Government debt is set to soar to levels not seen since the 1960s in the event of a no-deal Brexit, a leading economic think-tank has warned.
The Institute for Fiscal Studies (IFS) said following last month’s spending review that government borrowing was on course to top £50 billion next year, more than double what the Office for Budget Responsibility was forecasting as recently as March.
However, in the event of even a “relatively benign” no-deal Brexit, the IFS said that could rise to almost £100bn – while debt would climb to almost 90 per cent of national income for the first time since the mid 1960s.
In its annual “green budget”, the IFS warned that in those circumstances, next year’s “mini boom” in public spending would be followed by another “bust” as ministers tried to get the public finances under control.
Analysis by Citibank for the IFS calculated UK national income was already between £55bn and £66bn lower than it would have been if the country had voted Remain in the 2016 EU referendum.
As a result, Britain had missed out “almost entirely” on the global growth of the past three years.
It warned that a no-deal Brexit was likely to mean two years of zero growth – even with a “substantial” fiscal and monetary response by the government and the Bank of England.
Even when it returned to growth, it would remain weak at just 1.1 per cent, leaving the economy 2.5 per cent smaller than it would have been.
Citi said that leaving the European Union with a Brexit deal should see the economy continuing to grow, albeit weakly at around 1.5 per cent a year. However further delay to Brexit would mean continued economic uncertainty with “very poor” growth of around just 1 per cent a year.
Overall, Citi, said that remaining in the EU would be the best outcome for economic growth.
However, if this happened under a Labour government committed to carrying out its policies on tax, nationalisation, share ownership and labour policy regulation, it was 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 IFS said ministers had now effectively abandoned former chancellor Philip Hammond‘s tax and spending rules, including his manifesto commitment to balance the budget by the mid 2020s.
It said the government’s day-to-day spending plans for public services were now close to the levels implied by Labour’s 2017 election manifesto, and far higher than those in the Conservative manifesto.
IFS director Paul Johnson said the figures meant chancellor Sajid Javid could not afford any big tax giveaways when he comes to deliver his first budget. He said that in the event of no-deal, any measures to support the economy would have to be strictly temporary.
“The government is now adrift without any effective fiscal anchor,” he said. ”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.
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