Warning no deal will lead to spiralling debt

BREXIT: Respected think tank issues stark warning on public finances in the event of a nodeal exit from the EU

The government is now adrift without any effective fiscal anchor. PAUL JOHNSON DIRECTOR INSTITUTE FOR FISCAL STUDIES

Government debt is set to rise to levels not seen since the 1960s in the event of a no-deal Brexit, a leading economic think tank has warned.

The Institute for Fiscal Studies (IFS) said government borrowing was on course to top £50 billion next year, and that in the event of even a “relatively benign” no-deal Brexit, this could rise to almost £100 billion – while debt would climb to almost 90% of national income for the first time since the mid1960s.

The IFS warned that in those circumstances next year’s “mini boom” in public spending would be followed by another “bust” as ministers tried to get the public finances under control.

Analysis by Citi bank for the IFS calculated UK national income was already between £55 billion and £66 billion lower than it would have been had the country voted Remain in 2016.

It further warned that a no-deal Brexit was likely to mean two years ofzerogrowth– evenwitha “substantial” fiscal and monetary response by the government and the Bank of England.

Citi said leaving the EU with a Brexit deal should see the economy continuing to grow at around 1.5% a year.

Overall, Citi said, remaining in the EU would be the best outcome for economic growth.

However, if this happened under a Labour government committed to carrying out its policies on tax, nationalisation, share ownership and labour policy regulation, it was impossible to say whether the net effect would be better or worse than leaving the EU with a more “growth-friendly” set of policies.

The IFS said ministers had now effectively abandoned former chancellor Philip Hammond’s tax and spending rules, including his manifesto commitment to balance the budget by the mid-2020s and that the government’s day-to-day spending plans for public services were now close to the levels implied by Labour’s 2017 election manifesto.

IFS director Paul Johnson said the figures meant Chancellor Sajid Javid cannot afford any big tax giveaways when he comes to deliver his first budget and that in the event of no-deal, any measures to support the economy would have to be strictly temporary.

“The government is now adrift without any effective fiscal anchor,” he said, adding: “In the case of a no-deal Brexit, though, it should be implementing carefully targeted and temporary tax cuts and spending increases where it can effectively support the economy.

“It will be crucial that these programmes are temporary.

“An economy that turns out smaller than expected can, in the long run, support less public spending than expected, not more.”

Picture: PA. The Institute for Fiscal Studies says the government of Boris Johnson, shown on a visit to Watford General Hospital yesterday, should consider implementing carefully targeted and temporary tax cuts to support the economy after Brexit.