Johnson’s Brexit Deal Seen Leaving U.K. Economy 3.5% Smaller

(Bloomberg) --

Boris Johnson’s Brexit deal would leave the economy 3.5% smaller in the long run and policy makers at the Bank of England should start thinking about an interest-rate cut, according to the National Institute of Economic and Social Research.

The chaos surrounding Brexit has already taken a toll on growth, the think tank said in a report published Wednesday. If the U.K. continues on its current path of chronic uncertainty and unchanged trading rules with the European Union -- Niesr’s base-case scenario -- the economy will experience a 2% loss of output.

“The U.K. economy will continue to suffer what we’re calling a ‘slow puncture,”’ said Niesr Director Jagjit Chadha. “No pop, no bang, but a slow puncture, as investment is deferred and delayed in the face of uncertainty.”

The U.K. will hold a general election in six weeks, which may turn into a proxy referendum on Brexit. Johnson’s proposed deal would leave the country 70 billion pounds ($90 billion) worse off, Niesr said. It would also do more damage than his predecessor Theresa May’s plan, the report said.

The forecasts are relative to Britain staying in the EU. Johnson’s deal would leave all parts of the U.K. poorer over the next decade and reduce tax revenue by 2.5%, Niesr said. The report also took aim at the Treasury, saying fiscal policy is in “disarray” and that the lack of strategy is concerning.

Chancellor of the Exchequer Sajid Javid last week canceled plans to hold a budget on Nov. 6, though his fiscal watchdog said Tuesday it will still publish new economic forecasts, based on the assumption that Britain leaves the EU with a transition agreement in place.

The case for a BOE rate reduction is growing, according to Arno Hantzsche, an economist at Niesr. He cited inflation being below the 2% target, the pound rising, downside risks emanating from the global economy and no-deal risks receding. Still, policy makers are likely to wait until March before making such a move, he said.

The central bank will announce its latest policy decision and publish new forecasts on growth and inflation on Nov. 7.

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