Britain’s coronavirus-ravaged economy will plunge even further 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.
At the same time, 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’.
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 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 said the 2 per cent hit comes from increased border disruption, supply and demand issues, less capital deepening, lower productivity and a rise in unemployment.
It came as Mr Sunak 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.
In an analysis of what would happen if the UK left the EU with a so-called Australian-style agreement, on World Trade Organization terms, the OBR said: ‘A no deal Brexit is likely to impinge on different sectors of the UK economy to those that have been hardest hit as a result of the pandemic.
‘Businesses involved in the provision of non-tradable, face-to-face services such as hospitality, transport, and entertainment have been hardest hit by coronavirus as they are directly affected by public health restrictions and face difficulties in implementing social distancing.
Joe Biden, the US President-elect, has stressed the Irish border must remain open and unguarded after the end of the post-Brexit transition period
‘By contrast, firms in the manufacturing, financial services, and mining and quarrying sectors have been spared the worst economic consequences of the pandemic thanks to their ability to continue to operate while adhering to social distancing rules.
‘However, it is these latter, trade-intensive sectors that are most exposed to the loss of unfettered access to the EU market.’
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.
President-elect Joe Biden wades back into Brexit row demanding there must be ‘no guarded border’ on the island of Ireland
Mr Johnson’s government is seeking a trade deal with the European Union but says it is willing to leave without one.
That could complicate the situation at the sensitive Northern Irish border with Ireland – the UK’s only land border with the EU.
Mr Biden told journalists in Wilmington, Delaware, on Tuesday that the border must be open.
Mr Biden (pictured today) stressed the importance of protecting Northern Ireland’s peace deal in the Brexit process in a call with Boris Johnson this month after he won the US election
Mr Johnson (pictured yesterday) is seeking a trade deal with the European Union but says it is willing to leave without one
‘We do not want a guarded border,’ he said, answering a question from a reporter on what he would say to Brexit negotiators.
The 1998 Good Friday peace deal that effectively ended Northern Ireland’s 30 years of sectarian violence created institutions for cross-border cooperation on the island.
Mr Johnson put forward legislation in September that would break the Northern Ireland protocol of the Brexit divorce treaty that seeks to avoid a physical customs border between the British province and EU-member Ireland.
Mr Biden, who has talked about the importance of his Irish heritage, warned months ago as the Democratic candidate for the presidency that the UK must honour the 1998 agreement as it withdraws from the bloc or there can be no separate US deal.
Mr Johnson has never met Mr Biden and commentators suggest the prime minister will have to work hard to foster the ‘special relationship’ between the historic allies.
Ireland’s prime minister said on Monday he hoped the outline of a Brexit free-trade deal would emerge by the end of this week, despite what the EU negotiator called ‘fundamental divergences’ at talks.
It comes after lorry drivers were left stuck in miles of M20 queues as French authorities tested Channel Tunnel border controls they say will be in place if there is no Brexit deal.
Getlink, which operates the Channel Tunnel, said the queues were ‘not representative’ of a no-deal Brexit, as half of the available lanes were blocked off.
Highways England also said it had closed the entry and exit sliproads at Junction 11 in Kent today due to the number of HGVs parked on the hard shoulder.
Lorries queueing at the M20 in Kent, waiting to access the Eurotunnel terminal in Folkestone. French authorities tested border controls they say will be in place if there is no Brexit deal
Freight lorries queueing along the M20 in Kent. Getlink said the queues were ‘not representative’ of a no-deal Brexit however, as half of the available lanes were blocked off
A spokesman for Getlink told MailOnline: ‘They [the tests] were carried out by French authorities to test the impact of EU and Schengen immigration controls in the event of a no deal.
‘The queues are not representative however, as they were only using half of the available lanes/booths available.’
The spokesman earlier said: ‘The backlog (of traffic) built up this morning during tests conducted by the authorities in preparation for Brexit.’
They added this afternoon that traffic was now flowing ‘smoothly’ through the terminal and services were operating as normal.
It is understood that further intermittent border tests will be carried out before the Brexit transition period comes to an end on December 31.
Photographs showed dozens of freight lorries queued along the M20.
Freight lorries queuing along the M20, with two ambulances also seen in one of the lanes. Getlink said this afternoon that traffic was now flowing ‘smoothly’ through the terminal
The delays were caused by French authorities testing the impact of EU and Schengen immigration controls at the Eurotunnel terminal in Folkstone in the event of no deal
Freight lorries queuing along the M20 in Kent, while half of the available lanes were blocked off. It is understood that further intermittent border tests will be carried out before the Brexit transition period comes to an end on December 31
Highways England tweeted: ‘M20 coastbound at J11 Westenhanger – the entry slip is now closed due to heavy congestion in the area due to delays at Eurotunnel.
‘Due to the heavy congestion with HGV’s at this location, for safety reasons we have also closed the exit slip at J11 Westenhanger due to the amount of lorry’s parking up along the hard shoulder all the way back to exit slip.’
A spokesperson for The Road Haulage Association told MailOnline: ‘There is much speculation as to how the motorway network leading to and from the ports will work with or without a deal.
‘The subsequent delays or congestion are unavoidable, but necessary at this time as testing is in progress.’
The Channel Tunnel connects Folkestone to Coquelles near Calais in France.