BRITAIN’S fiscal watchdog has warned that a potential Brexit blow to productivity growth could put a £36 billion dent in the Treasury’s coffers and leave the economy nearly £100bn worse off overall.
The Office for Budget Responsibility (OBR) said an improvement to the UK’s weak productivity would bolster economic growth and help shore up the public finances.
However, it said Britain’s divorce from the European Union added to the uncertainty as to whether productivity – a measure of an economy’s efficiency – can return to healthy levels.
In its first Fiscal Risks Report, the OBR said if just 0.1 percentage points were shaved off productivity growth over the 50-year period the economy would shrink by 4.8 per cent. It came as the fiscal referee said because the UK’s debt position was higher than before the financial crisis, the public finances were now “much more sensitive” to higher inflation and interest rates.
Brexit also had the potential to exacerbate potential financial shocks, the OBR said, while it also highlighted the risk of higher public spending if the Government responds to “austerity fatigue”.
In a 300-page report, the OBR said: “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 £97bn in today’s terms.
“Given a tax-to-GDP ratio of 37 per cent, it would also imply tax receipts £36bn lower in today’s terms.”
The latest update on the public finances showed the Government borrowed its lowest amount for 10 years in May, falling by £300 million to £6.7bn compared to the previous month.
Public sector net debt, excluding state-owned banks, rose by £34.8bn to £1.6 trillion for May, the equivalent to 79.8 per cent of gross domestic product (GDP).
Prime Minister Theresa May has vowed to deliver a balanced budget by the middle of the next decade, but is facing mounting pressure to end austerity by increasing spending.
The Government previously stated in a Charter for Budget Responsibility that public borrowing should be below two per cent of gross domestic product (GDP) by 2020-21 and public sector net debt should fall as a share of GDP by the same year.
Putting the public finances through the same stress tests faced by banks, the watchdog said the Government’s fiscal targets “would be missed by a large margin”.
Chancellor Philip Hammond said the OBR’s analysis was a “sober reminder” of the challenge the country faces”, while John McDonnell, Labour’s shadow chancellor, said the report revealed that “one of the biggest risks to our economy is Theresa May’s weak Government”.
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