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Chancellor faces £25bn Brexit black hole

Chancellor faces £25bn Brexit black hole

The UK’s economic prospects have U-turned since March, as a think tank warned the public purse could be £25bn worse off than previously forecast.

The Institute for Fiscal Studies said it expects borrowing to hit nearly £15bn by 2019, wiping out the £10.4bn surplus which had been forecast by the former chancellor George Osborne in the March Budget.

According to the IFS this dramatic shift in expectations will be largely caused by lower economic growth, which has outweighed the £6bn cut to spending from no longer having to make a contribution to the European Union budget.

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The IFS stated new chancellor Philip Hammond is faced with a huge challenge as he prepares for his first Autumn Statement.

Carl Emmerson, deputy director at the IFS, said before the referendum the public finance challenge facing the UK already looked “far from easy”.

He pointed out that after the result the government was forced to abandon one of its fiscal targets and revise down its forecasts for economic growth. 

Yet the think tank said Mr Hammond needs to consider whether to announce new fiscal targets in the Autumn Statement, adding these targets should be "chosen wisely". 

“A good set of fiscal targets will be forward-looking and flexible, like the two targets that were actually met.”

Mr Emmerson also said the chancellor could sensibly choose not to add to the significant tax increases and spending cuts already planned through to 2020. 

“Indeed a well targeted temporary fiscal stimulus might help the economy through a period of uncertainty. 

“But if long-run growth is lower as a result of Brexit, he should also prepare for further austerity in the next parliament.”

The IFS also pointed to the long-running fiscal challenge due to an ageing population. 

“This challenge will be harder now that borrowing in 2019–20 is likely to be higher, and will be even more difficult if economic growth or immigration is lower, or interest rates are higher.” 

katherine.denham@ft.com