Even a small Brexit hit could leave fiscal rules broken

Relatively small overshoots in public sector borrowing, like that shown in last week’s figures, could soon pale into insignificance if the UK were to vote to leave the EU next month. Indeed, the Institute for Fiscal Studies (IFS) last week warned that to eliminate the deficit, the Chancellorwill have to introduce more and/or prolong austerity if the UK votes to leave the EU.

We doubt that the economy would be hit as badly by a Brexit as the IFS’s numbers assumed.But with the OBR projecting the Chancellor to eliminate the deficit by 2019/20 by only a slim margin, even a small adverse impact on the economy could result in a broken fiscal rule. So he would probably end up having to go into the next election with austerity due to drag on for a third parliament.