No-Deal Brexit Could Push UK Economy into Recession, Says Fiscal Watchdog
A no-deal Brexit could plunge the British economy into recession, hammer the pound and drive up government borrowing, according to the U.K fiscal watchdog.
The analysis from the Office for Budget Responsibility is based on the “less disruptive” of two no-deal Brexit scenarios modeled by the International Monetary Fund in April.
“Heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports,” the OBR said in its fiscal risks report published Thursday. “Together, these push the economy into recession, with asset prices and the pound falling sharply.”
The assessment comes as the two candidates vying to be prime minister harden their rhetoric around a no-deal Brexit, with both Boris Johnson and Jeremy Hunt saying they’d be prepared to let Britain crash out of the EU on Oct. 31 if renegotiating the withdrawal agreement proves impossible.
Fears of a no-deal Brexit sent sterling to its lowest level against the dollar in more than two years this week and pushed up the cost of insuring British debt against default.
“Brexit risks are more prominent than they were two years ago with no deal being countenanced at the highest levels, amid considerable uncertainty about what that would mean in practice,” OBR Chairman Robert Chote told a press conference in London.
Chancellor Philip Hammond said the OBR report showed that even the most benign no-deal Brexit would deliver a “very significant hit” to the U.K. economy, warning the consequences could be much worse if those pursing a clean break with the EU are successful.
“I greatly fear the impact on our economy and our public finances of the kind of no-deal Brexit that is realistically being discussed now,” Hammond said in Chantilly, France, where is meeting Group of Seven finance ministers.
The projections included in the OBR stress test see:
- GDP falling by 2% by the end of 2020, leaving it 4% below OBR March forecast
- Borrowing is around 30 billion pounds ($37 billion) a year higher than March forecast from 2020-21, with the loss of tax receipts explaining most of the deterioration
- Government debt is 12% of GDP higher than March forecast by 2023-24
- Near-term fiscal mandate is met with a smaller margin but hopes of balancing the budget by the mid-2020s are further out of reach, with the deficit rising to almost 40 billion pounds by 2023-24
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