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'Brexit' Would Require GBP5bn Tax Hike: IFS

by Robert Lee, Tax-News.com, London

01 June 2016


The Institute of Fiscal Studies (IFS) has warned that in the event of a "Brexit," the UK Government would need to hike taxes by GBP5bn (USD7.4bn) to meet its target of a balanced budget in 2019-20.

The warning was made in a new report on the direct and indirect effects a vote to leave the European Union (EU) would have on the UK's public finances. The report is based on a review of previously published studies on the short-and long-term economic effects of a Brexit.

The IFS said that the UK's gross contribution to the EU, after its rebate, is around GBP14.5bn a year. Its net contribution, after taking account of money received back from the EU, is approximately GBP8bn a year. Leaving the EU would therefore have the direct effect of strengthening the public finances by GBP8bn a year, the IFS explained.

However, it cautioned that a vote to leave the EU would increase uncertainty in the short-term and make trade more expensive in the long-term. In addition, it would likely make the UK less attractive to foreign direct investment (FDI).

According to the IFS, in a "relatively optimistic" scenario, where national income is 2.1 percent lower in 2019, borrowing would be more than GBP20bn higher than currently planned by the Government. To achieve the intended budget balance in 2019-20, the Government would need to implement a tax rise of more than GBP5bn, an additional GBP5bn of cuts to public service spending, and a further GBP5bn of cuts to social security spending.

The IFS did nevertheless note that it is unlikely that the Government would respond with bigger spending cuts and tax rises in the short-term. It said it is more likely that austerity would be extended by at least another year, or two in a less optimistic scenario.

Paul Johnson, IFS director and report co-author, said: "Leaving the EU would most likely increase borrowing by between GBP20bn and GBP40bn in 2019–20. Getting to budget balance from there, as the Government desires, would require an additional year or two of austerity at current rates of spending cuts. Or we could live with higher borrowing and debt. These are real costs, but they are costs we could choose to bear if it was felt that they – and other costs – were outweighed by advantages from Brexit in other realms."

TAGS: tax | investment | foreign direct investment (FDI) | budget | United Kingdom | tax rates | social security | tax reform | trade | European Union (EU) | Europe

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