Vote to leave EU could mean another two years of austerity, warns IFS

Written by Liam Kirkaldy on 25 May 2016 in News

Institute for Fiscal Studies warns Brexit could mean between £20bn and £40bn in additional borrowing by 2019-20

A vote to leave the European Union would mean between £20bn and £40bn in additional borrowing by 2019-20, according to a new report from the Institute for Fiscal Studies (IFS).

The IFS report, based on figured from the National Institute of Economic and Social Research, found that, although leaving the EU and halting the UK’s European budgetary contributions could directly free up about £8bn a year, the move would mean GDP in 2019 could be between 2.1 per cent and 3.5 per cent lower.

The IFS found that if national income was just 2.1 per cent lower in 2019 – the study’s most optimistic scenario – borrowing would be more than £20bn higher than currently planned. In that scenario achieving the government’s aim of creating a balanced budget by 2019–20 would mean the equivalent of an additional £5bn of cuts to public service spending, an additional £5bn of cuts to social security spending and a tax rise of more than £5bn.

The most pessimistic scenario – a 3.5 per cent fall in GDP – would mean a £40bn rise in borrowing.


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IFS director Paul Johnson, said: “Leaving the EU would most likely increase borrowing by between £20 billion and £40 billion in 2019–20. Getting to budget balance from there, as the government desires, would require an additional year or two of austerity at current rates of spending cuts. Or we could live with higher borrowing and debt.

“These are real costs, but they are costs we could choose to bear if it was felt that they –and other costs – were outweighed by advantages from Brexit in other realms”.

The report also rejects claims leaving the EU would bring an additional £350m per week, with the authors stating the figure is based on the assumption that other EU countries would continue to pay a rebate to the UK after it left the union.

The IFS predicted a vote to leave the EU would increase uncertainty in the short term and make trade more expensive in the long term. It also said a Brexit would likely make the UK less attractive for foreign direct investment.

Carl Emmerson, IFS deputy director, said: “The precise effects of leaving the EU on the British economy and hence the knock-on impact on the public finances is uncertain. But the overwhelming weight of analysis suggests that the economy would shrink by more than enough to offset the positive effect on the public finances of the reduced financial contribution to the EU budget”.

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