OBR warns no-deal Brexit could push UK economy into recession

Crashing out of the EU without a deal could push the UK’s economy into recession and increase borrowing by £30 billion a year, the Office for Budget Responsibility has warned.

The financial watchdog quantified the impact on public finances of a no-deal, no-transition Brexit scenario and concluded that debt would rise relative to GDP over the next three years.

But it said the stress test used in the fiscal risks report was “not the most disruptive one we could have chosen”.

The OBR warned that a no-deal Brexit could lead to a 2% fall in real GDP by the end of 2020 and a sharp fall in the pound.

The report came just six days before Boris Johnson or Jeremy Hunt are sworn in as prime minister, with both candidates pledging a no-deal exit if necessary.

Wage stagnation would stretch for 13 years since the last financial crisis, house prices would slump by nearly 10% between the start of 2019 and 18 months later, and the exchange rate would immediately depreciate by 10%, the report assumes.

The report states: “Heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports.

“Together, these push the economy into recession, with asset prices and the pound falling sharply. Real GDP falls by 2% by the end of 2020 and is 4% below our March forecast by that point.

“Higher trade barriers also slow growth in potential productivity, while lower net inward migration reduces labour force growth, so potential output is lower than the baseline throughout the scenario (and beyond).

“The imposition of tariffs and the sterling depreciation raise inflation and squeeze real household incomes, but the Monetary Policy Committee is able to cut bank rate to support demand, helping to bring output back towards potential and inflation back towards target.”

In the no-deal scenario, borrowing would be £30 billion a year higher from March 2020-21 as the Government would receive less money from income tax, National Insurance contributions and capital taxes.

Those alone would cost £26.5 billion a year from 2020/21, the report says, while weak consumer spending would also shave £3 billion off finances.

Compared with an OBR estimate of a smooth transition to a deal, welfare spending would rise by £2.7 billion in 2021-22 and business investment would slump 15% by the end of 2021.

Public sector net debt would rise to around 12% of GDP higher than the orderly exit forecast by 2023/24, the OBR adds.

But the damage may be partially offset by lower debt interest spending due to lower interest rates and raised customs duties.

Chancellor Philip Hammond said the report showed that, even in the “most benign version” of a no-deal exit, there would be a “very significant hit” to the British economy.

“But that most benign version is not the version that is being talked about by prominent Brexiteers,” he told Reuters.

“They are talking about a much harder version, which would cause much more disruption to our economy, and the OBR is clear that in that less benign version of no-deal the hit would be much greater, the impact would be much harder, the recession would be bigger.

“So, I greatly fear the impact on our economy and our public finances of the kind of no-deal Brexit that is realistically being discussed now.”

Though one thing the report does not assume is a fiscal policy in response to a no-deal.

The OBR countered leadership frontrunner Mr Johnson’s claim that a well-managed no-deal scenario would be “vanishingly inexpensive”, as he stated during a head-to-head debate.

“You are looking here at something that could increase borrowing by £30 billion-a-year, so most people would say that’s a significant sum of money,” OBR chairman Robert Chote said.

And he had a message to Brexit-backers who may argue the borrowing hit would be worthwhile if the UK refused to pay the £39 billion divorce bill.

“There’s a world of difference between a hit to the economy and to the public finances that is an ongoing one over time versus a relatively large but one-off sum,” he said.

Shadow chancellor John McDonnell said the report shows the Tories are a “clear and present danger to the economy and the wellbeing of everyone in the UK”.

“This warning makes it even more imperative MPs from across Parliament back today’s amendments to try and block the next Prime Minister from shutting down Parliament to force through a no-deal Brexit,” he added.

The Prime Minister’s official spokesman she has “repeatedly said that it is better to leave with a deal and that it is up to her successor to take forward the Brexit process”.