OBR report shows that incoming PM’s Brexit strategy will shape their domestic strategy too

Published on Public Finances and the Economy

The fiscal implications of the incoming Prime Minister’s Brexit strategy in the coming months will shape the government’s domestic policy strategy, rather than exist as a separate agenda, the Resolution Foundation said today (Thursday) in response to the latest Office for Budget Responsibility (OBR) Fiscal Risks Report.

The 293-page report highlights several risks to the fiscal outlook, including from a ‘No Deal’ Brexit. The OBR estimates that the ‘No Deal’ scenario envisaged by the IMF would cause a recession, add £30bn to public borrowing next year (2020-21) – equivalent to almost half of the extra £70bn of borrowing in the year after the financial crisis – and add 12 per cent to the national debt as a share of GDP.

The Foundation notes that this could be a conservative estimate, falling well short of the impact envisaged in the Bank’s recent ‘stress test’, but would nonetheless transform Britain’s economy.

The Foundation says that while the Conservative party leadership has hitherto tried to split into two debates – Brexit and domestic policy – today’s report shows that the two agendas are closely intertwined, with the former likely to shape the latter.

It adds that Brexit uncertainty has already had a major effect on the domestic economy over the past two years – with elevated inflation and weak investment playing key roles in the UK suffering the worst period for household income growth outside of recessions since the 1960s, worse even than the early 1990s recession.

James Smith, Research Director at the Resolution Foundation, said:

“So far the debate over who will be the next Prime Minister has centred on two separate issues – how to deal with Brexit, and what the government’s domestic policy agenda will be.

“Today’s OBR report shows that those two debates are closely intertwined, and that the fiscal implications of how we leave the EU will shape the domestic policy choices facing the next PM.

“The incoming Prime Minister will also need to address the fact that Brexit uncertainty is already having an effect on the domestic economy, with Britain recently experiencing a bigger living standards squeeze than during the 1990s recession.”