Public borrowing could surge by £30bn a year if there is a no-deal Brexit, the country’s spending watchdog says.
The Office for Budget Responsibility (OBR) said the scenario was based on assumptions that a no-deal Brexit would cause a UK recession.
It said this was “not necessarily the most likely outcome” but also “by no means the worst case scenario”.
The UK is set to leave the European Union on 31 October.
Chances of a no-deal outcome appear to have risen recently, after both Tory leadership contenders said they would be willing to leave the EU without a deal.
The OBR was created in 2010 to give independent analysis of the UK’s public finances.
In its first assessment of the economic impact of a no-deal scenario, the OBR used IMF analysis that shows the UK economy would contract by 2% in 2020 before recovering in 2021.
This would come as tariffs of 4% were imposed on goods traded with the EU – up from zero currently – although the IMF does not expect there to be disruption at the border.
In this scenario, the OBR said that “heightened uncertainty and declining confidence” would deter investment, while higher trade barriers with the EU would “weigh on exports”.
“Together, these push the economy into recession, with asset prices and the pound falling sharply,” it said.
It said this could push up public sector borrowing, leaving debt 12% higher by 2024.
The OBR also warned that both Conservative leadership contenders had made “a series of uncosted proposals for tax cuts and spending increases that would be likely to increase government borrowing by tens of billions of pounds if implemented”.
The government’s official independent budgetary watchdog has for the first time put a price on the impact to the public finances of leaving the European Union without a deal.
The numbers come at a sensitive time politically when both likely future Prime Ministers suggest that a no-deal Brexit is possible this year.
The OBR is legally obliged to consider all threats to the public finances, and today’s new numbers come as part of its biannual Fiscal Risks report.
The fall in tax revenue is forecast to significantly outweigh any benefit from no longer paying the UK’s subscription fee as a member of the EU.
The numbers show a deep crisis-like impact on the public finances, and are based on the IMF’s projections for the economy.
But they go further, showing a long-run hit to the economy.
The forecast used by the OBR is less severe than those of the Bank of England and the Treasury.
In November, the Bank said a no-deal outcome could send the pound plunging and trigger a worse recession than the 2008 financial crisis.
The economy could shrink by 8% in the immediate aftermath if there was no transition period, the Bank said.
The Treasury meanwhile has predicted a £90bn hit to the economy by 2035 – although prominent eurosceptics dispute this view.
In a comment piece for the Telegraph newspaper earlier this week, Conservative backbencher Jacob Rees-Mogg called the forecast “silliness”, adding that a no-deal scenario could instead boost the economy by £80bn.
On Thursday, Mr Hammond said: “The report that the OBR has published shows that even in the most benign version of a no-deal exit, there would be a very significant hit to the UK economy.
“But that most benign version is not the version that is being talked about by prominent Brexiteers. They are talking about a much harder version that would cause much more disruption.”
Source: BBC News