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No-deal Brexit will hit UK economy hardest and make debt skyrocket

Lianna Brinded
·Head of Yahoo Finance UK
Brexit piggy bank. Photo: Getty
The cost for Brexit admin even before tariffs for UK will run into billions, according to the IFS. Photo: Getty

A no-deal Brexit would be “economically considerably worse, even under a relatively benign scenario” and make UK debt skyrocket.

According to a new report, entitled The IFS Green Budget 2019, by the Institute for Fiscal Studies in association with Citi and the Nuffield Foundation, a no-deal Brexit would push UK debt to its highest since the 1960s as borrowing was likely to rise to £100bn ($122.9bn) and total debt would soar to 90% of national income.

Chart: IFS
Chart: IFS

“It is hard to imagine a set of short-term fiscal targets that would make sense both in the event of the UK leaving the EU with a deal, and in the event of leaving without a deal,” said the IFS in the report.

“Any rules that constrained behaviour at all in the first case would be broken in the second. Given heightened uncertainty, rather than setting a target for borrowing or debt, the chancellor could consider instead setting a fiscal anchor to limit the amount of permanent tax cuts or further increases in day-to-day spending that is announced.”

The four Brexit scenarios

The IFS looked at four different Brexit scenarios to determine what is the best outcome for the UK.

It found that a no-deal Brexit will hit the UK economy the hardest and drag down growth.

“A ‘no-deal’ Brexit would be economically considerably worse, even under a relatively benign scenario,” the IFS said. “We assume this would happen under a Conservative-led government, which would implement further fiscal loosening totalling 2% of GDP. Interest rates are cut to zero alongside £50bn of quantitative easing.

Chart: IFS
Chart: IFS

“Private consumption and investment growth falls while net trade is also a drag on growth. Overall, the economy does not grow over the next two years, and grows by just 1.1% in 2022, leaving it 2½% smaller in that year than under our base case.”

UK prime minister Boris Johnson has just until 31 October to seal a deal with the EU over Brexit.

However, the European Union will decide this week whether a Brexit deal is possible, which will fundamentally alter the decision course of parliament before the Brexit deadline.

French president Emmanuel Macron told UK prime minister Boris Johnson that all remaining 27 EU members will make their decision by the end of the week after they discuss whether a proposed Brexit deal can "respect" the bloc’s principles and is likely to be passed through parliament.

READ MORE: The EU's biggest Brexit decision will happen this week