Brexit could force UK to extend austerity by two years

[LONDON] Leaving the European Union could add tens of billions of pounds to UK government borrowing and force Chancellor of the Exchequer George Osborne to extend austerity into the next decade, according to the Institute for Fiscal Studies.

Instead of returning to surplus in the 2019-2020 fiscal year as currently planned, Britain may face a budget deficit of as much as 30 billion pounds (S$60.6 billion) if Britons vote for a so-called Brexit next month, the London-based IFS said in a report published Wednesday.

"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," said IFS Director Paul Johnson. "Or we could live with higher borrowing and debt."

The intervention of the non-partisan IFS is a major boost for Mr Osborne as he presses the economic case for remaining in the EU in the June 23 referendum. It comes two days after the Treasury warned that a vote to quit the bloc could plunge Britain into a recession and push up net borrowing by 39 billion pounds over the next two years.

The group was immediately attacked by Vote Leave, the official pro-Brexit campaign, which said it was in the pay of the EU.

"The IFS are part of this cozy establishment which desperately wants to keep us in the European Union," Conservative lawmaker John Redwood told BBC Radio 4's Today programme.

NO INFLUENCE

Mr Johnson told the same show that about about 10 per cent of the IFS's income comes from the European Research Council. The money "certainly doesn't impact on this kind of work," he said. "There is no sum of money from anywhere in the world which would influence what we say."

The IFS based its analysis on the forecasts of the National Institute of Economic and Social Research, which sees a Brexit leading to an output loss of between 2.1 per cent and 3.5 per cent in 2019 relative to current forecasts.

The IFS predicts the budget could take a 20 billion-pound hit in its more optimistic scenario or 40 billion pounds in the worse case in 2019-20. Official forecasts are for a surplus of 10.4 billion pounds that year.

FISCAL RULE

A vote to end membership of the EU could force Osborne to abandon his key fiscal rule, a commitment to balance the books by the end of the decade, according to the IFS.

Even under the more optimistic scenario, the fiscal tightening needed to meet that target would be the equivalent of an additional 5 billion pounds of cuts to public services, 5 billion pounds of welfare reductions and a tax increase of more than 5 billion pounds, it estimated.

The report "further underlines what a disaster it would be for the UK to risk a Tory Brexit under the chancellor's recovery built on sand," John McDonnell, the finance spokesman for the opposition Labour Party, said in an e-mailed statement.

Even a 0.6 per cent fall in national income would be enough to offset the savings on the net contributions Britain makes to the EU budget, according to the IFS. These payments currently total 8 billion pounds a year, and the bill would fall to 4 billion pounds if Britain wanted to retain its membership of the European Economic Area, it said.

A vote to leave would increase uncertainty in the short run, make trade more expensive in the long run and make Britain less attractive to foreign investors, the IFS said. "Whatever deal we came out with would be worse than the deal we have at the moment," Mr Johnson said.

The IFS is the latest organisation to highlight the costs of leaving the EU. following similar warnings from the Bank of England, the International Monetary Fund and the Organisation for Economic Cooperation and Development. These have been dismissed by Brexit campaigners, who say Britain would see stronger growth and lower immigration outside the 28-nation bloc.

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