The UK's Brexit war chest likely to be cut by over £16bn.

Weak economic forecasts from the Office of Budget Responsibility (OBR) will “limit the UK’s deficit reduction and cut the size of the war chest that the Chancellor Philip Hammond put aside to smooth the Brexit transition”, according to the Financial Times. The FT claims that a recent internal Treasury analysis suggests that the OBR’s revisions will be sufficient to wipe out two-thirds of the £26bn the Chancellor allocated to deal with Brexit risks. The downward revisions are said to be as a direct consequence of Britain’s low productivity performance.

The UK’s productivity growth outlook has a profound influence on the HM Revenue & Customs tax take, meaning a deterioration there is, automatically, bad news for the public finances.

The Independent online picks up the analysis and states when the OBR unveils its latest Fiscal Evaluation Report next week it says it will outline what weak data and previous forecast errors on productivity growth “imply for the judgements about potential output that we will make in our forthcoming EFO [Economic and Fiscal outlook] which will be published alongside the Chancellor’s autumn Budget”.

The OBR warned in July that: “Small changes in potential output growth can build up over time to deliver large effects on the size of the economy and therefore the size of the tax base and the affordability of public spending plans.”

Many economists expect Brexit itself to reduce the UK’s long-term productivity performance by reducing trade with our nearest neighbours and also restricting immigration.

In the near-term weaker business investment, brought on by uncertainty about future trade arrangements, is already pencilled in to damage productivity.

In November 2016, in the wake of the Brexit vote, the OBR revised down its forecast for trend potential productivity growth between 2017 and 2020, resulting in a £7.2bn hole in the public finances by 2020-21 relative to otherwise.