No-deal Brexit would inflict substantial costs on UK economy, says IMF

PUBLISHED: 12:32 17 September 2018 | UPDATED: 15:57 17 September 2018

IMF managing director Christina Lagarde (r) and deputy director Philip Gerson (l)

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Leaving the EU without a Brexit deal would inflict "substantial costs" on the UK economy, the International Monetary Fund (IMF) has warned.

In the latest of its regular assessments of the state of Britain's finances, the IMF said that all likely Brexit scenarios would "entail costs for the UK economy", but that a disorderly departure could lead to "a significantly worse outcome".

While new trade agreements made possible by EU withdrawal "could eventually pare some of these losses for the UK", any such deals are "unlikely to bring sufficient benefits to offset the costs imposed by leaving the EU", the international economic think tank said.

And the cost of Brexit will "exceed" any savings from lower contributions to the EU budget.

In its report, launched by managing director Christine Lagarde alongside chancellor Philip Hammond at the Treasury in London, the IMF urged the UK authorities to prepare policies to "safeguard macroeconomic and financial stability" in the case of a chaotic Brexit.

The Treasury and Bank of England should be prepared for the possibility of "sharp declines in sterling and other asset prices" and the Bank should be ready to act to ensure the financial system has adequate liquidity, the report said.

Plans should also be in place for a possible "significant" increase in interest charged on government debt.

Ministers may have to use the flexibility available to them to boost economic activity by bringing forward major infrastructure projects.

But any easing of fiscal policy - for example by cutting interest rates to stimulate the economy - would have to be temporary and introduced as part of a "credible" longer-term plan to keep debt under control.

The IMF warned that tax rises and spending cuts may be needed if Brexit inflicts lasting harm on the economy, saying: "A permanent shock to output would require an eventual adjustment of revenues or spending."

Even if an orderly Brexit is achieved, with a trade deal covering goods and some services, UK growth can be expected to remain "moderate" over the next few years, said the IMF.

Its forecast of around 1.5% growth in GDP for 2018 and 2019 under this scenario was virtually unchanged from its predictions in July.

The UK has already fallen from the top to near the bottom of G7 growth tables in the wake of the 2016 referendum, with business uncertainty holding back investment and the fall in the value of the pound feeding through to higher inflation and slower growth in incomes and consumption, said the report.

The IMF noted that "fundamental questions", particularly on the Northern Irish border, remain to be answered in order to secure a smooth Brexit.

And it warned: "Resolving these issues is critical to avoid a no-deal Brexit on World Trade Organisation terms that would entail substantial costs for the UK economy - and to a lesser extent the EU economies - particularly if it were to occur in a disorderly fashion."

The report warned that the UK still faces a "daunting" task to prepare for Brexit and is unlikely to have completed the task by departure day on March 29, 2019 even with "the most determined efforts".

"This risks serious disruptions without an implementation period in place," said the IMF.

"Co-ordination and co-operation between the EU and UK on priority issues, such as ensuring air traffic continues to flow, would be to the benefit of both parties."

The IMF urged the Bank of England to exercise caution over any further increases in the base rate of interest, following the hike from 0.25% to 0.5% in November last year and to 0.75% in August.

"Further withdrawal of monetary stimulus should await clear confirmation of a durable rise in domestic cost pressures," said the report.

While the inflationary impact from the Brexit vote should fade over time, the tight labour market can be expected to force up wages, fuelling further price rises, said the IMF.

The organisation said it was "critical" for the UK continue its strategy of "fiscal consolidation" to reduce overall debt levels by keeping a tight hand on the purse-strings.

This meant that the £20bn boost to NHS resources announced by Theresa May in June should be funded from new taxes or cuts elsewhere in the government's budgets, and not from borrowing, said the report.

London Mayor Sadiq Khan said: "Today's report from the International Monetary Fund is a bleak reminder of the disastrous consequences a 'no-deal' Brexit could have across the entire country.

"It is yet more evidence that the government's chaotic approach to the Brexit negotiations could be dire for our economic prospects - with fewer jobs, less investment and reduced growth.

"The government should heed this warning from the IMF and agree to a public vote on any Brexit deal so that the people can take back control."

Labour MP David Lammy, a champion of anti-Brexit campaign group Best for Britain, said the report proved "beyond doubt that the Tories' plans would act as a sledgehammer to the UK economy".

He said: The substantial costs would weigh disproportionately on those with the least.

"It's not fair on the most vulnerable in this country. The prime minister might try to trumpet this report as a victory for her Chequers plan, but doing so would be to deceive the British people. She and the Brexit extremists who have held a gun to the country's head should take responsibility for this entire mess.

"No deal would be a nightmare - that's for certain. We need a people's vote with the option to stay in the EU."

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