A ‘No Deal’ Brexit would leave a £30 billion per year hole in UK spending plans and plunge the country’s economy into an immediate recession, the UK’s chief budget watchdog warned on Thursday (18 July).
Leaving the EU without a deal in October would cause the UK economy to shrink by 2% in 2020, and increase the budget deficit by £30 billion per year, according to the results of the fiscal stress test set out by the Office for Budget Responsibility (OBR) on Thursday.
Launching the OBR’s report on fiscal stress tests, the chairman, Robert Chote, said that “the big picture is that heightened uncertainty and declining confidence deter investment, higher trade barriers with the EU weigh on domestic and foreign demand, while the pound and other asset prices fall sharply.
Chote said that the imposition of tariffs and a weaker pound, together with weaker income tax would “combine to push the economy into recession”.
That, in turn, would leave the UK with a net debt burden about 12% higher over the next five years.
The OBR’s stress test is based on the less severe of the two ‘no deal, no transition’ scenarios set out by the International Monetary Fund in April.
Until now, the OBR has based its economic forecasts on the assumption that the UK will not leave the EU without a deal.
However, the chances of the UK crashing out without a deal after the 31 October deadline appear to have rapidly increased in recent weeks as the two possible successors to outgoing Prime Minister Theresa May have talked up the prospects of a No Deal.
Both Boris Johnson and Jeremy Hunt have promised to re-negotiate parts of the Withdrawal Agreement brokered by May and the EU, and to take the UK out of the bloc without a deal if EU leaders refuse to budge.
However, Chancellor Philip Hammond, who is expected to resign or be replaced if, as expected, Johnson is confirmed as prime minister and Tory leader next week, warned that the recession would be deeper than the OBR’s forecast.
“Even in the most benign version of a no-deal exit, there would be a very significant hit to the UK economy, a very significant reduction in tax revenues and a big increase in our national debt – a recession caused by a no-deal Brexit,” Hammond told Sky News on Thursday.
“But that most benign version is not the version that is being talked about by prominent Brexiteers. They are talking about a much harder version, which would cause much more disruption to our economy. And the OBR is clear that in that less benign version of no-deal the hit would be much greater, the impact would be much harder, the recession would be bigger,” Hammond said.
[Edited by Zoran Radosavljevic]