Britain's economy could face a black hole of £84bn ($102.3bn) by the time the Chancellor sets out his spending plans in the Autumn Statement next month, a think tank has warned.
According to a report from the Resolution Foundation, the deteriorating economic outlook, increased spending and lower tax receipts in the aftermath of Brexit could leave the government facing a shortfall until 2020-21.
The think-tank warned the Treasury would face a £23bn deficit at the end of the parliament, meaning the government would have to find a combined £84bn to balance the books over the next five years. However, the Foundation added, the only way to do so would be by implementing cuts or allow for extra borrowing.
George Osborne's pledge to achieve a budget surplus by 2020 has already been abandoned by the government, which by then could be confronted with an economy £60bn smaller than it was expected to be before the referendum.
"Despite the long-term impact of Brexit remaining very uncertain at this stage, there is a strong consensus among economists that post-referendum uncertainty will lead to deterioration in the public finances, which were coming in below expectation even before the referendum," said Matt Whittaker, chief economist at the Resolution Foundation.
Hammond, who will deliver the Autumn Statement on 23 November, could opt for a softer target, by switching to a current budget balance in 2019-20, Whittaker added. That would allow the Chancellor to meet the political goals set out by the government, but would lead to significant higher borrowing.
"The leeway created by a new set of fiscal rules could afford the Chancellor the opportunity to make his mark on two key themes of the new government [...] by reversing the social security cuts that are set to squeeze their incomes," explained Whittaker.
"But the trade-off for this approach is significantly higher borrowing in the coming years. The Chancellor will need to decide if that is a price he is prepared to pay for adjusting to new economic times and setting out a direction for the new government."
The majority of economic forecasters have predicted that, over the next few years, a decline in investment, higher inflation and a return to higher unemployment will drag GDP growth down to around 1% in 2017, less than half of what the Office for Budget Responsibility predicted in March.
The latest GDP figures, scheduled for release on Thursday (27 October), are expected to show Britain's economic growth slowed down to 0.3% in the third quarter, compared with 0.7% in the previous three months.