(Bloomberg) -- A no-deal Brexit would drag the U.K. economy to a near standstill next year, according to a new report.
If Britain leaves the European Union without an agreement, reverting to World Trade Organization's most-favored-nation status rules, gross domestic product would increase only 0.3 percent in 2019, the National Institute of Economic and Social Research said on Friday.
By contrast, a trade accord that preserves most of the current arrangements would mean the economy will grow 1.9 percent next year, more than the think tank's previous forecast of 1.7 percent.
A no-deal Brexit would “eliminate any fiscal space” for Chancellor of the Exchequer Philip Hammond, who presents his budget on Oct. 29. While it's possible for the government to meet its targets for the deficit and public sector net debt, it won't be easy regardless of whether the split with the EU is hard or soft, according to Niesr's model.
Prime Minister Theresa May is racing against time to secure an agreement with the EU before Britain formally leaves the bloc on March 29, and businesses are increasingly getting nervous about repercussions. Her own cabinet isn't even close to any agreement on the way forward for stalled negotiations to resume, as time runs short to reach a deal.
On top of that, the Prime Minister has vowed to end years of austerity, giving Hammond a further challenge to chart a prudent fiscal path in his budget.
“The Chancellor will announce the budget at a time of considerable uncertainty about the future trading relationship between the U.K. and EU, which also complicates the fiscal outlook,” authors including Amit Kara wrote in the Niesr report. “A no-deal Brexit will lead to a currency depreciation, lower GDP in the short and long run, and higher temporary inflation.”
Under that scenario, which Niesr assumes will still be “orderly,” the Chancellor will lose almost all his headroom to borrow the additional 30 billion pounds ($39 billion) he needs to meet spending promises. Even if the government complies with its fiscal mandate under a soft Brexit scenario, it will still not meet the medium-term target of balancing the budget without raising taxes, according to the think tank.
To contact the reporters on this story: Anurag Kotoky in London at akotoky@bloomberg.net;Linly Lin in London at llin153@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, David Goodman
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