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 OBR 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.

In the executive summary, the OBR said: “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.

The report states: “Borrowing is around £30 billion a year higher than our March forecast from 2020-21 onwards. Lower receipts – in particular income tax and NICs (due to the recession) and capital taxes (due to weaker asset prices) – explain most of the deterioration.

“These are partly offset by lower debt interest spending (thanks to lower interest rates and RPI inflation) and the revenue raised customs duties (which are treated as EU rather than UK taxes in the baseline).

“Higher borrowing and the assumed rollover of Term Funding Scheme loans leave public sector net debt around 12% of GDP higher than our March forecast by 2023-24.”

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.”