No-deal Brexit likely to cause UK recession, says watchdog
The UK is likely to fall into recession next year if there is a no-deal Brexit, the country’s spending watchdog says.
The Office for Budget Responsibility (OBR) said economic growth could fall by 2% by the end of 2020 if it left the bloc without an agreement.
This would effectively forgo about 18 months of growth in Britain.
Chances of a no-deal outcome have risen recently, after both Tory leadership contenders said they would be willing to leave the EU without a deal.
The UK is set to leave the European Union on 31 October.
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 said the UK economy would contract 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 it does not expect there to be disruption at the border.
In this scenario, “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 added this would push up public sector borrowing by £30bn a year, leaving debt 12% higher by 2024.
By Faisal Islam, BBC economics editor
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 is less severe than those of the Bank of England and the Treasury, although the OBR said it was “by no means a worst-case scenario”.
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 would shrink 8% in the immediate aftermath if there was no transition period, the Bank said.
The Treasury meanwhile predicts 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.
Chancellor Philip Hammond later tweeted that he found this view “terrifying”, given Mr Rees-Mogg is tipped for a role in government in the future.
The chances of a no-deal appear to have risen in recent weeks after both candidates in the race to replace Theresa May hardened their positions on the controversial Irish backstop – an insurance policy to prevent a hard border on the island of Ireland after Brexit.
Jeremy Hunt and Boris Johnson both said the backstop was “dead”, but the EU said it would not support any deal that excludes it.
In an interview with the BBC’s Panorama programme – conducted in May before the start of the Conservative leadership contest – the EU’s chief Brexit negotiator, Michel Barnier, said the UK would have to “face the consequences” if it opted to leave without a deal.
Mr Barnier said the thrice-rejected withdrawal agreement negotiated by Theresa May was the “only way to leave the EU in an orderly manner”.