OBR analysis highlights no-deal Brexit economic risk

Clare Francis, head of Brexit advisory at Pinsent Masons, the law firm behind Out-Law, was commenting as the OBR projected a £30 billion increase in the UK's budget deficit by 2020-21, based on the latest global economic outlook by the International Monetary Fund (IMF).

The OBR, which publishes an in-depth report on the financial risks to the UK's economy once every two years, said it was required to consider the potential impact of leaving the EU without a negotiated withdrawal agreement in place "given the [Conservative] leadership contenders' willingness explicitly to countenance a 'no deal' exit" on 31 October 2019.

"This scenario is not necessarily the most likely outcome and it is relatively benign compared to some (for example, assuming limited short-term border disruptions)," the OBR said in its report. "A more disruptive or disorderly scenario, closer to the stress test we considered two years ago, could hit the public finances much harder."

The IMF projections on which the OBR has based its analysis assume average tariffs of 4% imposed on goods traded with the EU but limited physical border disruption; a temporary recognition regime for some financial services; and a drop in net migration into the UK by 25,000 per year to 2030.

The UK Treasury is legally committed to publish a response to the OBR's report, although this will not happen until the new prime minister is in place and has chosen his chancellor of the exchequer.

"The OBR report brings the negative impact of a no-deal Brexit into sharp focus," said Clare Francis. "For many this will send shockwaves through their business as they attempt to prepare for the very real possibility of a no-deal Brexit at the end of October."

"For industries that are exposed to a seasonal flow of goods, such as food and retail, a wintertime EU exit creates a more extreme economic risk compared to the original springtime date. This means that those businesses exposed to seasonal fluctuations must step up plans to hedge against a no-deal Brexit. Streamlining supply chains, switching to UK suppliers and realigning the workforce could all bolster the foundations of businesses grappling with Brexit risk," she said.

The government warned in February that businesses were not prepared for the possibility of the UK leaving the EU without a withdrawal agreement in place ahead of an anticipated EU exit date of 29 March 2019. The UK and EU are yet to formally agree on the terms of withdrawal, with the so-called 'Irish backstop' temporary customs arrangement designed to avoid the need for a 'hard' border between the UK and Ireland proving particularly contentious.

The OBR has also warned that "uncosted proposals for tax cuts and spending increases" made by both of the Conservative leadership contenders would further push up government borrowing.