Prime Minister Boris Johnson was urged to rein in his tax-cutting plans amid warnings that a no-deal Brexit could blow a 100 billion-pound ($123 billion) hole in the public finances and lift government debt to its highest for half a century.
The budget deficit is already set to exceed 50 billion pounds and that could easily double within a year if Britain crashes out of the European Union without a transition deal, the Institute for Fiscal Studies said in its Green Budget published Tuesday.
Even with a “substantial” easing of monetary and fiscal policy, the British economy is facing two years of stagnation under a no-deal Brexit scenario, according to Citi, which provided analysis for the report. It estimated that output could be over 5% higher in 2022 than it is today if the opposition Labour Party takes office.
“The government is now adrift without any effective fiscal anchor,” said IFS Director Paul Johnson. “Given the extraordinary level of uncertainty and risks facing the economy and public finances, it should not be looking to offer further permanent overall tax giveaways.”
With a possible general election looming, Johnson is offering voters an end to austerity with tens of billions of pounds of spending increases and cuts to payroll taxes. Plans announced by Chancellor Sajid Javid last month mean that day-to-spending on the National Health Service and policing is now higher than that proposed by Labour Party before the 2017 election, the IFS said.
The IFS and Citi argued that reversing Brexit would produce the best outcome for the economy, with GDP more than 4% higher in 2022 than under a no-deal scenario. This would require Labour to come to power and deliver on its pledge to hold a second referendum, with an option to remain in the European Union.
Labour has also promised to significantly boost spending on infrastructure. Growth would be maximized, however, if the party governed in a coalition as it may then be forced to scale back some of the more “radical” reforms outlined in 2017.
Citi estimated that Britain has lost out almost entirely on the bout of global growth since 2016, with output around 60 billion pounds lower than it would have been had voters chosen to stay in the EU. A further delay to Brexit would extend the uncertainty weighing on investment and growth, it said.
Britain is on course to break its key fiscal rule, which requires structural borrowing to be less than 2% of GDP in 2020-21, the IFS said. A fiscal stimulus to help the economy weather a no-deal Brexit would see debt climb to almost 90% of national income for the first time since the mid-1960s, raising the prospect of sharp cutbacks to spending in future years.
Giveaways should be “carefully targeted and temporary,” Johnson said. “An economy that turns out smaller than expected can, in the long run, support less public spending than expected, not more.”