Even a 0.6 per cent fall in national income would be enough to offset the savings on the net contributions Britain makes to the European Union budget, according to the IFS.
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“It is unlikely that government would respond with bigger spending cuts and tax rises in the short run”, the IFS said.
If the United Kingdom were to leave the EU and join the European Economic Area (like Norway), then its net contributions might be halved to around £4bn a year, depending on the deal that it is able to negotiate with the EU.
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 United Kingdom a less attractive destination for foreign direct investment.
Carl Emmerson, IFS deputy director and co-author of the report, said: “The precise effects of leaving the European Union on the British economy and hence the knock-on impact on the public finances are uncertain”.
The IFS found that if national income was just 2.1 per cent lower in 2019 – the study’s most optimistic scenario – borrowing would be more than £20bn higher than now planned.
“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”, said IFS Director Paul Johnson.
Even under the more optimistic scenario, the fiscal tightening needed to meet that target would be the equivalent of an additional 5 billion pounds of cuts to public services, 5 billion pounds of welfare reductions and a tax increase of more than 5 billion pounds, it estimated.
This news was a severe blow to the Vote Leave campaign, because the IFS is an independent organization, and their studies suggest that there could be a gap of £20 billion to £40 billion in the government’s finances by 2020, and it could take until 2022 to recover.
“It is disgraceful that the Leave campaigns response to the IFS study is to smear their reputation for impartiality and fairness”.
“The IFS comments that it is “politically difficult” to embark on this WTO (World Trade Organisation) path”.
In 2014, 11% of the think-tank’s research funding came from the EU and it has received more than 7.4 million euros (£5.6 million) from European Commission sources since 2009, Vote Leave said. “Yet this is entirely irrelevant for what is a purely economic argument”. With polls drifting against them, “Leave” campaigners may struggle to explain why that is a price worth paying.
Asked whether he was claiming the IFS was paid to warn about the economic consequences of Brexit, Redwood said: “I haven’t made that allegation”.
A vote to leave would let the United Kingdom “secure our economic security for future generations based on expanding our trade across the globe, turbocharging our economy and taking control of our borders”.
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‘If one has a more upbeat view of the economic outlook with Brexit, as the Economists for Brexit group does, then naturally the budget numbers improve considerably.
