By David Milliken
LONDON (Reuters) – Britain’s budget deficit is likely to more than double to around 100 billion pounds if the country leaves the European Union without a deal, quickly requiring a return to austerity, a leading think-tank said on Tuesday.
Britain is due to leave the EU on Oct. 31 and Prime Minister Boris Johnson has said he is determined to do so despite parliament ordering him to seek a delay if he cannot negotiate an acceptable transition agreement before then.
The Institute for Fiscal Studies predicted borrowing would rise to 92 billion pounds – equivalent to 4% of national income – by 2021/22 under a “relatively benign” no-deal Brexit scenario, in which there are no major delays at borders.
Even then, the economy would still enter recession in 2020, the IFS said in an annual assessment of the public finances.
If the government undertook enough fiscal stimulus to stop the economy contracting – roughly 23 billion pounds of extra spending in 2020 and 2021 – annual borrowing would peak at 102 billion pounds
“A no-deal Brexit would likely require a fiscal short-term stimulus followed by a swift return to austerity,” IFS deputy director Carl Emmerson said.
In the 2018/19 financial year Britain’s budget deficit was 41 billion pounds or 1.9% of GDP, its lowest since 2001/02, following years of efforts to reduce the deficit from a peak of 10.2% during the depths of the financial crisis in 2009/10.
In the longer term, a no-deal Brexit would mean less money to spend on public services – or higher tax rates – than staying in the EU or leaving with a deal, the IFS said.
Even without Brexit, Britain was likely to have to raise tax rates to fund the cost of pensions and public healthcare for an ageing population, it said.
Finance minister Sajid Javid announced 13.4 billion pounds of extra spending on health, policing, schools and other areas last month – putting borrowing on course to overshoot a cap of 2% of GDP targeted by his predecessor, Philip Hammond.
“The outlook for borrowing has worsened dramatically since March,” Emmerson said.
Javid is due to set out fresh borrowing plans an annual budget before the end of 2019, possibly before an early election as Johnson seeks to regain a working majority in parliament.
The IFS said the government’s budget targets had lost credibility and it was now set to spend almost as much on day-to-day public services as planned by the opposition Labour Party before an election in 2017, promises which drew criticism from the ruling Conservative Party.
It also said the government should wait until the outlook for Brexit was clearer before setting long-term budget goals, and avoid income tax cuts of the type that Johnson suggested when he campaigned to become Conservative leader.
(Reporting by David Milliken; Editing by William Schomberg)