The government's aim of balancing the books by 2019/20 would be virtually impossible after a Leave vote
The reduction of national income that would follow a Leave vote in June would likely force the government to extend its austerity programme by two years, new IFS analysis suggests.
The economic think-tank accepts the consensus that a Leave vote would increase uncertainty in the short run and make trade more expensive in the long run, as well as making the UK a less attractive destination for foreign direct investment.
In the most optimistic of short term forecasts, national income would slide by 2.1 per cent by 2019, meaning that — in order the achieve a balanced budget in 2019/20 — the government would have to find an additional £5bn in cuts to public services, an additional £5bn in cuts to social security and tax increases of more than £5bn.
More pessimistic forecasts suggest that borrowing could be £40bn higher by 2019/20 than currently forecast if the UK votes to leave.
In either scenario, the IFS suggests that the government would abandon its goal of balancing the books by the end of the parliament and, rather than imposing immediate extreme cuts, would extend the period of austerity by one or two years.
The IFS has been much more reserved in its forecasts than other institutions, including the Treasury, and has been more considerate of the claims of the Leave campaign.
While the report reiterates that ‘claims that we would have an additional £350 million a week to spend are wrong’, it does acknowledge that leaving the EU could directly free up approximately £8bn a year.
However, the benefit to the public finances would be negated if national income fell by more than 0.6 per cent, which is overwhelmingly likely.
“The precise effects of leaving the EU on the British economy and hence the knock-on impact on the public finances is uncertain,” commented the report’s author Carl Emmerson.
“But the overwhelming weight of analysis suggests that the economy would shrink by more than enough to offset the positive effect on the public finances of the reduced financial contribution to the EU budget”.
Interestingly, IFS director Paul Johnson has diverged from the rhetoric of ‘Project Fear’, by acknowledging that while the objective evidence suggests that Brexit would damage the economy, voters could still choose to prioritise other issues.
“Leaving the EU would most likely increase borrowing by between £20 and £40 billion in 2019–20,” Johnson said.
“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. Or we could live with higher borrowing and debt.
“These are real costs, but they are costs we could choose to bear if it was felt that they – and other costs – were outweighed by advantages from Brexit in other realms”.Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.