Chancellor warns of ‘large fiscal consequences’ of no deal Brexit
Chancellor Philip Hammond has confirmed that in the event of a no deal/Word Trade Organisation (WTO) outcome to the current Brexit negotiations, GDP is predicted to fall 7.7%, with the largest negative impacts felt in the North East and Northern Ireland
24 Aug 2018
Hammond’s economic analysis is contained in a letter to the Treasury select committee, which last month requested information on the government’s no deal planning and analysis.
The letter stated: ‘This January provisional analysis estimated that in a no deal/WTO scenario GDP would be 7.7% lower (range 5%-10.3%) relative to a status quo baseline.
‘This represents the potential expected static state around 15 years out from the exit point. The analysis did not estimate the path the economy and different sectors might take under no deal and the potential for short-term disruption.’
It goes on to state: ‘Under a no deal/WTO scenario chemicals, food and drink, clothing, manufacturing, cars, and retail were estimated to be the sectors most affected negatively in the long-run, with the largest negative impacts felt in the North East and Northern Ireland.’
The Chancellor then writes: ‘GDP impacts of this magnitude, were they to arise, would have large fiscal consequences. The January analysis estimated that borrowing would be around £80bn a year higher under a no deal/WTO scenario by 2033-34, in the absence of mitigating adjustments to spending and/or taxation, relative to a status quo baseline. This is because any direct financial savings are outweighed by the indirect fiscal consequences of a smaller economy.’
Nicky Morgan, chair of the Treasury committee, said: ‘The Chancellor has confirmed that the government forecasts a disastrous hit to our economy and living standards in the event of a no deal Brexit. The Committee will expect an updated analysis to be published in good time to inform Parliament’s key decisions on the final deal.
‘The committee will continue to press the Treasury for a robust and high-quality short- and long-term analyses of the economic consequences of Brexit so that Parliament can take properly informed decisions in the coming months.’
The Chancellor’s letter was published in the wake of the release of the first tranche of 24 ‘technical notices’ outlining the impact of a no deal Brexit in different areas.
For financial services, these show that EEA-based customers of UK firms currently passporting into the EEA, including UK citizens living in the EEA, may lose the ability to access existing lending and deposit services, insurance contracts (such as a life insurance contracts and annuities or pensions) due to UK firms losing their rights to passport into the EEA, affecting the ability of their EEA customers to continue accessing their services.
There would be changes to the customs regime. Before importing goods from the EU, a business would need to register for an UK economic operator registration and identification (EORI) number, and ensure their contracts and international terms and conditions of service (INCOTERMS) reflect that they are now an importer.
Businesses will also need to consider how they will submit import declarations, including whether to engage a customs broker, freight forwarder or logistics provider, and decide the correct classification and value of their goods and enter this on the customs declaration.
When importing goods from the EU, a business will need to have a valid EORI number, make sure that their carrier has submitted an entry summary declaration at the appropriate time, submit an import declaration to HMRC, and pay VAT and import duties including excise duty on excise goods unless the goods are entered into duty suspension.
In the event of no deal, goods traded between the UK and the EU after 23:00 on 29 March 2019 will be subject to the same requirements as third country goods, including the payment of duty. Under WTO rules, the principle of most-favoured-nation (MFN) treatment means that, unless a preferential agreement is in place, the same rate of duty, on the same good, must be charged to all WTO members equally.
In a no deal scenario, trade with the EU will be on non-preferential, WTO terms. This means that MFN tariffs and non-preferential rules of origin would apply to consignments between the UK and EU.
All goods entering the UK as parcels sent by overseas businesses will be liable for VAT, if there is no deal. For parcels valued up to and including £135, a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HMRC digital service and account for VAT due.
Morgan said: ‘The no deal Brexit notices have highlighted the myriad of additional tariffs, taxes, and red tape that businesses and households would need to comply with in order to go about their day-to-day lives.
‘The British citizens living in the EU who may lose access to their pensions and other basic financial services such as their current accounts will be extremely concerned.
‘It is clear that the Government’s mantra that “no deal is better than a bad deal” is dead in the water, and that no deal is in fact a very, very bad deal.’
The no deal Brexit technical notices are here
Report by Pat Sweet