A “no deal” Brexit scenario would cost the UK economy at least around £800 per person in lost output each year, a think-tank has warned.
The National Institute of Economic and Social Research (Niesr) also estimates the cost to the economy of the UK crashing out of the EU could double the lost output if the impact on productivity is also taken into account.
It said the Bank of England will likely “weigh the consequences of ‘getting it wrong'” ahead of Thursday’s vote on whether to raise interest rates to the highest level for more than nine years amid uncertainty over a Brexit deal.
Niesr predicts a hefty blow to the economy if the UK Government’s “more restrictive” White Paper proposals on Brexit are achieved – amounting to £500 per person in lost output per year over time, compared with the soft Brexit scenario.
But it said this would rise to £800 per person in the event of a “no deal” Brexit.
“These estimates do not include the likely impact on productivity which could, on some estimates, double the size of the losses,” it said.
In its latest set of predictions for the economy, Niesr said the Bank of England should only raise rates gradually and “stand ready to move in either direction should circumstances change”.
“The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions,” according to Niesr.
It is forecasting UK growth of 1.4% this year and 1.7% next year – broadly in line with its previous forecasts.
The predictions assume a “soft Brexit” scenario – where the UK achieves close to full access to the EU market for goods and services – and an increase in rates from 0.5% to 0.75% on Thursday decision, with rates hitting 1.25% in 2019.
Though it stressed the risks are heavily skewed to the downside.
Niesr said: “The UK economy is facing an unusual level of uncertainty because of Brexit.”
“The UK government’s White Paper, which set out its preferences for that new relationship, has failed to unite the Government or Parliament, leaving open an entire spectrum of possible outcomes,” it added.
Niesr also warned the Government would have to make “significant concessions” to the EU for its White Paper proposals put forward last month to succeed.
On spending, it said pressure to increase funding for the NHS and public sector workers will fail to see government spending as a share of GDP fall, in contrast to forecasts by the Office for Budget Responsibility (OBR).
The Budget deficit will therefore remain close to 2% of GDP over the next five years instead of the OBR’s forecast of 1%, according to Niesr.