Signing a new “Brexit reset” deal with the EU will boost the economy but not enough to end the squeeze on public finances, Rachel Reeves has been warned.
Multiple economists said that agreeing a closer economic relationship with Brussels would help improve the UK’s growth – though it remains highly uncertain how much difference it will make.
A deal could also add as much as £10bn-20bn to the Chancellor’s fiscal headroom at future Budgets, but that would not represent a fundamental shift in the Government’s finances. Treasury insiders said the agreement was only one part of ministers’ growth plans.
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Reeves has faced warnings that amidst global economic turbulence there is a high chance she will need to raise taxes or cut spending again in the autumn, to avoid breaking her self-imposed borrowing rules.
One estimate suggested that the shortfall would be as much as £60bn, while a former senior aide in No 10 has said that higher taxes are inevitable.
Negotiations with the EU are intended to ease trade by securing a deal to reduce checks on imports and exports, as well as making it easier to hire some workers across borders, and closer co-operation on security and defence. An outline agreement is expected to be announced on Monday at a summit in London.
Economists said that a deal with Europe would be much more valuable than the free-trade agreement recently signed with India, or the US-UK economic partnership deal which Sir Keir Starmer finalised this month with Donald Trump.
Stephen Millard, interim director of the National Institute of Economic and Social Research, told The i Paper: “In 2024 we exported roughly £6.5bn to India, roughly £53.5bn to the United States and roughly £159bn to the European Union.
“It is fairly clear from those numbers that a trade deal with the European Union is much more likely to shift the dial than the deals with India and the United States.”
His colleague Fergus Jimenez-England added: “I don’t think this is likely to fundamentally change the course of public finances, but that is not to say it is not a step in the right direction.” He suggested that getting closer to the EU could provide a positive signal to investors that Britain is serious about pro-growth policies.
Isabel Stockton of the Institute for Fiscal Studies said: “It depends on how far you think the new agreement will get us to the trade and competition intensity of being in the customs union and single market. A percentage point on GDP long-term might reduce borrowing by some £12bn in today’s terms.”
Frontier Economics and ING are both forecasting an uplift of around £10bn to the public finances over the next few years, providing some relief to the Chancellor.
Paul Danes of Capital Economics struck a note of caution, saying: “The UK-EU reset might boost growth by a tiny bit – perhaps 0.1 percent over 10 years. That wouldn’t make much difference to the public finances, although every little helps.
“That said, the Government’s new migration policy may reduce GDP growth by something like 0.1 per cent, so we might end up in a very similar place to where we are now.”
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Read MoreAt the Spring Statement in March, Reeves was forced to tweak taxes and spending to restore her headroom – the difference between the amount the Exchequer is borrowing, and the maximum allowed under the fiscal rules. It currently stands at £9.9bn, which is relatively low compared to historical norms.
A Treasury source said that the deal set to be announced on Monday would be “a stepping stone towards the new relationship that Keir has set out” but would only represent “the first step”.
The insider added: “Tackling some of the barriers to trade with the EU is an important part of the growth agenda, but the Chancellor’s growth strategy is also about capital investment, about planning, and other things.”
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