LEAVING the EU without a Brexit deal would inflict "substantial costs" on the UK economy, the International Monetary Fund (IMF) has warned.
In the latest of its regular assessments of the state of Britain's finances, the IMF said that all likely Brexit scenarios would "entail costs for the UK economy", but that a disorderly departure could lead to "a significantly worse outcome".
While new trade agreements made possible by EU withdrawal "could eventually pare some of these losses for the UK", any such deals are "unlikely to bring sufficient benefits to offset the costs imposed by leaving the EU", the international economic think tank said.
And the cost of Brexit will "exceed" any savings from lower contributions to the EU budget.
In its report, launched by managing director Christine Lagarde alongside Chancellor Philip Hammond at the Treasury in London, the IMF urged the UK authorities to prepare policies to "safeguard macroeconomic and financial stability" in the case of a chaotic Brexit.
Mr Hammond said the report underlined the need for a Brexit deal to ensure the economic gains of the past decade were not lost.
"We are at a critical juncture for the UK economy. Despite the contingency actions we are taking, leaving without a deal would put at risk the substantial progress the British people have made over the last 10 years," he said.
Downing Street stopped short of an explicit endorsement of Mr Hammond's warning.
When asked whether the Prime Minister backed her Chancellor's assessment, Theresa May's official spokesman told reporters: "The PM said very clearly that she believes our best days are ahead of us and we will have plans in place to allow us to succeed in all scenarios."
Ms Lagarde said the UK economy was likely to be weaker under any likely scenario, while a disorderly, no-deal Brexit would have serious consequences.
"It will be a shock to supply. It would inevitably have a series of consequences in terms of reduced growth going forward, increased deficit most likely, depreciation of the currency," she said.
"It would mean in reasonably short order a reduction in the size of the UK economy."
The report said the Treasury and Bank of England should be prepared for the possibility of "sharp declines in sterling and other asset prices" and the Bank should be ready to act to ensure the financial system has adequate liquidity.
Plans should also be in place for a possible "significant" increase in interest charged on Government debt.
Ministers may have to use the flexibility available to them to boost economic activity by bringing forward major infrastructure projects.
But any easing of fiscal policy - for example by cutting interest rates to stimulate the economy - would have to be temporary and introduced as part of a "credible" longer-term plan to keep debt under control.
The IMF warned that tax rises and spending cuts may be needed if Brexit inflicts lasting harm on the economy, saying: "A permanent shock to output would require an eventual adjustment of revenues or spending."
Even if an orderly Brexit is achieved, with a trade deal covering goods and some services, UK growth can be expected to remain "moderate" over the next few years, said the IMF.
