How ministers will try to protect UK economy in a no-deal Brexit

Treasury mandarins plan emergency measures designed to avert recession

Treasury mandarins have lined up emergency measures to protect the UK economy from a potential no-deal Brexit in fewer than 50 days’ time, with a series of growth-boosting measures designed to avert a recession.
News emerged this week of cross-Whitehall plans codenamed Project After, drawn up after the 2016 Brexit vote. As the likelihood of a no-deal Brexit grows, some ministers and officials have returned to the work in search of emergency levers to pull in the event of a downturn, the Guardian has been told. These are the options that could be open to ministers:

Tariffs

Under a disorderly Brexit, Britain’s imports and exports will switch to World Trade Organization rules, which would mean higher tariffs than under existing EU arrangements.

Some free-market economists and politicians have called for the UK to cut its tariff rates to zero to offset the cost to consumers. However, this would probably damage UK firms that could be undercut by foreign imports, particularly for manufacturing and agriculture.

However, there could be a benefit from a WTO regime. Paul Dales, the chief UK economist of the consultancy Capital Economics, said WTO-level border taxes could bring in about £10bn a year extra for the public purse. This could be used to finance tax cuts to maintain consumer spending.

VAT

Economists said cutting VAT paid on goods in the shops from the current level of 20% would help to support consumer spending. A no-deal Brexit is forecast to cause a slide in the value of the pound, which would push up the cost of imports, leading to higher inflation and eroding consumer spending power.

Income tax

Philip Hammond announced tax cuts in the autumn budget, and could raise the personal allowance – the rate at which people start paying tax on income – further to put more money in consumers’ pockets to help them keep spending. He could also cut income tax, although he would probably face political pressure not to cut taxes for wealthier voters. He could also cut stamp duty to help stimulate the housing market.

Benefits

Hammond could overturn the benefit freeze to put more money in the pockets of lower-income households – helping to maintain spending. Real-terms welfare cuts worth £1.5bn per year are due to kick in from April, and will lose the average lower-income-bracket couple with children about £200.

Spending

The chancellor held about £15.4bn worth of spending firepower in reserve at the last budget, which he could unleash to stimulate economic growth. Dales said an additional £10bn of spending would boost economic growth by about 0.5% per year.

Spending on infrastructure projects, such as roads, bridges and railways, would have the biggest impact. However, it would take time to get started. Economists said tax cuts were quicker and easier, and therefore more likely to be deployed.

Austerity

Public borrowing could expand rapidly in the event of no-deal Brexit. The National Institute of Economic and Social Research estimates about £60bn in additional borrowing by 2023-24 – three times the increase for the NHS – would be required to stimulate the economy and avoid a recession. The Conservatives have, however, imposed austerity. Many economists believe that higher spending immediately after the 2008 financial crisis by the Labour government helped avoid a more damaging recession.

Border checks

Some Brexit supporters have suggested that customs checks at UK borders could be relaxed to help smooth international trade.

There are fears the government could lower UK regulations, including food standards, to strike trade deals around the world. This would probably face strong opposition from Labour.

Interest rates and quantitative easing

Two of the most powerful options are wielded by the independent Bank of England: interest rates and quantitative easing. The Bank kept interest rates on hold at 0.75% this week as it warned that the outlook for the UK economy was the worst since the financial crisis, in a move that helps keep borrowing costs low for consumers and companies to maintain spending.

City economists believe Threadneedle Street would cut interest rates to 0.25% in the event of no-deal Brexit to further stimulate growth, although the Bank said such a reaction would not be automatic.

Should the economy require additional support from the Bank, it could relaunch its programme of quantitative easing – buying UK government bonds from commercial banks to flood the financial system with additional money. It could also reinstate its term funding scheme – which provided banks with cheap borrowing in exchange for them continuing to lend to the real economy.

Source: The Guardian