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.
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