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Tue, 26 January 2021

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The Finance Watchdog Says There's "Evidence" Neither Ministers Or Businesses Are "Fully Prepared" For Brexit

The Finance Watchdog Says There's 'Evidence' Neither Ministers Or Businesses Are 'Fully Prepared' For Brexit
3 min read

The Office for Budget Responsibility has warned there is "evidence" that ministers and businesses are not prepared for "imminent changes" to the economy from Brexit.

Chancellor Rishi Sunak has come under fire for failing to mention the potential impact of Brexit on the nation's finances during the spending review, despite the OBR warning a no-deal outcome was a "material risk".

The watchdog, which modelled a 11.3% contraction of the economy, said the figures were based on a presumption that ministers would strike a free trade deal with Brussels ahead of the 31 December deadline.

But it said the "unresolved nature" of the talks meant that "other outcomes are possible, including that no agreement is reached and the UK defaults to trading with the EU on World Trade Organization (WTO) terms from 1 January 2021."

The finance watchdog concluded that under that scenario the UK's GDP would be reduced by a further 2% in 2021, "due to various temporary disruptions to cross-border trade and the knock-on impacts".

It added: "As these abate, the longer-term effects of lower trade instensity continue to build such that output is 1.5% lower than our central forecast after five years, and 2% lower in the long run..."

The analysis also found that a no-deal scenario would see borrowing likely rise by a further 0.5% of GDP from 2021-22.

And under its worst case scenario, which would also see vaccines failing to control the pandemic, the OBR predicted the additional impacts of a no-deal would lead to national debt reaching 126.3% of GDP by 2025-26.

"The degree of near-term disruption to economic activity associated with defaulting to WTO terms depend in part upon the preparedness of the Government and businesses to manage any additional administrative, regulatory, and customs requirements," the report said.

"While both have had more time to prepare than when we last considered these issues in our [earlier report], they have also been distracted by the need to deal with the disruption caused by the virus.

"This is likely to have taken up personnel and resources at some businesses that would have otherwise been used to prepare for a no deal Brexit, while also running down cash reserves and inventories making them more vulnerable to shocks," it went on.

Meanwhile, pointing to work carried out by business groups, the OBR said there was "evidence" that ministers and businesses were still not prepared for Brexit related disruption, even if a deal is signed.

The watchdog added: "We continue to assume that the UK and EU conclude a free-trade agreement (FTA) and that there is a smooth transition to the new trading relationship after the transition period ends on 31 December 2020. However, there is evidence that neither the government nor businesses are fully prepared for the imminent changes even if a deal is agreed."

Hitting out at Mr Sunak's failure to address Brexit during his economic update, shadow chancellor Anneliesse Dodds, said: "In less than 40 days, we're due to leave the transition period. Yet the chancellor didn't even mention that in his speech.

"There's still no trade deal. So does the chancellor truly believe that his government is prepared and that he's done enough to help those businesses that will be heavily affected?"

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