Britain’s independent fiscal watchdog, the Office of Budget Responsibility, has said a no-deal Brexit at the end of this year will cut economic growth and increase unemployment.
In addition to economic damage caused by Covid-19, which has already caused the biggest fall in UK economic output since 1709, it said a no-deal Brexit will also push up the cost of living for consumers/
In an economic assessment used as the basis for government spending plans announced by UK chancellor of the Exchequer Rishi Sunak, the OBR said the UK economy will shrink by 19% this year due to the impact of the pandemic.
The OBR assumes the UK economy will grow at a slower pace from next year as a result of leaving the EU in any case, but said failure to agree a Free Trade deal with the EU in the coming weeks will worsen that negative effect.
It said a no-deal Brexit would delay the point at which the UK’s economic output returns to pre-Covid level by almost a whole year, to the third quarter of 2023.
The OBR said Border disruptions would cut output by 0.75% of GDP – approximately £15bn – in the first quarter of next year, but would disappear by the end of the year as businesses and government adjust to the new trading arrangements.
However, longer-term effects from decreased productivity and capital decreases deepening due to lower investment and higher structural unemployment would continue to add to economic underperformance.
It said consumer prices would be 1.5% higher than their central forecast without a deal with the EU, with 1% of that rise coming from tariffs and non-tariff barriers to trade, and 0.5% coming from a 5% fall in the value of sterling, making imports more expensive.
It said customs duties imposed by the UK under a WTO trade arrangement with the EU would bring in an extra £6bn in custom revenue.
However, this would be more than offset by a £14bn reduction in all other revenues caused by having a smaller economy, leaving tax receipts £6bn worse off than if Britain does a deal with the EU.
It also assumes that this worse economic situation would result in an extra £4bn in defaults on government-guaranteed loan schemes for businesses as part of its Covid-19 response.
Earlier, Chancellor Sunak announced a new £4bn “levelling up” fund for investment.
The OBR also expects a rise in non-compliance with VAT and customs and excise payments over the next two years, due to a lack of readiness of the UK border system and the lack of familiarity and preparedness among businesses.
Overall the OBR said not doing a deal with the EU will force the British government to borrow an extra £10bn per year from next year on, driving the debt:GDP ratio higher by almost 3% by 2025/26.
All of this would be in addition to the impact of Covid-19, which has delivered the largest peacetime shock to the global economy on record.
The UK economy has been hit relatively hard by the virus and by the public health restrictions required to control it.
During the first wave of infections, the UK locked down later and for longer than some of its European neighbours and experienced a deeper fall and slower recovery in economic activity.
The second wave of infections is “taking the wind out of an already flagging recovery”, according to the OBR.
That includes the UK, where GDP is set to fall by 11% this year the largest drop in annual output since the Great Frost of 1709 – a period of exceptionally cold weather in Europe that caused crop failures and widespread famine.
This year the pandemic has hit the UK public finances, with tax receipts forecast to be £57bn lower and spending £281bn higher than last year.
The total cost of government spending to deal with the pandemic including the direct payments to support workers’ income – has risen from £181bn at the time of the Summer Economic Update, to £218bn at the time of the Winter Economy Plan, to £280bn in this forecast.
All of this has pushed the UK budget deficit this year to an estimated £394bn (19% of GDP), its highest level since 1944-45.
Such borrowing would take the debt: GDP ratio to 105% of GDP, which would be the highest level since 1959-60, although the exceptionally low interest rate environment makes that easier to bear.
British government borrowing is forecast to fall back to around £102bn (3.9% of GDP) by 2025-26, but “even on the loosest conventional definition of balancing the books, a fiscal adjustment of £27bn (1% of GDP) would be required to match day-to-day spending to receipts by the end of the five-year forecast period”, according to the OBR.
This implies a tough set of budget choices in the coming years, including tax rises and spending cuts.
The OBR added: “In our central forecast and downside scenario, tax rises or spending cuts of between £21bn and £46bn (between 0.8% and 1.8% of GDP) would be required merely to stop debt rising relative to GDP”.
It said as support schemes for workers are withdrawn next spring, the UK unemployment rate will rise from 3.9% forecast last March to 7.5% next year.
However, it said if the UK leaves the EU transition period without a deal, unemployment will be 8.3%.
In a worst case scenario, in which vaccines are unsuccesful and the virus is not contained, the OBR said unemployment could rise to 12%.
The OBR said the economic impact of a no-deal Brexit would be different and in addition to that of Covid-19.
It said the virus has mainly impacted non-traded face-to-face services such as hospitality, transport and entertainment.
But failure to strike a trade deal with the EU would mean a hit to the trade-intensive sectors of manufacturing, financial services, and mining and quarrying – the sectors that have been least impacted by Covid-19.