Reversing Brexit with a second referendum would have a 'positive' impact on economy, OECD claims

A second referendum that reverses Brexit would have a "positive" and "significant" impact on the UK economy, a leading think tank has claimed.

The Organisation for Economic Co-operation and Development has projected that the British economy will grow by just 1 per cent next year in part because of uncertainty around Brexit.

It said that there is a risk of a "disorderly" Brexit, in which the UK leaves without a deal triggering an "adverse reaction" in the financial markets and pushing exchange rates to new lows.

The head of the OECD is unveiling the report at a press conference alongside Philip Hammond, the Chancellor, in the Treasury. Mr Hammond has faced repeated criticism for being "gloomy" about Brexit.

The OECD report says: "In case Brexit gets reversed by political decision (change of majority, new referendum, etc.), the positive impact on growth would be significant."

Highlighting the risk of leaving the EU without a deal, the report says: "A break-up of EU-UK negotiations, cancelling out the prospect of a trading relationship in the foreseeable future, would trigger an adverse reaction of financial markets, pushing the exchange rate to new lows and leading to sovereign rating downgrades.

"Business investment would seize up, and heightened price pressures would choke off private consumption. The current account deficit could be harder to finance, although its size would likely be reduced."

The OECD admitted that Brexit negotiations were difficult to forecast, and could "prove more favourable" than assumed in its report - boosting trade, investment and growth - but stressed that this would require "an ambitious EU-UK agreement and a transition period to allow for adjustment to the new agreement".

"Meantime, however, uncertainty could hamper domestic and foreign investment more than projected and hurt consumption even more were the exchange rate to depreciate further," it added.

Brexit has compounded the challenge of reviving labour productivity growth, which the OECD said had come to a "standstill" and made "no meaningful contribution" to UK output since 2007.

The report highlighted that labour productivity was also weakest outside of Greater London and the South East of England.

This kind of disparity between regions and workers "may lead to, or be the result of, important differences among people in terms of income and wealth, jobs and earnings, and education and skills."

"Well-being inequalities may have been one of the causes of Brexit, as less-educated workers in remote regions might have perceived to benefit less from the European project," it added.

It also calls on the Government to resurrect plans to end the "triple lock" on the state pension, which rises in line with either wages, earnings or inflation - whichever is highest.

The plans were abandoned in the wake of Theresa May's disastrous snap election. It also suggests the Chancellor should return to plans to increase national insurance  contributions for the self-employed, which triggered a revolt among Tory MPs.

The report is critical of rises in the National Living Wage, which it warns "may be too step" because of the slowdown in economic growth. It warned the plans could ultimately backfire and see low-skilled workers "priced out of employment".

In other controversial recommendations the report suggests that the Government should be prepared to build on the Green Belt. It says: "A careful reassessment of the overall economic costs and environmental benefits of maintaining the Green Belt is needed, including alternative ways to preserve or create green space, more integrated in the cities (parks) rather than around them."

Responding to the OECD report, a spokesman for the Treasury said: "Increasing productivity is a key priority for this Government, so that we can build on our record employment levels and improve people's quality of life.

"Today, the OECD has recognised the importance of our £23 billion National Productivity Investment Fund which will improve our country's infrastructure, increase research and development and build more houses.

"In addition, our reforms to technical education and our ambitious Industrial Strategy will also help to deliver an economy that works for everyone."