Think Tank Warns Against the Ill-Effects of Brexit Deal on the UK Public Finances
Business, Finance

Think Tank Warns Against the Ill-Effects of Brexit Deal on the UK Public Finances 

Last updated on December 3rd, 2018

After months of tortuous negotiations, Brexit deal has smoothly crossed level one of its journey, where the European Union leaders have approved the agreement. As the deal is on the next step, a think tank report has published a warning regarding the effects of Britain’s exit from the bloc on the public finances.

According to the report, Theresa May’s proposed Brexit deal — a 21-month transition followed by a free trade deal with the EU — is expected to make it difficult to fund the public services of the United Kingdom by reducing tax revenues.

In a new modeling exercise published on Tuesday, A Changing Europe, UK calculated that in the long term the Prime Minister’s deal would hit fiscal revenues by 0.4 per cent to 1.8 per cent of GDP. This is likely to surpass any benefit to the public finances from no longer paying a net contribution to the EU budget, easily.

The calculations flow from the think tank’s larger modeling exercise — suggesting a long term hit to UK GDP per capita of between 1.9 per cent and 5.5 per cent. It is by and large being seen in alignment with those from a separate modeling exercise on Monday by the National Institute of Economic and Social Research, which pointed to a £100 bn hit to long-term GDP.

The UK and EU authors wrote, “We assume that the public finances benefit by 0.4 per cent of GDP per year as a result of reduced EU net contributions … [but] we assume that a 1 per cent fall in GDP per capita reduces government revenue by 0.4 per cent of GDP.”

They also said, “Our findings imply challenges ahead for policymakers. The scale of impact that we have estimated will make it harder to achieve key public policy objectives.

“Difficult choices, particularly about taxation and spending, will have to be made. And there is little if any sign that the starkness of these choices has yet been appreciated, not least by the two main political parties, both of whose manifestos for the 2017 seemed to imply that a post-Brexit world would be one of business as usual.”

The modeling was based on the inputs from the experts at the London School of Economics and the Institute for Fiscal Studies.

To boost the support for the Brexit deal, May had written a ‘letter to the nation’ this weekend. In the letter she wrote, “We will be able to spend British taxpayers’ money on our own priorities, like the extra £394 m per week that we are investing in our long-term plan for the NHS.”

Her letter was seen as are iteration of the claim by the Leave campaign, stating that the Brexit deal would enable the UK to spend an extra £350 m a week on the National Health Service.

However, the claim was condemned by the UK Statistics Authority as misleading, since it used ‘gross’ rather than ‘net’ of the EU budget contributions figures.

Moreover, since then it has been shown to be doubly wrong because all the credible forecasters anticipated the Brexit deal to damage the UK public finances overall rather than improve them by.

While the think tanks are asserting the ill-effects of the Brexit deal on the UK Public finances, Theresa May is dogged on her decision. However, the deal is yet to be approved by the British Parliament, which remains divided on the matter.

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