EU referendum: Brexit will add two years to austerity, says IFS

It would take the overall period of fiscal consolidation in the UK in the wake of the 2008-09 financial crisis to an unprecedented 12 years

Ben Chu
Wednesday 25 May 2016 00:12
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Brexit would mean further cuts and would lengthen the period of austerity, the IFS report warns
Brexit would mean further cuts and would lengthen the period of austerity, the IFS report warns

Brexit could “add two years to austerity” according to the Institute for Fiscal Studies, in the respected think tank’s first major analysis of the impact of the UK leaving the European Union.

There has been a wave of negative economic Brexit forecasts from a succession of organisations such as the Treasury, the Bank of England, the OECD and the International Monetary Fund in recent weeks. But the IFS, whose responses to Budgets and Autumn Statements are always closely watched, enjoys an impeccable reputation for impartiality, meaning its calculations could be important in persuading the public that Brexit will be economically harmful to them.

The IFS said even after accounting for the benefit of keeping the UK’s £8bn net annual contribution to the EU Budget – one of the main advantages cited by the Leave camp – government tax revenues would be between £20bn and £40bn lower in 2019-20 than projected if Britain voted to quit the 28-member bloc.

The Government has committed to running an absolute budget surplus in that year. But the IFS said rather than imposing additional near-term cuts to public spending and welfare it was more likely ministers would simply extend austerity for another two years. That would take the overall period of fiscal consolidation in the UK in the wake of the 2008-09 financial crisis to an unprecedented 12 years.

This could have major political repercussions since the Government is already coming up against strong resistance to its cuts, having been forced into embarrassing retreats since the last general election on proposed cuts to tax credits and disability benefits.

“Getting to budget balance… as the government desires, would require an additional year or two of austerity at current rates of spending cuts. Or we could live with higher borrowing and debt. These are real costs, but they are costs we could choose to bear if it was felt that they – and other costs – were outweighed by advantages from Brexit in other realms” said Paul Johnson, the director of the IFS.

“The analysis from the IFS further underlines what a disaster it would be for the UK to risk a Tory Brexit under the Chancellor’s recovery built on sand” said the Labour shadow chancellor John McDonnell. “We all know that the Tories want to use Britain leaving the EU as a pretext to slash workplace protections, but things could be even worse if a Tory Brexit led to even more austerity to try and meet George Osborne’s self-imposed and self-defeating deficit targets.”

The IFS reached its conclusions by taking the post-Brexit GDP forecasts from another impartial think tank, the National Institute for Economic and Social Research (Niesr), and calculating the knock-on implications for tax revenues. Earlier this month Niesr calculated that in the event of Brexit UK GDP was likely to be lower in 2019 than otherwise by between 2.1 per cent and 3.5 per cent.

The IFS said that there was a “near consensus” among economists that leaving the UK would damage the economy and that Niesr’s GDP forecast was in the “middle of the available range”. As many as 280 economists have signed a letter warning of a “sizeable risk of a short-term shock to confidence” if Britain votes to leave the EU on 23 June.

The IFS also dismissed the claim of the Leave camp that the cost of the UK contributions to the EU budget was £350m a week as “wrong”. It said this figure took no account of the UK’s rebate and also the money UK farmers and poorer regions receive back in agricultural payments and regional EU aid.

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