In the event of a soft Brexit, the Treasury could borrow an extra £30bn to spend over the next five years, but if the UK crashes out of the European Union in 2019 without a deal this benefit would be erased, the National Institute of Economic and Social Research said on Friday.
The future relationship between the UK and the EU remains unclear and this uncertainty is likely to have an effect on the Budget that will be announced on Monday by Chancellor Philip Hammond.
NIESR stated in their report that under a soft Brexit scenario, the Chancellor would have enough wriggle-room to borrow on average an additional £16bn per year to fund additional spending between 2019-20 and 2022–23 compared to the spring forecast from the Office of Budget Responsibility. This means the Hammond could spend an average of £30bn over the period.
Under the no-deal Brexit scenario almost all of this additional fiscal space will be non-existent, NIESR said, and would require the government to stabilise the economy in the short term.
“In our view, there is no single tax measure that can plug the 2 per cent gap that persists in our soft Brexit scenario which allows for additional spending. As a consequence, we recommend a comprehensive review of taxation and the charges for public services in the UK with the express aim of achieving more equity and efficiency,” NIESR said in a press release.
Despite a dip last month, the UK economy has recently gained momentum with quarterly GDP growth expected at 0.7% in the third quarter after more or less stalling in the first.
NIESR’s soft Brexit forecast for GDP growth is broadly unchanged at 1.14% this year and slightly higher in 2019 at 1.9%. On the other hand in a hard Brexit scenario, economic growth slows to just 0.3% in 2019.
Prime Minister Theresa May vowed to end austerity in her speech to the Conservative party conference earlier this month but said the government would have to secure a good Brexit deal first. This could prove to be difficult task since negotiations are still stuck trying to resolve the Irish border issue with both sides at an impasse.
Jagjit Chadha, the director of NIESR, said that should the government “continue to try and hit arbitrary fiscal rules” it would generate “suboptimal arrangements” in society.
“So much of debate on fiscal policy has been framed by the self-imposed rules of the chancellor. The regret is that it hasn’t focused on the true objective of fiscal policy … to find ways of sharing risk with previous and future generations,” he said.
Source: Web Financial Group