A no-deal Brexit would see government borrowing rise to almost £100bn a year and overall debt reaching levels not seen since the 1960s, a leading economic think-tank has warned.
Analysis by the Institute for Fiscal Studies (IFS) predicted a mini-boom in public spending, funded by the extra borrowing, to help soften the blow if the UK crashes out of Europe without a deal.
But the boom would likely be followed by bust as the government struggles to cope with the consequences of a smaller economy and higher debt on its funding of public services, the IFS said.
The findings were published in the think-tank’s “green budget” setting out the issues likely to be facing the chancellor Sajid Javid as he prepares his first budget.
It also contained analysis from economists at the global investment bank Citi finding that the UK economy was already as much as £66bn smaller as a result of the leave vote and predicting two years of zero growth in the event of no-deal.
IFS director Paul Johnson said “things have changed remarkably quickly” on public finances with the Conservative government’s current spending plans taking it closer to what Jeremy Corbyn promised in 2017 to anything implied in the Conservative manifesto.
The think-tank said that the plans for a 4.4% rise in day-to-day spending next year – together with a weakening economy – would help push borrowing above £50bn, or more than 2%, of national income.
That is more than double the level forecast by the independent Office for Budget Responsibility as recently as March.
But even a “relatively benign” no-deal Brexit would see that rise to £100bn, or 4% of national income, while debt would climb to 90% of national income for the first time since the 1960s, the IFS report said.
Borrowing as a proportion of GDP was as high as 10% in 2009/10 under Labour and has since been falling. It was last higher than £100bn a year in 2013/14.
The IFS analysis concluded that the government was now operating with no effective fiscal rules and had abandoned a manifesto commitment to balance the books by the mid-2020s.
It judged that the chancellor needed the flexibility to loosen the purse strings if necessary to respond to economic hard times but cautioned Mr Javid against implementing any “substantial and permanent” tax cuts.
Mr Johnson said: “The government is now adrift without any effective fiscal anchor.
“In the case of a no-deal Brexit… it should be implementing carefully targeted and temporary tax cuts and spending increases where it can effectively support the economy.
“It will be crucial that these programmes are temporary: an economy that turns out smaller than expected can, in the long run, support less public spending than expected, not more.”