Government debt could rise to highest level in 50 yrs.

Even a “relatively benign” no-deal Brexit would push government debt to its highest since the 1960s warns The Institute for Fiscal Studies, IFS.

Britain’s leading experts on the public finances said government borrowing was likely to rise to £100bn and total debt would soar to 90% of national income.

IFS director Paul Johnson, said:

“The government is now adrift without any effective fiscal anchor.”

In response, the Treasury said any decisions would be made “with a view to the long-term sustainability of the public finances”.

Government Spending Rules.

The IFS’s Mr Johnson continued:

 “Given the extraordinary level of uncertainty and risks facing the economy and public finances, it [the government] should not be looking to offer further permanent overall tax giveaways in any forthcoming Budget.

“In the case of a no-deal Brexit, though, it should be implementing carefully targeted and temporary tax cuts and spending increases where it can effectively support the economy.”

The forecasts were prepared as part of the IFS Green Budget which looks at the challenges facing Chancellor Sajid Javid as he prepares for his first Budget.

“The government is now adrift without any effective fiscal anchor.”

The thinktank said government borrowing was already set to more than double next year regardless of the outcome of negotiations with Brussels.

It also said the national debt, the sum total of all borrowing accumulated by the British state, would hit almost 90% of GDP if Britain crashed out of the EU without a deal. Its highest level since the mid-1960s.

The warning comes  as the government’s Brexit plan risked unravelling in the face of stiff opposition at home and abroad. 

Government debt could rise in the event of a no-deal Brexit.

The IFS said the scale of the government response required to firefight a flatlining economy in the event of a disorderly departure from the EU would come with a hefty price tag for the public purse.

As the government increases funding for some public services such as the police, schools and healthcare the IFS said a mini-boom in public spending would be followed by another bust because the government would likely struggle to handle the impact of no-deal Brexit.  This would shrink the size of the economy and cause debt levels to rise.

The IFS also warned that a new wave of austerity could be introduced in the future to limit further debt increases.

Mr Johnson, said:

“You could well be on an upward spiral of debt and deficit.  And in a world in which we have to go through another period of austerity to undo it.”

With mounting speculation over possible government tax giveaways ahead of an election, including potential for a cut in fuel duty for motorists, Paul Johnson warned the prime minister that such moves would be dangerous given the heightened level of uncertainty facing the economy and the future state of the public finances.

Government’s day to day spending plans.

The IFS said the government’s current plans for day-to-day spending next year are closer to the levels proposed by Labour’s 2017 manifesto than plans laid out by the Conservative party at the time.

An HM Treasury spokesperson said:

 “September’s spending round supported the people’s priorities of health, education and the police within the existing fiscal rules, as we said it would be.

“Beyond that, the chancellor has already said that we will be reviewing the fiscal framework as we turn the page on austerity. In so doing, we will retain a fiscal anchor to public spending so that decisions are taken with a view to the long-term sustainability of the public finances.”

But even before the cost of a possible no-deal Brexit is factored in, the think tank said the government was set to break its own spending rules.

Annual borrowing will top £50bn next year.

The IFS forecast that annual borrowing will top £50bn next year.

That will be about 2.3% of gross domestic product (GDP), a measure of national income. Under current spending rules the government can only borrow up to 2% of national income.

A doubling in the annual budget deficit, leading, in relation to the size of the economy, to the highest government debt since the 1960s.

Growth Warning.

In the case of a no-deal Brexit, the IFS said a temporary government spending spree could help to smooth the path for growth, although it would also add to government debt.

The think tank forecasts that the debt stock, the total amount of money owed by the government, would climb to almost 90% of national income. It currently stands at about 80%.

Even with “substantial” government spending, the IFS expects the UK economy to flatline for two years following a no-deal Brexit.

A rise in public spending could be followed by ‘another bust.’

The think tank warned that a rise in public spending in 2020 would likely be followed by “another bust”.  As the government would have to deal with “the consequences of a smaller economy and higher debt for funding public services”.

Mr. Johnson said that it would be “crucial” that government spending programmes were temporary.

“An economy that turns out smaller than expected can, in the long run, support less public spending than expected, not more,” he said.

Christian Schulz, the chief UK economist at Citi, which contributed to the report, said:

“The UK economy is already around £60bn smaller than it would have been without a vote to leave the European Union, with the UK missing out on a bout of global growth.

“Business investment is up to 20% lower than it would otherwise have been, hurting productivity and wage growth,” he said.

However, Mr Schulz added that a further Brexit delay would create more uncertainty, denting investment and leaving growth at around 1% a year.

“From a growth perspective, a Brexit deal is a little better, leaving growth at 1.5%, but it would leave no chance of Brexit being cancelled,” he said.

“A no-deal Brexit – even with a substantial stimulus – could mean no growth at all for the next two years. Remaining in the EU would be the best scenario for economic growth in the next few years.”

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