Britain will need to curb public spending further or raise taxes if leaving the EU does long-term damage to economic growth, underscoring the importance of the country striking new trade deals, the UK government’s budget watchdog has said.
The Office for Budget Responsibility said ensuring robust trade agreements was more significant for the long-run health of Britain’s public finances than the size of any divorce bill to settle one-off liabilities with the EU.
A continuation of Britain’s recent weak productivity would also make tax rises or spending cuts more likely, the OBR said.
UK chancellor Philip Hammond said the report was “a stark reminder of why we must deliver on our commitment to deal with our country’s debts”.
The report comes as Theresa May unveiled the landmark law that will remove Britain from the EU, setting up clashes with opposition parties and the Scottish government that will prove the prime minister’s biggest tests since her Conservative Party lost its parliamentary majority.
The so-called repeal bill is aimed at transferring EU laws on to the British statute book for when Brexit takes place in March 2019. The draft would hand the government two years to alter UK law through a fast-track process.
Meanwhile, the British Chambers of Commerce said that consumer-facing businesses had suffered in the face of higher inflation over the past three months and that a better outlook for exporters was too little to compensate.
Whether stronger exports can offset a squeeze on consumer demand is the key question for Britain’s economy as it grapples with the effect of last year’s sharp fall in sterling following the vote to leave the EU.
The Bank of England predicts the overall effect will be modest, and could raise interest rates for the first time in a decade later this year if that continues to be the case.
But the BCC, which carries out Britain’s biggest quarterly survey of businesses, said economic activity was subdued in the three months to the end of June.
“For many businesses growth is static at best, and at worst, beginning to slow,” BCC director general Adam Marshall said. “The subdued growth picture underlines the importance of getting as much clarity on the Brexit transition as possible, as quickly as possible over the coming months.”
British banks expect to cut back lending to consumers in the coming months as they turn more cautious about the economy, according to a Bank of England survey.
The central bank’s quarterly Credit Conditions Survey also found that banks planned to tighten their credit standards further in the July-September period for credit cards and other unsecured borrowing.
The Bank of England said last week it wanted banks and other lenders to show they are not being too complacent about risks to their balance sheets in case Britain’s economy slows, raising the risk of higher loan losses.
Britain’s economy slowed sharply early this year as consumers felt the inflationary pinch from the fall in value of sterling.
The survey also showed banks expected to provide fewer mortgages to highly indebted homebuyers in the third quarter.
The Bank of England survey was conducted between May 22 and June 9, mostly covering the period before the UK’s inconclusive general election on June 8.
British house price inflation slowed last month to its weakest since just after last year’s Brexit vote, but this time domestic political worries played the greatest role, the Royal Institution of Chartered Surveyors said yesterday.
Meanwhile, the supply of life-saving medicines in Europe could be severely disrupted unless Britain successfully negotiates a smooth and orderly exit from the EU, pharmaceutical industry leaders has warned.
Europe’s pharmaceutical and bio-science industry is concerned about Brexit because it is currently well integrated across the EU, with many EU-wide regulatory agreements and cross-border collaborations.
In a letter to Brexit negotiators stressing the importance of securing ongoing co-operation on medicines after Britain leaves the EU, drug company representatives said a bad transition could put patients at risk.
There was better news for the UK in an assessment of tourism as spending by overseas visitors to the UK climbed to £4.4bn (€4.9bn) in the first quarter, a 15.6% increase from a year earlier.
Reuters and Bloomberg
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