Forget the Brexit bill, OBR warns ‘no deal’ is bigger threat to public finances

We should expect “nasty fiscal surprises” from time to time. But Brexit could make it worse as well as precipitate weaker economic growth.

The Office for Budget Responsibility has published its Fiscal risks report and it’s looking pretty grim. Not only does it warn us to “expect nasty fiscal surprises from time to time”, it said the “budget is still in deficit by 2 to 2 per cent of GDP – as it was on the eve of the crisis – and net debt is more than double its pre-crisis share of GDP and not yet falling”. Nearly a decade on from the financial crisis, we are not in a great position to be confronted with a “nasty fiscal surprise”. This alone is a damning indictment of the Tories who have had seven years to put us in a better position.

In its summary, the report said public finances were at risk from a number of sources with Britain’s ageing population and another financial crisis amongst those that would have the highest impact. It also noted that “Brexit-related uncertainties overlay many of these risks”. It’s a succinct description of just how much Brexit has consequences for the country. Indeed, the report said that whilst “a lot of attention focuses on the possible ‘divorce bill’”, the implications of Brexit on the country’s long-term economic growth is the bigger threat. And that’s the case even if the “numbers mooted” for the ‘divorce bill’ are very large. This is, it said, because “a one-off hit of this sort would not pose a big threat to fiscal sustainability”.

However, what does pose as big threats to public finances is how new trading arrangements affect potential productivity growth as well as how new migration policies affect working-age population growth. With Britain’s ageing population constituting a big fiscal risk to public finances, can we really afford to cut immigration as the prime minister seems intent to do?

Despite the new First Secretary of State Damian Green suggesting the OBR’s report would include an assessment of a “no deal” and other Brexit scenarios, this wasn’t the case. The OBR refuted the claim yesterday and in its report, said they would not attempt to predict the “implications of whatever agreements are reached with the EU and other trading partners” on the economy.

But in its summary of risks to the medium-term forecast, the OBR said it did take into account the prospect for weaker growth in the financial sector as a result of Brexit. The economy relies heavily on the financial sector so weaker growth would clearly hit revenues. Moreover, the OBR said “a more severe Brexit impact or ‘no deal’ scenario could have bigger negative effects”.

For the government, this will make for uncomfortable reading particularly as it continues to insist that it is prepared to walk away from negotiations with “no deal”. It will also make for uncomfortable reading for the Labour party who, like the government, insist the UK will need to leave the single market as a result of Brexit. Despite the opposition party’s wish to retain the benefits of single market participation, the EU has said again and again that this is not possible if you’re outside of it.

Barnier: No frictionless trade outside of single market and customs union

In an interview on BBC’s Radio 5 Live today, Theresa May was asked where the £1bn for the DUP deal was coming from. She said money could come from three areas: higher taxes, more borrowing, or spending cuts. However, the prime minister said a fourth option more money from economic growth. This is similar sentiment to that made by the chancellor Philip Hammond who said the “only sustainable solution” to fund public services was to grow the economy.

Unfortunately, for both the prime minister and the chancellor, there are clear signs the economy is now slowing. And it’s slowing as a result of the Brexit vote.

More signs of economic slowdown as Britain’s trade deficit widens

“Triple-whammy” of bad economic news as UK services growth slows again

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