News | Published October 08 2019

UK debt would hit 50-year peak under no-deal Brexit, IFS claims

The Institute for Fiscal Studies believes that any no-deal Brexit would see UK debt rise to levels unseen since the 1960s.

It says that even a "benign" no-deal Brexit would trigger an increase in borrowing to around £100 billion, with debt equalling 90 per cent of national income.

The figures have been released as the IFS compiles its Green Budget, which examines the challenges that chancellor Sajid Javid will contend with as he prepares for his first Budget in post.

IFS director Paul Johnson says the outlook is not good, with the government having been “cut adrift” with “no effective fiscal anchor”.

Johnson said: "Given the extraordinary level of uncertainty and risks facing the economy and public finances, it [the government] should not be looking to offer further permanent overall tax giveaways in any forthcoming Budget.

"In the case of a no-deal Brexit, though, it should be implementing carefully targeted and temporary tax cuts and spending increases where it can effectively support the economy."

The Treasury said that any major decisions would be made in full consideration of “the long-term sustainability of the public finances".

The IFS predicts that the government will renege on its own rules on annual borrowing against GDP, even before the costs of a no-deal Brexit are accounted for, with its 2020 spending pledges almost as high as those set out in Labour’s 2017 election manifesto.

Under current regulations, the government can only borrow up to two per cent of GDP, but the IFS forecasts that annual borrowing could exceed £50 billion in 2020, which equates to roughly 2.3 per cent of GDP.

The Treasury has responded to the claims, with a spokesperson saying that last month's spending round from the chancellor "supported the people's priorities of health, education and the police within existing fiscal rules."

The spokesperson added: “Beyond that, the chancellor has already said that we will be reviewing the fiscal framework as we turn the page on austerity. In so doing, we will retain a fiscal anchor to public spending so that decisions are taken with a view to the long-term sustainability of the public finances."

As the government would look to encourage growth after a no-deal Brexit, the IFS predicts a quick-fire spending spree which would help push up debt to 90 per cent of national income, a ten per cent increase on current levels.

Prime minister Boris Johnson has also emphasised the importance of government spending programmes being temporary, should the economy not perform as well as expected.

The IFS also claims that having to deal with the "consequences of a smaller economy and higher debt for funding public services" would see the economy flatline for two years under no-deal.

This idea is supported by Christian Schulz, the leading UK economist at Citi, one of the leading firms which helped produce the IFS report.

Schulz said: "A no-deal Brexit, even with a substantial stimulus, could mean no growth at all for the next two years. Remaining in the EU would be the best scenario for economic growth in the next few years."

Schulz added that the UK economy has already been affected by the consequences of a Leave victory in the EU referendum of 2016.

He said: "Business investment is up to 20 per cent lower than it would otherwise have been, hurting productivity and wage growth".

Schulz added that the impact of uncertainty on investment has left the economy an estimated £60 billion smaller than it would have been with a Remain victory in 2016, but warned that continued uncertainty from a further Brexit delay would continue to weigh heavily on growth, leaving it at one per cent per year.

"From a growth perspective, a Brexit deal is a little better, leaving growth at 1.5 per cent, but it would leave no chance of Brexit being cancelled."

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Authored by

Scott Challinor
Business Editor
October 08 2019

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