Leslie – OBR report shows real risks of hard Brexit

The Brexit process poses real risks to the public finances, productivity and the UK financial sector, the Office for Budget Responsibility says today.

In their latest risk report, the Government’s economic forecaster say even a slight hit to productivity could create a £36bn black hole in the public finances. And they say Brexit poses a “particular risk” to the financial sector. 

Commenting, Chris Leslie MP, leading supporter of Open Britain, said:

“The OBR’s message is loud and clear – hard Brexit poses a real threat to our economy. People voted for £350m a week for the NHS, not a £36bn black hole in the public finances that could mean severe cuts to the NHS. 

“And they say Brexit poses ‘a particular risk’ to the financial sector – putting the entire basis of our economic stability at risk.

“The Government are meant to base their fiscal policies in part on the OBR’s assessments. When their warnings about the potential consequences of hard Brexit are so stark, Ministers should wake up and put Single Market membership – the best economic outcome for our country – back on the table.”

/ends

Notes to editors:

The OBR report is here: http://budgetresponsibility.org.uk/frr/fiscal-risk-report-july-2017/

A summary of the OBR’s findings on Brexit follows:

Brexit will impact on any ‘nasty fiscal surprises’ the Government faces:

“The main message is clear: governments should expect nasty fiscal surprises from time to time – because policy can only reduce risks, not eliminate them – and plan accordingly. And they have to do so in the context of ongoing pressures that are likely to weigh on receipts and drive up spending and a variety of risks that governments choose to expose themselves to for policy reasons. This is true for any government, but this one also has to manage the uncertainties posed by Brexit, which could influence the likelihood or impact of other risks.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.3

Post-brexit trading uncertainty will impact fiscal sustainability

“The new Government must also manage the risks posed by Brexit. These do not supplant the possible shocks and likely pressures that we have already discussed, but they could affect the likelihood and impact of many of them. A lot of attention focuses on the possible ‘divorce bill’, but, while some numbers mooted for it are very large, a one-off hit of this sort would not pose a big threat to fiscal sustainability. More important are the implications of whatever agreements are reached with the EU and other trading partners for the long-term growth of the UK economy, which we do not attempt to predict here. If GDP and receipts grew just 0.1 percentage points more slowly than projected over the next 50 years, but spending growth was unchanged, the debt-to-GDP would end up around 50 percentage points higher.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.5 

Brexit poses a “particular risk” to the financial sector:

“The financial sector is relatively tax-rich, which means that any decline in the sector relative to the economy as a whole would be likely to weigh on the tax-to-GDP ratio. Tighter regulation may reduce the size and profitability of the sector, while uncertainties surrounding the impact of Brexit pose a particular risk.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.8 

“There are a number of sector-specific risks where Brexit is likely to be a factor. The UK’s large financial sector, for example, could be affected if there are changes to the terms on which UK businesses can access EU markets.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.69 

“Brexit could have significant effects on the risks emanating from the financial sector, quite

possibly in both directions. The size and concentration of the financial sector could be reduced if greater barriers emerge between the EU and UK financial systems…. Since the referendum, a number of financial institutions have announced plans to move parts of their operations to the EU because of Brexit. Estimates have suggested that, depending on the form that Brexit takes, UK job losses could range from around 3,000 to over 60,000.”

Office for Budget Responsibility, Fiscal risk report – July 2017, pp.88-89

“Our medium-term forecast already assumes weaker earnings at the top end, lower bonuses growth and weaker financial sector profits following Brexit.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.134

The OBR’s assessment that Brexit is likely to reduce productivity growth remains unchanged:

Until November 2015, our medium-term forecasts assumed that potential productivity growth would return to its pre-crisis average rate of 2.2 per cent by the end of the forecast. In March 2016, we put more weight on the post-crisis weakness, taking our medium-term assumption down to 2.0 per cent. And in November 2016, we revised it down to 1.8 per cent in light of the expected effects of the Brexit vote. All these assumptions imply that most of the recent weakness in productivity growth results from ultimately temporary factors.

Office for Budget Responsibility, Fiscal risk report – July 2017, p.46 

The OBR maintains its forecast that Brexit will “lead to a somewhat less open economy”:

“In our post-referendum forecasts, we assumed that the UK’s exit from the EU would lead to a somewhat less open economy, with a broadly equal effect on exports and imports.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.68 

Brexit is adding to uncertainty over productivity growth:

“The expected return of productivity growth toward historical norms is the most important uncertainty in our forecast, given its persistent weakness in recent years and its importance for wider GDP growth and the fiscal position. Brexit only adds to this uncertainty. Any factors that affect productivity growth over the medium or long term would have significant fiscal implications. Just 0.1 percentage points less productivity growth each year over a 50-year horizon would leave the economy 4.8 per cent smaller than would otherwise be the case, which is equivalent to £97 billion in today’s terms. Given a tax-to-GDP ratio of 37 per cent, it would also imply tax receipts £36 billion lower in today’s terms.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.68

If the Brexit negotiations go wrong, business investment is likely to weaken:

“In any negotiation, however, there is the possibility of brinkmanship and conflicting signals. That could result in further uncertainty and investment volatility. Weaker business investment is favourable to the public finances in the near term, but negative in the longer term.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.69

Brexit, especially Brexit with no deal, poses a risk to financial stability:

“While financial stability risks appear low, there remain important revenue risks associated with the taxation of financial sector companies and their employees. Reliance on the financial sector for revenues remains significant (see paragraph 4.7). Our medium-term forecast takes some account of the prospect for weaker earnings growth at the top of the earnings distribution, lower bonus growth and weaker financial sector profits due to Brexit. But clearly these broad-brush adjustments are subject to significant uncertainty. A more severe Brexit impact or ‘no deal’ scenario could have bigger negative effects.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.91

Setting up UK regulatory bodies to replace EU equivalents will represent a new cost to the taxpayer:

“Establishing and running UK-specific regulators: it is likely that the Government will need to set up UK-specific regulators in areas where we leave EU equivalents. This could involve one-off set-up costs and ongoing staff and procurement costs that require additional funding rather than reprioritisation within existing plans.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.209

Companies “adversely affected” by leaving the Single Market and Customs Union could require more compensation:

“Sector-specific interventions: pressure for support or compensation from companies and industries adversely affected by the UK leaving the single market and customs union could mount.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.209 

Brexit may already be affecting international student numbers:

“Brexit effects may already be showing up, with applicants from the EU to study at UK universities in 2017-18 down by 6 per cent on the previous year.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.225

Brexit is likely to increase the volatility in the value of the pound:

“The prospect of currency volatility as the Brexit negotiations progress and the UK leaves the EU means that the risk of future movements – in both directions – is high.”

Office for Budget Responsibility, Fiscal risk report – July 2017, p.233