An emergency Budget that immediately raised taxes and reduced public spending in the event of a vote by the UK to leave the EU was on Wednesday dismissed by economists as “scaremongering’, though they agreed that the cuts warned of by chancellor George Osborne and former Labour chancellor Alistair Darling would ultimately be required.
A 2p increase in the basic rate of income tax, 5p on inheritance tax and cuts of 2 per cent to the National Health Service, education and defence budgets would be among the measures needed to fill a £30bn hole in the public finances caused by the economic pain of Brexit, Mr Osborne said.
“Frankly, this is scaremongering”, said Jonathan Portes, senior fellow at UK in a Changing Europe, a think-tank. Like the majority of economists, he agreed that “over the long run, Brexit will reduce UK growth, with damaging consequences for tax and spending” but dismissed the idea that any action to address this would have to be taken as soon as an emergency Budget.
The consensus among economists was that Brexit would leave the UK’s economy as much as 9.5 per cent smaller over the long term. Public borrowing could be pushed up by £20bn to £40bn a year, according to the Institute for Fiscal Studies. If that happened, the government would probably have to act at some point to prevent debt levels becoming unsustainable.
To do so in the short term would be counter-productive, however. It would further weaken the economy when it could already be struggling to cope with the uncertainty of Brexit.
Vicky Redwood, chief UK economist at Capital Economics, said: “If the economy were hit so badly, it seems very unlikely that the government would exacerbate this in the near-term by ramping up austerity and sending the public finances and economy into a downward spiral.”
One reason to act quickly would be to reassure lenders that the government had a grip on public finances. Mr Osborne’s former chief of staff, Rupert Harrison, pointed out that this was what the government did in 2008 in response to the financial crisis.
“Saying something reassuring would be sensible” Ms Redwood said. However, a specific plan for austerity set out so quickly might not soothe markets if it were based on limited information about the effects of Brexit. There would be “a question about how meaningful that would be” she noted.
The tax rises and spending cuts that Mr Osborne said would be needed seemed designed to elicit a response from Conservative voters: they reversed many of the party’s 2015 manifesto commitments — such as raising spending on the NHS, cutting inheritance tax and protecting pensioner benefits.
Steve Baker MP, a supporter of Brexit, said he was “shocked that the chancellor is threatening to break so many key manifesto pledges on which all Conservative MPs were elected”.
Other tax rises or spending cuts could be considered. However, Paul Johnson warned that “additional cuts in unprotected areas [of spending] would be very hard” and that “if you are going to do a significant chunk of it through tax, you’re not going to do it painlessly”.
But he added that “most likely this would be pain delayed, not implemented immediately in an emergency Budget”.