Brexit could cost UK Treasury tens of billions in lost tax revenue, says Office for Budget Responsibility

The Treasury's official watchdog has highlighted the significant risk posed by Brexit to the UK's public finances in a new report.

The Office for Budget Responsibility, in its Fiscal Risk Report published on Thursday, said that a possible Brexit “divorce bill", which some have suggested could be up to €100bn (£88bn), would only be a “one-off hit” to the Exchequer and that the far bigger risk related to the damage that leaving the EU could do to the UK’s long-term growth rate.

It said that if Brexit ended up reducing the UK’s annual trend productivity growth rate – the amount the UK produces per hour of labour – by just 0.1 per cent over 50 years, the economy would be 4.8 per cent smaller than otherwise.

That would be equivalent to a cost in lost GDP of almost £100bn in today's money – which would translate into a £36bn hit to tax revenues.

The OBR said there was “no meaningful basis” on which to predict the outcome of the Government's Brexit talks in terms of the UK’s future trade arrangement, and so it has not assumed any long-term hit to the UK’s productivity growth rate in its current official forecast.

However, many private sector forecasters have downgraded their potential productivity growth forecasts for the UK due to the decision to leave the EU, some by as much as 0.3 per cent.

Berenberg Bank has downgraded its base-case estimate for long-term annual UK potential productivity growth from 2.1 per cent to 1.8 per cent due to Brexit.

Combining that with the OBR’s estimates implies a £100bn hit to tax revenues over the next half-century.

Theresa May’s Government has not commissioned an official report on the long-term economic impact of Brexit, but before last June's referendum the Treasury produced an analysis which argued that leaving the EU would impact negatively on the UK’s productivity growth by reducing EU trade and curbing foreign investment in the UK. Both are seen as having an outsized impact on productivity.

“Any alternative to EU membership that substantially reduced guaranteed access to EU markets would ... have a negative impact on UK GDP, productivity, employment and tax revenue,” it said.

The Treasury then estimated that if the UK left the single market and negotiated a free trade deal with the EU – the Government's current objective – the national level of productivity in 15 years’ time would be between 3 per cent and 6 per cent lower than otherwise.

And that would translate into 4.6 per cent to 7.8 per cent hit to GDP.

It said the impact of a Brexit in which we left with no deal in 2019 would be considerably more damaging.

Other analysts argue that reduced immigration to the UK, which could follow Brexit, would also negatively impact on UK productivity growth.

“This sobering warning from the independent Office for Budgetary Responsibility should serve as a wake-up call,” said Liberal Democrat Shadow Chancellor Sir Vince Cable.

“Even a small deterioration in growth could mean billions of pounds less funding for our public services in the long-term. Theresa May has shown complete disregard for the economic consequences of the extreme Brexit she has chosen.”

The Chancellor, Philip Hammond, said that the OBR’s latest report “shows why we must tackle our debts while investing in our future, to deliver economic security for hard-working people”.

The First Secretary of State, Damian Green, had mistakenly said in the Commons on Wednesday that the OBR’s report would outline the risks of the UK crashing out of the EU without a trade deal in 2019.

But the report makes no analysis of the impact of such an outcome, or any other specific Brexit result.

Credible external economic forecasters have said that a “no deal” outcome could result in a hit to GDP by 2020 of between 2.6 per cent and 5.5 per cent.

As well as a hit to productivity growth, some other big medium-term fiscal risks identified by the OBR were another financial crisis, higher inflation and higher tax litigation costs for the exchequer.

In an embarrassment for Ms May, the report also seemed to suggest that her failure to secure a majority in the general election could result in the risk of higher public spending.

“The result of the general election might also be seen to increase the risk of upward revisions to current spending limits, given reports of ‘austerity fatigue’ among voters and the £1bn cost of the minority Conservative Government’s confidence and supply agreement with Northern Ireland’s Democratic Unionist Party,” it said, noting that post-election changes to the Finance Bill to secure its passage through Parliament had already reduced projected revenues in 2020-21 by £3.5bn.

“One of the biggest risks to our economy is Theresa May’s weak Government,” said Labour’s Shadow Chancellor John McDonnell.