No-Deal Brexit Could see UK Debt Levels Reach 50- Year High
UK debt could climb to almost 90% of national income for the first time since the mid -1960s in the event of a no-deal Brexit, according to the UK based Institute for Fiscal Studies (IFS).
The independent research institute issued the stark warning as part of its annual Green Budget. Published in association with Citi, the Green Budget analyses the fiscal challenges facing Government ahead of its next budget.
The report states that Government borrowing is set to be over £50 billion next year (2.3% of national income), more than double what the Office for Budget Responsibility (OBR) forecast in March.
However, it says that, even in the event of a ‘relatively benign’ no-deal Brexit this figure could jump to £100 billion, or 4% of national income.
It says that ‘under such a scenario, a temporary fiscal stimulus could help to smooth the path of growth. But it would also add to government debt, which would be on course to breach the government’s sustainable debt rule.’
Analysis from Citi contained in the report shows that ‘growth in the UK has been weaker than in other G7 economies since 2016 and annualised growth has averaged just 1.3% over the past four quarters.’
Paul Johnson, IFS Director and an editor of the Green Budget, said, ‘The government is now adrift without any effective fiscal anchor. Given the extraordinary level of uncertainty and risks facing the economy and public finances, it should not be looking to offer further permanent overall tax giveaways in any forthcoming Budget.
In the case of a no-deal Brexit, though, it should be implementing carefully targeted and temporary tax cuts and spending increases where it can effectively support the economy. It will be crucial that these programmes are temporary: an economy that turns out smaller than expected can, in the long run, support less public spending than expected, not more.’
The report lays out a range of economic scenarios in relation to Brexit. In addition to a possible significant increase in national debt it also states that no-deal, even with a substantial monetary and fiscal response, would likely mean two years of zero growth.
Uncertainty around Brexit is cited as having been ‘hugely damaging to private sector investment, which may now be as much as 15–20% lower than otherwise.’
The report predicts that securing a Brexit deal would see somewhat higher growth, but it would still be weak at perhaps 1.5% a year.
Remaining in the European Union is likely to provide higher levels of growth however the report caveats this prediction by saying ‘if accompanied, though, by full implementation of Labour’s policies on tax, nationalisation, share ownership and labour market regulation, it is impossible to say whether the net effect would be better or worse than leaving the EU with a more growth-friendly set of policies.’
The Green Budget was issued as German Chancellor Angela Merkel has reportedly told British Prime Minister Boris Johnson that there will be no deal unless Northern Ireland remains in the EU’s customs union.
With just 23 days to the Brexit deadline uncertainty continues to loom.