Chancellor Philip Hammond revealed he has £26.6bn to spend to mitigate a no-deal Brexit outcome, but this won’t be enough according to KPMG chief UK economist Yael Selfin.
In the Spring Statement, delivered to the House of Commons this afternoon (March 13), Mr Hammond said the economy was in "robust shape" but that a no-deal Brexit outcome would lead to a "short and medium term reduction" in the productive capacity of the UK economy.
The chancellor said cash that would otherwise be used for infrastructure and other spending would be directed to mitigating what he sees as the negative impact of a no-deal exit from the EU if no deal is agreed.
But Ms Selfin said the extra cash "wouldn’t be enough” to deal with what she sees as the problem of no-deal.
And the UK economy will grow below its natural rate of growth, even if there is a Brexit deal, according to Chancellor Philip Hammond.
Mr Hammond said he expects the UK economy to grow by 1.2 per cent this year, and 1.4 per cent next year, followed by 1.5 per cent in each of the following three years.
The Bank of England believes the UK’s natural, or trend, rate of growth is 1.5 per cent, and any number below this means the economy is growing at below its normal rate.
The trend of growth is the level at which the economy can grow without overheating and becoming inflationary - if it grows at less than 1.5 per cent, then the economy is growing at below capacity.
Mr Hammond said if no-deal is agreed with the EU on the terms of the UK’s exit, then "there would be a short and medium term reduction in productive capacity".
This means the 1.5 per cent natural growth rate would be lower, with higher unemployment, lower real wages and higher inflation.
He said the major challenge for the government was that with the economy growing at close to the 1.5 per cent level already, a significant injection of extra cash risked adding more short-term inflation, rather than short-term growth, into the economy.
This is because, for example, with unemployment presently below the 4.5 per cent level the Bank of England deems to be full employment, additional money pumped in by the government in the event of a no-deal Brexit to create jobs would cause a sharp rise in inflation, as wages would rise.
This inflation would be matched by the likely inflation caused by a decline in the value of the UK currency in the event of a no-deal Brexit. Mr Hammond is concerned that extra cash would simply create extra inflation, rather than extra economic growth.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: "Today’s Spring Statement by Philip Hammond was always going to be overshadowed by the Brexit crisis playing out on the floor of the House of Commons.