Economic slowdown after Brexit “to lead to jump in borrowing”

2 Aug 16

Public sector borrowing is set to increase by around £47bn over the next four years as the economy slows following the Brexit vote, economic researchers have forecast.

The National Institute of Economic and Social Research said that the increase in the deficit, which would equate to an annual average increase of £9.5bn, would effectively override the fiscal charter created by previous chancellor George Osborne.

Osborne had planned for the public finances to be in surplus in 2019-20 and for the government to continue to take in more in taxes than it spends annually in normal times, defined as when there is real gross domestic product growth of at least 1%.

However, before he was replaced by Philip Hammond, Osborne noted that the target may need to be ditched following the Brexit vote, Hammond has since said he will revisit government spending plans in the Autumn Statement. Borrowing in 2015/16 was estimated at £74.9bn.

According to NIESR, UK GDP is expected to grow by 1.7% in 2016, slowing to 1% in 2017. Also, GDP is anticipated to drop by around 0.2% in the third quarter of the year.

A surplus will only be achievable by 2020 at the earliest, according to the institute, while gross government debt, as a percentage of GDP, is expected to increase from 89% at the end of 2015 to just over 90% of GDP by the end of 2017. 

Simon Kirby, head of macroeconomic modeling and forecasting at NIESR, said: “We expect the UK to experience a marked economic slowdown in the second half of this year and throughout 2017.”

Kirby described the risk of a ‘technical’ recession within the next 18 months as fifty-fifty, and said there was an “elevated risk of further deterioration in the near term.”

The growth forecast figure released by the institute was, it said, built on the assumption that the Bank of England would reduce the base level of interest (currently at 0.5%) at the committee’s next meeting in August, and then again in November. This combined with quantitative easing measures could, it argued, offset a 1.5% negative shock to the UK economy.

“In light of the downturn underway, and the downside risks to the outlook, a decision by the [Bank of England’s] MPC to provide monetary stimulus would be welcome,” Kirby stated.

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