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What economic support might Chancellor Sajid Javid offer in event of a no deal Brexit?

Chancellor of the Exchequer Sajid Javid at the Conservative Party Conference in Manchester. Credit: PA

The chancellor has confirmed that the government has prepared a “significant economic policy response” should we leave the EU abruptly, without a deal on October 31st.

In a sense this isn’t very newsworthy, it would be more remarkable if the Treasury hadn’t been tasked with planning for such an outcome.

A no deal Brexit would be an economic shock of unknowable scale.

There are tried and tested levers Sajid Javid could pull to protect the economy although, perhaps unsurprisingly, he’s not keen to share the details of which ones he’d reach for.

Tax cuts are a good way of providing a short-term, immediate boost to encourage households and businesses to continue spending, if that’s the medicine that’s required.

In the face of the last recession the government cut VAT, but cuts to national insurance and income tax could also provide effective relief, depending on whom the government wishes to target.

The problem, of course, is such support is extremely expensive.

A 1% cut in the headline rate of VAT would cost the government approximately £6 billion in lost tax revenues.

And tax cuts will have to used cautiously.

While they may be the appropriate response to a conventional downturn, the Bank of England has warned that a no deal Brexit could well damage the supply-side as well as the demand-side of the economy.

A concerted push for more people to spend could both help and hurt the economy. Credit: PA

Priming people to spend in the face of a supply shock may well still be worth trying but it carries the risk of creating inflation.

In addition to tax cuts, the chancellor would probably pursue support for the economy in the form of spending.

The Treasury’s own analysis of the economic impact of a no deal Brexit shows that there are certain parts of the UK and certain industries that stand to be disproportionately affected.

Mr Javid could target relief for specific companies in specific parts of the UK - e.g. car manufacturers in the West Midlands - who have made it clear they will struggle in the event of no deal.

Taxpayer support could be preventative (in the form of cash injections, loan guarantees or even nationalisation) or post-mortem a la Thomas Cook (offering re-training to workers in a business or industry that has failed).

Sajid Javid could target specific industries like car manufacturing on a regional basis. Credit: PA

Once again, it is not surprising that the government isn’t publishing the detail of what support will be offered to whom and what basis.

Firstly, there’s a desire to offer taxpayer relief only when it is demonstrably required.

Secondly, to set out the detail would be to admit that no deal could have a potentially catastrophic effect on parts of the economy, which is not the political message of the moment.

What would a no deal Brexit do to the ambitions that Mr Javid set out in his recent spending round?

Paul Johnson, head of the Institute for Fiscal Studies, believes the big spending increases that were announced for health, for schools and for police, as well as the end to cuts elsewhere, are safe in the short-term.

"In short-term the government will probably stick to its spending commitments because they’ll need to support the economy," Mr Johnson says.

"In the medium run, the danger is it just results in another dose of austerity as we have to unwind the cuts as the economy gets smaller and tax receipts go down."

In July, the Office for Budget Responsibility (OBR) calculated that even a rather “benign” Hard Brexit could trigger a recession and blow a hole in the public finances of around £30 billion a year.

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