The UK government faces a challenging fiscal situation as it grapples with rising debt interest costs and the need for spending cuts and potential tax hikes. Chancellor Rachel Reeves is seeking ways to boost economic growth to provide more spending capacity under the government’s primary fiscal rule. One potential avenue being explored is resetting UK-EU economic ties.
The rationale is that higher economic growth could lead to increased revenues for the Treasury. However, experts argue that even with closer ties to the EU, significant boosts to fiscal headroom remain unlikely. The Office for Budget Responsibility (OBR) previously made substantial downward revisions to growth potential due to the UK’s exit from the customs union and single market.
Logically, the reverse could occur if the UK were to forge closer ties with Europe.
Resetting economic ties with Europe
To move closer to Europe, the UK could consider rejoining the single market for goods or adopting EU regulations across various products.
A customs union, which would eliminate tariffs entirely between the UK and EU, is another consideration. Despite the political and economic rationale for closer ties with the EU, significant fiscal headroom remains questionable. Even in the best-case scenario of full alignment with Europe, productivity boosts would be modest and unlikely to reverse all post-Brexit economic damage.
The OBR might increase its growth forecasts, but this would occur over several years, spreading beyond the five-year period relevant for fiscal rules. Basic calculations suggest this could mean an extra £10-15 billion available annually for government spending, still a modest amount relative to fiscal needs. In conclusion, while closer EU ties could offer some economic benefits, they are unlikely to fully alleviate the UK’s current fiscal challenges.
Additional tax rises in 2025 appear inevitable as the government navigates the complexities of managing national finances in a slow-growth environment.