Belfast Telegraph

Brexit productivity hit 'could cost Treasury £36bn and hit economy by £100bn'

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 £100 billion 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 (EU) 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 was shaved off productivity growth over the 50-year period the economy would shrink by 4.8%.

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: "T he 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% smaller than would otherwise be the case, which is equivalent to £97 billion in today's terms.

"Given a tax-to-GDP ratio of 37%, it would also imply tax receipts £36 billion 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 £6.7 billion compared to the previous month.

Public sector net debt, excluding state-owned banks, rose by £34.8 billion to £1.6 trillion for May, the equivalent to 79.8% 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 2% 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 and underscored why the Government must deliver on its "commitment to deal with our country's debts".

However, 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".

The OBR said the outcome of the recent General Election heightened the risk to the public finances by increasing the likelihood of more spending.

It pinpointed the previous Government's decision to abandon measures for tax rises and spending cuts, and t he £1 billion cost of the Conservatives' confidence and supply agreement with Northern Ireland's Democratic Unionist Party, as areas that could lead to " upward revisions to current spending limits".

While the watchdog stressed it was not calling for spending cuts, it said "unfunded giveaways" would only shift the Government further away from balancing the books.

On Brexit, the watchdog said the fallout of the UK's future trading arrangements with the EU posed a greater risk to the public finances than the size of any Brexit divorce bill.

Areas of concern also included the cost of delivering adult social care and pensions for Britain's ageing populations, and the impact on tax revenues from declining North Sea oil production and less people smoking.

The OBR said it was almost inevitable the UK would face a recession or a financial crisis over the next 50 years and the Government risked putting the public finances on an "unsustainable path" if it failed to shore up the deficit during brighter economic times.

It added: "The main message is clear: governments should expect nasty fiscal surprises from time to time (...) and plan accordingly."

Sir Vince Cable, Liberal Democrat shadow chancellor and party leadership candidate, said the report laid bare the risks to the economy and the public finances by the Government's "reckless approach to Brexit".

He said: "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.

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

A spokesman for the Treasury said: "We take the productivity challenge seriously, which is why we are prioritising investment in productivity while delivering our fiscal plan to get debt falling.

"Boosting productivity is the only sustainable way to secure growth and deliver a better quality of life for all, which is why we are investing £23 billion through the National Productivity Investment Fund to boost infrastructure, R&D and housing, as well as investing in skills."