Brexit and the UK's public finances

Document type
Report
Author(s)
Emmerson, Carl; Johnson, Paul; Mitchell, Ian
Publisher
Institute for Fiscal Studies
Date of publication
25 May 2016
Series
IFS Report; 116
Subject(s)
Social Policy
Collection
Social welfare
Material type
Reports

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This report sets out the possible impact of Brexit, focusing particularly on the short run, given that the Chancellor wishes to achieve a budget balance by the end of this parliament. It also looks at possible long-run consequences.

The overall impact on the public finances will depend on two distinct components, each of which is uncertain to some degree:

  • The mechanical effect. As a net contributor to the EU, leaving the EU would strengthen the public finances because our net contribution would fall. But given uncertainty over the form of any subsequent arrangement with the EU, it might not necessarily fall to zero.
  • The national income effect. Any effect of leaving the EU on UK national income would affect the public finances. A rise in national income would strengthen the public finances, a fall would weaken them.

Estimates suggest that the overall effect of Brexit would be to damage the public finances. On the basis of estimates by NIESR, the effect could be between £20 billion and £40 billion in 2019–20, more than enough to wipe out the planned surplus. In the long run, lower GDP would likely mean lower cash levels of public spending.

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