OBR: No-deal Brexit will spark recession
Asset prices and sterling fall 'sharply'
A sharp decline in investment into the UK and higher trade barriers with the European Union in the event of a no-deal Brexit will plunge the country into a recession, according to the Office for Budget Responsibility (OBR).
The OBR's Fiscal risks report, published on Thursday (18 July), forecasts that real GDP will fall by 2% by the end of 2020, while the UK's debt is set to spiral by an additional £30bn per year than was predicted it March.
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Its forecast, which was established by Parliament in 2015 to identify and analyse risks to the medium-term outlook for public finances and long-term fiscal sustainability, comes ahead of the UK's 31 October departure date.
Compiled with the assistance of the International Monetary Fund, the OBR's latest forecasts also warned a cliff-edge Brexit will see asset prices and sterling fall "sharply".
In the event of no deal, it said: "Heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports.
"Together, these push the economy into recession, with asset prices and the pound falling sharply.
"Higher trade barriers also slow growth in potential productivity, while lower net inward migration reduces labour force growth, so potential output is lower than the baseline throughout the scenario (and beyond)."
It added the inevitable imposition of tariffs by the EU, in addition to a depreciation in sterling, will "raise inflation and squeeze real household incomes".
However, it said the Bank of England's Monetary Policy Committee could then cut interest rates "to support demand, helping to bring output back towards potential and inflation back towards target."
In the OBR's view, the Treasury will receive lower levels of income tax and national insurance contribution, while capital taxes will also fall as a result of weaker asset prices.
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As a result, borrowing will be around £30bn a year higher from 2020-2021 than its March forecast. Higher borrowing will contribute to pushing public sector net debt around 12% of GDP higher by 2023 than previously forecast.
It said: "The impact of Brexit itself - once it happens - would also continue to unfold for many years beyond the end of the stress test horizon."
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