to prepare for it.”
Boris Johnson and Jeremy Hunt have also been warned by the Chancellor that there will be no extra cash to meet their spending pledges in the event of a no-deal Brexit.
Since the Conservatives came to government in 2010, national debt has increased from £1 trillion to £1.8 trillion. Despite subjecting the country to punishing austerity.
Austerity has been linked to growing inequality, 130,000 preventable deaths since 2010 according to the Institute for Public Policy Research, and cut backs on public services from the NHS to schools and policing.
Austerity policies have resulted in nine years of slower growth and left us all £1,495 a year worse off, analysis by The New Economics Foundation revealed.
And now with the Tory leadership candidates vying to please the Brexit ultras in the party ranks, the prospect of a no-deal Brexit is an actual possibility. – Which appears to have rendered the shortfall in public spending of the past nine years that led to cuts in social services and UK councils’ school field, playground and library sell-offs etc utterly pointless as even more of a hole in public finances beckons.
Philip Hammond has warned the Tory leadership contenders that the “fiscal firepower” that has been stocked up will be needed entirely to counteract the effects of departing without a deal.
£30 billion borrowing per year
The OBR today warned borrowing would go up to £30 billion higher per year in a no-deal Brexit scenario.
In the executive summary, the OBR’s report said: “Heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports.
“Together, these push the economy into recession, with asset prices and the pound falling sharply. Real GDP falls by 2% by the end of 2020 and is 4% below our March forecast by that point.
“Higher trade barriers also slow growth in potential productivity, while lower net inward migration reduces labour force growth, so potential output is lower than the baseline throughout the scenario (and beyond).
“The imposition of tariffs and the sterling depreciation raise inflation and squeeze real household incomes, but the Monetary Policy Committee is able to cut Bank Rate to support demand, helping to bring output back towards potential and inflation back towards target.”
In the no-deal scenario, borrowing would be £30 billion a year higher from March 2020-21 as the Government would receive less money from income tax, national insurance contributions and capital taxes.
The report states: “Borrowing is around £30 billion a year higher than our March forecast from 2020-21 onwards. Lower receipts – in particular income tax and NICs (due to the recession) and capital taxes (due to weaker asset prices) – explain most of the deterioration.
“These are partly offset by lower debt interest spending (thanks to lower interest rates and RPI inflation) and the revenue raised customs duties (which are treated as EU rather than UK taxes in the baseline).
“Higher borrowing and the assumed rollover of Term Funding Scheme loans leave public sector net debt around 12% of GDP higher than our March forecast by 2023-24.”