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No-deal Brexit could spark UK recession, OBR warns

A no-deal Brexit could spark a recession in the UK, the OBR has warned. Credit: PA

A no-deal Brexit could spark a recession in the UK, the Office for Budget Responsibility (OBR) has warned.

The independent public body said the price of the pound could fall sharply if there is no transition period and that GDP could fall by two per cent by the end of 2020.

The fiscal watchdog added that government borrowing would increase by around £30 billion-a-year, with debt like to rise relative to the rate of GDP over the next three years.

The OBR said the tests and metrics used in its report were "not the most disruptive one we could have chosen".

This suggests that a more "disruptive" form of Brexit could have an even worse impact on the UK's economy and public finances.

  • What does the OBR say?

In a statement, the OBR said: "Heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports.

"Together, these push the economy into recession, with asset prices and the pound falling sharply. Real GDP falls by 2% by the end of 2020 and is 4% below our March forecast by that point.

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"Higher trade barriers also slow growth in potential productivity, while lower net inward migration reduces labour force growth, so potential output is lower than the baseline throughout the scenario (and beyond).

"The imposition of tariffs and the sterling depreciation raise inflation and squeeze real household incomes, but the Monetary Policy Committee is able to cut Bank Rate to support demand, helping to bring output back towards potential and inflation back towards target."

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  • How could increased borrowing impact the UK economy?

With regards to increased borrowing, a no-deal scenario could increase borrowing by £30 billion-a-year higher from March 2020-21 as the government would receive less money from income tax, insurance contributions and capital taxes.

This would add up to around 12 per cent of GDP to net debt by 2023-24.

It said: "Borrowing is around £30 billion a year higher than our March forecast from 2020-21 onwards. Lower receipts - in particular income tax and NICs (due to the recession) and capital taxes (due to weaker asset prices) - explain most of the deterioration.

"These are partly offset by lower debt interest spending (thanks to lower interest rates and RPI inflation) and the revenue raised customs duties (which are treated as EU rather than UK taxes in the baseline).

"Higher borrowing and the assumed rollover of Term Funding Scheme loans leave public sector net debt around 12% of GDP higher than our March forecast by 2023-24."

  • What is the OBR?

The non-governmental body was created in 2010 to give an independent analysis of the UK's public finances.

Is is one of a number of independent fiscal watchdogs around the world.

On the OBR's website, it sets out its main five roles.

These include:

  • Provides economic forecasting along with the Autumn and Spring Statements
  • Evaluate the government's performance against fiscal targets
  • Assess long-term situation of public finances
  • Evaluate fiscal risks from 2017
  • Examine tax and welfare policy costs at each Budget
  • What has been the reaction to the OBR's report?

Chancellor Philip Hammond said the OBR's report laid bare the negative impact a no-deal Brexit could have on the UK.

He said: "The report that the OBR have published this morning shows that even in the most benign version of a no-deal exit, there would be a very significant hit to the UK economy, a very significant reduction in tax revenues, and a big increase in our national debt, a recession caused by a no-deal Brexit.

"But that most benign version is not the version that is being talked about by prominent Brexiteers. They are talking about a much harder version, which would cause much more disruption to our economy.

"And the OBR is clear that in that less benign version of no-deal, the hit would be much greater, the impact would be much harder, the recession would be bigger.

"So 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."

The OBR chairman, Robert Chote, said: “The big picture is that heightened uncertainty and declining confidence deter investment, higher trade barriers with the EU weigh on domestic and foreign demand, while the pound and other asset prices fall sharply.

“These factors combine to push the economy into recession.”