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Brexit will hit public finances by tens of billions, government budget watchdog warns

Supporters of the Stronger In Campaign react as results of the EU referendum are announced at the Royal Festival Hall on June 24, 2016 in London (Rob Stothard/Getty Images)
Supporters of the Stronger In Campaign react as results of the EU referendum are announced at the Royal Festival Hall on June 24, 2016 in London (Rob Stothard/Getty Images)

The Treasury has been advised to curb public spending further or raise taxes if leaving the European Union does long-term damage to economic growth, the Office for Budget Responsibility has warned.

In its fiscal risk report, the government’s budget watchdog highlighted the importance of robust trade agreements to secure the long-run health of Britain’s public finances, adding it was more important than the size of any ‘divorce bill’ to settle one-off liabilities with the EU.

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“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… for the long-term growth of the UK economy,” the OBR said.

The headline impact of the stress test on the public finances is shown in the charts above (Office for Budget Responsibility)
The headline impact of the stress test on the public finances is shown in the charts above (Office for Budget Responsibility)

Just 0.1 percentage points less productivity growth each year over a 50-year term would leave the economy 4.8 per cent smaller, equivalent to £97 billion in today’s terms, the OBR explained. Given a tax-to-GDP ratio of 37 per cent, it would also imply tax receipts £36 billion lower in today’s terms.

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A continuation of Britain’s recent weak productivity would also make tax rises or spending cuts more likely, the OBR said.

Chancellor Philip Hammond said the report was “a stark reminder of why we must deliver on our commitment to deal with our country’s debts”.

But Vince Cable, former business secretary for the Liberal Democrats, said the OBR’s report should “serve as a wake-up call”.

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“Theresa May has shown complete disregard for the economic consequences of the extreme Brexit she has chosen,” Cable said.

“This sobering warning from the independent Office for Budgetary Responsibility should serve as a wake-up call.”