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Will UK budget deficit skyrocket following Brexit?

A catastrophe, a tsunami, a return to austerity. Britain’s budget deficit is likely to more than double to around 100 billion pounds if the country leaves the European Union without a deal, a leading think-tank said on Tuesday.

The Institute for Fiscal Studies (IFS) predicted borrowing would rise to 92 billion pounds – equivalent to 4% of national income – by 2021/22 under a “relatively benign” no-deal Brexit scenario, in which there are no major delays at borders.

Even then, the economy would still enter recession in 2020, the IFS said in an annual assessment of the public finances.

IFS added that total debt would soar to 90% of national income. “The government is now adrift without any effective fiscal anchor,” said IFS director Paul Johnson.

The Treasury said any decisions would be made “with a view to the long-term sustainability of the public finances“.

If the government undertook enough fiscal stimulus to stop the economy contracting – roughly 23 billion pounds of extra spending in 2020 and 2021 – annual borrowing would peak at 102 billion pounds

“A no-deal Brexit would likely require a fiscal short-term stimulus followed by a swift return to austerity,” IFS deputy director Carl Emmerson said.

In the 2018/19 financial year Britain’s budget deficit was 41 billion pounds or 1.9% of GDP, its lowest since 2001/02, following years of efforts to reduce the deficit from a peak of 10.2% during the depths of the financial crisis in 2009/10.

In the longer term, a no-deal Brexit would mean less money to spend on public services – or higher tax rates – than staying in the EU or leaving with a deal, the IFS said.

Even without Brexit, Britain was likely to have to raise tax rates to fund the cost of pensions and public healthcare for an ageing population, it said.