Don’t Forget About Brexit Amid the U.K.’s Budget Bonanza
Don’t Forget About Brexit Amid the U.K.’s Budget Bonanza
Britain’s fiscal watchdog has warned that the economy’s capacity to grow will be severely dented even if it secures a free-trade deal with the European Union this year.
The Office for Budget Responsibility sees a 4% loss in potential GDP over 15 years, compared with what would have happened staying in the EU. The calculation is based on a average of estimates, and it didn’t make an assumptions of what type of trade deal the U.K. will actually secure.
The figures were contained in the documents accompanying Wednesday’s budget, where a huge ramp-up in spending -- partly to offset the economic fallout from the coronavirus -- took almost all of the spotlight.
The OBR’s view reflects lower net immigration, and also weak productivity growth, a long-running U.K. problem that’s been exacerbated by near-stagnant investment since the referendum in 2016. It said the economic effects of the decision to leave the EU have already reduced potential output by about 2%.
“Real business investment has barely grown since the referendum, whereas our March 2016 forecast assumed it would have risen more than 20% by now,” the OBR said. While investment may rebound once there’s more Brexit clarity, higher trade barriers will continue to weigh on the economy’s capacity to grow.
Bank of England Governor Mark Carney has referred to this as the economy’s “speed limit,” which he says has fallen in recent years. The BOE is even more gloomy on potential growth, partly because of a downbeat view of productivity.
The central bank, which also unveiled stimulus today to combat the impact of the virus, sees productivity growth only averaging 0.5% in the coming years, half the pace anticipated by the OBR.
To contact the reporter on this story: Fergal O'Brien in Zurich at fobrien@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson
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