Get a Brexit deal by December 31 or make Covid economic damage even worse, economists warn ministers

Britain’s coronavirus-ravaged economy will face even worse problems if it fails to agree a Brexit trade deal with the EU, ministers were warned today.

The Office for Budget Responsibility (OBR) said that UK GDP could fall an additional two per cent next year if no agreement is in place before December 31.

This is on top of any contraction caused by the coronavirus pandemic and a four per cent GDP hit the OBR has previously forecast from leaving the EU with a deal. 

Chancellor Rishi Sunak today revealed that borrowing is expected to hit £394billion this year as the economy shrinks by 11.3 per cent this year – the worst recession in more than 300 years. 

In its first forecasts since March, the OBR said the economy will not be back to pre-crisis levels until the end of 2022 at the earliest.

The jobless rate – currently around 4.8 per cent – is set to peak at 7.5 per cent in the middle of next year, equivalent to 2.6million people on the dole.

And the OBR suggests ‘scarring’ from the pandemic will be 3 per cent of GDP by 2025, equivalent to a £20-30billion black hole in the government finances that will eventually need to be filled with tax rises or spending cuts.

It came as European Commission President Ursula von der Leyen today warned the UK that the EU is ‘well prepared for a no deal scenario’ as she told the European Parliament she cannot guarantee the two sides will be able to strike a trade accord. 

The President of the European Commission said trade talks are now entering their ‘decisive days’ but ‘frankly I cannot tell you today if in the end there will be a deal’. 

In its economic and fiscal outlook today the OBR said it had created three scenarios for how the pandemic plays out; an ‘upside’ in which in which lockdown and vaccines work to bring Covid under control late in 2021, a ‘central’ one in which normality arrives late in 2022 and a ‘downside’ where problems continue until the end of 2024.

But it said all bar the ‘upside’ forecast left GDP ‘permanently scarred by the pandemic’, adding: ‘All three assume a smooth transition to a free-trade agreement with the EU in the new year. 

‘But we also describe an alternative scenario in which the Brexit negotiations end without a deal. This would further reduce output by 2 per cent initially and by 1.5 per per cent at the forecast horizon (in five years time).’

It came as Chancellor Rishi declared that billions of pounds will be pumped into getting the unemployed back to work, as well as boosting infrastructure, the NHS and defence, in a bid to create a platform for recovery.

Mr Sunak told the Commons his main priority is to ‘protect people’s lives and livelihoods’, declaring that the government’s response to coronavirus was now set to cost a total of £280billion.

But he warned: ‘Our health emergency is not yet over and our economic emergency has only just begun.’ 

But the Government is also grappling with complex Brexit negotiations.

 Ms von der Leyen told MEPs today that there was now ‘very little time’  to break the negotiating deadlock but insisted the bloc is ‘ready to be creative’ to get an agreement over the line.

Post-Brexit fishing rights, the so-called ‘level-playing field’ on rules and future governance of the deal remain the key points of contention.     

Ms von der Leyen’s intervention came after US President-elect Joe Biden stressed the importance of keeping the Irish border open after Brexit.      

Top level negotiations between the UK and the EU had to be suspended last week after a member of Michel Barnier’s team tested positive for coronavirus.