Theresa May's Brexit deal will damage UK public finances, think tank warns

The harm would easily outweigh any benefit to the public finances from no longer paying a net contribution to the EU budget, says UK in a Changing Europe

Theresa May’s proposed Brexit deal will make it harder to fund the UK’s public services by reducing tax revenues, according to a think tank report published today.

UK in A Changing Europe, in a new modelling exercise published on Tuesday, calculates that the prime minister’s deal – a 21-month transition followed by a free trade deal with the EU – would hit fiscal revenues by between 0.4 per cent and 1.8 per cent of GDP in the long term.

That would easily outweigh any benefit to the public finances from no longer paying a net contribution to the EU budget.

The calculations flow from the think tank’s larger modelling exercise, which suggests a long-term hit to UK GDP per capita of between 1.9 per cent and 5.5 per cent, which is broadly in line with those from a separate modelling exercise conducted by the National Institute of Economic and Social Research on Monday which pointed to a £100bn hit to long-term GDP.

“We assume that the public finances benefit by 0.4 per cent of GDP per year as a result of reduced EU net contributions ... [but] we assume that a 1 per cent fall in GDP per capita reduces government revenue by 0.4 per cent of GDP,” the UK and EU authors wrote.

“Our findings imply challenges ahead for policymakers. The scale of impact that we have estimated will make it harder to achieve key public policy objectives.

“Difficult choices, particularly about taxation and spending, will have to be made. And there is little if any sign that the starkness of these choices has yet been appreciated, not least by the two main political parties, both of whose manifestos for the 2017 seemed to imply that a post-Brexit world would be one of business as usual.”

The modelling drew on input from experts at the London School of Economics and the Institute for Fiscal Studies.

In her “letter to the nation” at the weekend to boost support for her Brexit deal, Ms May wrote: “We will be able to spend British taxpayers’ money on our own priorities, like the extra £394m per week that we are investing in our long-term plan for the NHS.”

This was an echo of the claim by the Leave campaign – put on the side of their red battlebus in 2016 – that departing the UK would enable the UK to spend an extra £350m a week on the National Health Service.

It was a claim that was condemned as misleading by the UK Statistics Authority since it used gross, rather than net, EU budget contributions figures.

Further, it has since been shown to be doubly wrong, since Brexit is expected by all credible forecasters to damage the UK public finances overall rather than improve them.