Wednesday 7th Aug 2019
Should the UK leave the EU without a deal this October, the OBR has warned that public borrowing will likely be double that of leaving with a deal. It’s estimated that agreeing to the withdrawal deal will mean just over £29bn of public borrowing, but that a No Deal scenario means more like £60bn will need to be borrowed.
These numbers are based on the expectation that the UK will enter a recession if it leaves without a deal. Current numbers anticipate a 2% reduction in GDP in 2020, with a recovery eventually coming in 2021. By 2024 this will mean a 1.6% smaller economy when comparing No Deal with a deal. 4% tariffs on EU goods, as well as heightened uncertainty, poor economic confidence and poor exports are all factors that the watchdog believes will play into the potential recession.
This contraction will likely mean lower tax income for the government, which forces additional borrowing and cost, which is where the extra £30bn cost comes from. For individuals, the No Deal impact is likely expected to mean inflation and decreased wages in real terms. For businesses, stability and predictable income will be key as customers have less to spend.
The OBR also warned that new Prime Minister Boris Johnson has made various spending commitments without yet explaining how they will be funded. This is very likely to have an effect on the overall level of public borrowing. Much has been made of the money that the UK pays the EU for membership, but most experts agree that this dividend will be wiped out and more by Brexit-related costs.
It’s also worth noting that there are various projections used by financial commentators, and that the OBR’s forecasts are less severe than the ones published by the Bank of England or the Treasury, both of which warn more more significant damage and cost.
Who are the OBR?
The Office for Budget Responsibility is an independent authority, legally obligated to publish information on anything it considers to be a danger to the UK economy, and Brexit certainly fits that bill. This warning has come as part of its Fiscal Risks report, which is published twice a year.
What are the chances of No Deal?
Many commentators are beginning to agree that leaving without a deal is now a likely scenario, particularly on the back of Brexit-supporting PM Boris Johnson’s entry into Number 10. The EU maintain that the deal agreed with former PM Theresa May cannot now be renegotiated before being approved by Parliament, and the backstop regarding the Irish border still remains a sticking point that means the deal is highly unlikely to receive Parliamentary support. Johnson has reiterated his desire for a deal, but has ramped up efforts to prepare for leaving without one.
Source: BBC