The difference between no-deal and a soft Brexit is £30billion over the next five years, according to a major think tank.
If the UK fails to reach a withdrawal deal with the EU, GDP growth can be expected to slow sharply from 1.4 per cent this year to 0.3 per cent in both 2019 and 2020, the National Institute of Economic and Social Research (Niesr) said.
This scenario, assuming an orderly shift to World Trade Organisation rules, would erode almost all of the space available for Chancellor Philip Hammond to increase spending on services.
By contrast, Niesr forecast that a "soft" Brexit with a deal with Brussels could see growth rise to 1.9 per cent in 2019 and 1.6 per cent in 2020.
This would give Mr Hammond space to borrow an average of £16bn a year more between 2019/20 and 2022/23 than was expected in the spring.
"This provides room for the chancellor to spend an average of around £30bn more over the same period," said Niesr.
"Under the no-deal Brexit scenario almost all of this additional fiscal space will be eroded."
The soft Brexit scenario would allow Mr Hammond to meet his fiscal targets of getting the deficit below two per cent of GDP by 2020/21 and seeing debt falling as a proportion of GDP over the same period, while making additional borrowing, said Niesr.
But the think tank added: "All this is not to suggest that a soft Brexit will offer the chancellor a free rein on spending - it will not.
"Even under that optimistic scenario, the chancellor will fail to comply with the fiscal objective which is to achieve overall fiscal balance over the medium term."
Additional reporting by Press Association
