"We estimate that the new trading arrangements could reduce UK GDP by around 3% by 2030, compared with remaining in the EU."
The Institute for Fiscal Studies says that meeting the government's target of eliminating the deficit during the next parliament will probably mean an additional consolidation of up to £34 billion, extending austerity "well in to the 2020s".
Additionally, the Institute estimates that the new Brexit trading arrangements could reduce UK GDP by around 3% by 2030, adding that shaving just 1% off growth over the period to 2020–21 could see the deficit rise by £7 billion.
In its paper, the IFS said: "On the assumption that there will be a three-year transitional arrangement similar to the status quo, followed by a free-trade agreement, and that the Government will take a ‘populist’ approach in areas such as immigration policy Oxford Economics estimates that the UK economy could end up around 3% smaller in 2030 than it would have been if we had voted to remain in the EU."
It added that Chancellor Philip Hammond wants to ensure the structural deficit – the deficit after adjusting for the estimated impact of any temporary weakness or strength in the economy – is no more than 2% of national income in 2020–21.
The IFS says this is a "much easier target to hit" than the previous aim of eliminating the deficit entirely by 2019–20, but that previous experience suggests there is a more than one-in-three chance that he will miss even this looser target.
While spending cuts are playing a greater role than tax rises in reducing the deficit, the Institute predicts that tax is set to rise as a share of national income to its highest level since 1986–87.
Paul Johnson, Director of the Institute for Fiscal Studies, said: “For all the focus on Brexit the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne. Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise.
"Even so the new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament. Even on central forecasts that is going to require extending austerity towards the mid-2020s. If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”
Andrew Goodwin, Lead UK Economist at Oxford Economics and co-author of a chapter in the Green Budget, added: “Though the UK economy has continued to achieve solid growth, it has been almost entirely reliant on the consumer. With spending power set to come under significant pressure from higher inflation and the welfare squeeze, the consumer will not be able to keep contributing more than its fair share. Exports should be a bright spot, but overall a slowdown in GDP growth appears likely.
"If the Government is able to agree a transitional arrangement with the EU and make progress on a free-trade agreement then the impact of Brexit is likely to be fairly modest within our forecast horizon of 2021. However, the negative effects of leaving the single market and the customs union are likely to become clearer over time and we estimate that the new trading arrangements could reduce UK GDP by around 3% by 2030, compared with remaining in the EU. Should we fail to secure a free-trade agreement then the outcome is likely to be worse still.”
