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Analysis

Brexit spectre haunts budget

by Sam Ashworth-Hayes | 08.03.2017

To say that Brexit was the elephant in the room at the chancellor’s budget speech is an understatement. Effectively, there was no room, only elephant. Even so, Philip Hammond managed to repeat his autumn statement trick of avoiding the dreaded portmanteau.

It is now clear that Brexit comes with a hefty price tag. While Brexiters crowed at the Office for Budget Responsibility (OBR) upgrading UK growth this year to 2%, they made less of the downgrades in subsequent years.

The OBR now thinks the economy will be 0.3% smaller in 2021 than it did it in November (see Table 1.1). This was already 1.4% down on what it was predicting before Brexit (see para 1.8).

And remember, the OBR has had to make some big assumptions. To start with, the government hasn’t told it what it wants to achieve from Brexit. All the OBR has to go on is Theresa May’s Lancaster House speech and the subsequent white paper.

Without any more solid information, the OBR has used the following assumptions: annual net migration falls to 185,000 rather than the government’s “tens of thousands” target; an average of external predictions for the Brexit hit to trade; and no reduction in long-run productivity growth.

These assumptions will probably not hold. Britain is headed for a hard Brexit. We are to be out of the single market and out of the customs union, while immigration may fall more rapidly in part because EU citizens don’t feel welcome. What’s more, there’s a high risk that we will crash out of the bloc without any deal at all. Indeed, one of Hammond’s predecessors, Nigel Lawson, yesterday said this was by “far and away the most likely outcome”.

So the OBR’s growth predictions are probably on the high side, even before accounting for the fact that the organisation has historically been too optimistic in forecasting productivity growth.

The OBR is expecting the government to borrow £25 billion less money up to 2021 than it was in November (see table 1.3). Hammond still thinks that we will need to borrow nearly £100 billion more than was forecast pre-Brexit – so that’s not great news.

However, let’s look on the bright side. Given that the OBR has avoided making any allowance for our divorce settlement and that the EU is expected to ask for about £50 billion, any extra cash will come in handy.

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Edited by Hugo Dixon