No-deal Brexit ‘could cause lasting damage to UK economy’

11 Jan 19

A no-deal Brexit could cause lasting damage to demand and supply in the economy, with productivity at particular risk from reduced migration, leading economists have warned.

Robert Chote, chairman of the Office for Budget Responsibility, told the Scottish Parliament’s finance and constitution committee that a disruptive exit would deliver a “very unusual sort of shock” to the UK economy for which there was no reliable precedent.

“It would be a simultaneous negative or damaging shock both to demand in the economy – or to the willingness of consumers and businesses to spend - and to the supply capacity of the economy, or the ability to produce goods and services and get them distributed,” he said.

On the fiscal implications, he said there was uncertainty over how big the initial hit to GDP would be, but the critical issue was how persistent the effect would be.

He outlined two scenarios, under which the shock either had a long lasting effect, moving the economy down to a permanently lower trend path, or alternatively led to the UK having “a really bad six months then bouncing back”.

The eventual outcome would depend on the nature of disruption, the mitigating measures put in place by the UK government, and the attitudes of EU neighbours, he said.

The Scottish Fiscal Commission, which produces economic and fiscal forecasts for the Scottish Government, told the committee that an orderly Brexit would mean “negative effects…on migration, productivity and trade which will lead to income being lower than it would be otherwise”.

Although the forecaster had not examined the likely impact of a disorderly Brexit, it said it would expect these negative effects to be bigger in a no-deal scenario.

Commissioner Alasdair Smith warned that greater than expected reductions in migration would hit productivity, which had been boosted north of the border by an inward flow of migrants with high levels of education and skills.

“We need to worry about the negative effects of migration not just because of the demographic effects, which are of course important, but also because of the link between migration and productivity,” he said.

Earlier in the session, commission chair Susan Rice said her organisation had had “a number of quite constructive conversations” with the Department for Work and Pensions on access to data.

She had previously warned that the department’s unwillingness to supply information had created a significant challenge for the commission.

“Agreement has been reached to allow us separate and timely access to information that is already provided to the Scottish Government,” she said.

“We still have to finalise a memorandum of understanding, but the DWP is now taking our need for access to data seriously.”

The commission had also just signed a memorandum with the OBR which reflected the “strong and collegiate” relationship the two bodies had developed in recent years, said Dame Susan.

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