Brexit could cost UK Treasury tens of billions in lost tax revenue, says Office for Budget Responsibility

Brexit could cost UK Treasury tens of billions in lost tax revenue, says Office for Budget Responsibility

Brexit could make the UK economy 4.8 per cent smaller, according to the watchdog – with serious implications for the tax take

July 13, 2017

The Treasury's official watchdog has highlighted the significant risk posed by Brexit to the UK's public finances in a new report.

The Office for Budget Responsibility, in its Fiscal Risk Report published on Thursday, said that a possible Brexit “divorce bill", which some have suggested could be up to €100bn (£88bn), would only be a “one-off hit” to the Exchequer and that the far bigger risk related to the damage that leaving the EU could do to the UK’s long-term growth rate.

It said that if Brexit ended up reducing the UK’s annual trend productivity growth rate – the amount the UK produces per hour of labour – by just 0.1 per cent over 50 years, the economy would be 4.8 per cent smaller than otherwise.

That would be equivalent to a cost in lost GDP of almost £100bn in today's money – which would translate into a £36bn hit to tax revenues.

The OBR said there was “no meaningful basis” on which to predict the outcome of the Government's Brexit talks in terms of the UK’s future trade arrangement, and so it has not assumed any long-term hit to the UK’s productivity growth rate in its current official forecast.

However, many private sector forecasters have downgraded their potential productivity growth forecasts for the UK due to the decision to leave the EU, some by as much as 0.3 per cent.

Berenberg Bank has downgraded its base-case estimate for long-term annual UK potential productivity growth from 2.1 per cent to 1.8 per cent due to Brexit.

Combining that with the OBR’s estimates implies a £100bn hit to tax revenues over the next half-century.

Theresa May’s Government has not commissioned an official report on the long-term economic impact of Brexit, but before last June's referendum the Treasury produced an analysis which argued that leaving the EU would impact negatively on the UK’s productivity growth by reducing EU trade and curbing foreign investment in the UK. Both are seen as having an outsized impact on productivity.

“Any alternative to EU membership that substantially reduced guaranteed access to EU markets would ... have a negative impact on UK GDP, productivity, employment and tax revenue,” it said.

The Treasury then estimated that if the UK left the single market and negotiated a free trade deal with the EU – the Government's current objective – the national level of productivity in 15 years’ time would be between 3 per cent and 6 per cent lower than otherwise.

And that would translate into 4.6 per cent to 7.8 per cent hit to GDP.

It said the impact of a Brexit in which we left with no deal in 2019 would be considerably more damaging.

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