EU - UK flag

The UK could see economic output fall by as much as 4% if it leaves the European Union without a new trade agreement in place, the Institute of Fiscal Studies (IFS) has warned.

"While leaving the EU will free the UK from having to make a budgetary contribution, loss of trade could depress tax receipts by a larger amount," the IFS report said.

The report's co-author, IFS research associate, Ian Mitchell, said: "From an economic point of view we still face some very big choices indeed in terms of our future relationship with the EU.

"There is all the difference in the world between 'access to' and 'membership of' the single market. Membership is likely to offer significant economic benefits, particularly for trade in services."

The IFS said having a no barriers on the trade of services was far more important than removing tariffs and checks on goods, largely because the UK economy is around 75% service based. And services are a particularly important export for Britain. Around 40% of all UK services were exported to the EU last year.

And without a free trade agreement in place, the IFS believes the UK's economy and finances will be very vulnerable following Brexit.

But the concerns are not limited to the services sector. The IFS also warned that the financial services sector, in particularly, will be hit hard if UK-based banks lose their 'passporting rights', which allows them to deal with EU citizens and businesses.

"To maintain these rights would likely require membership of the European Economic Area (EEA)," the report said.

"But that would come at the potentially considerable cost of submitting to future regulations designed in the EU without input from the UK. The UK may have to make some very difficult choices between the benefits from passporting and the costs of submitting to external imposed regulation."

Many Brexit supporters highlighted the idea of negotiating a new trade deal with global economies and trading as part of the World Trade Organisation (WTO). The IFS, however, believes either of these options is likely to come with tariffs and barriers to both goods and services.

"Single market access is virtually meaningless as a concept," the IFS said. "Any country in the World Trade Organisation - from Afghanistan to Zimbabwe - has 'access' to the EU as an export destination."

"Single Market 'membership' by contrast involves elimination of barriers to trade in a way that no existing trade deal, customs union or free trade area achieves.

"In particular it means reducing 'non-tariff' barriers like licensing and other regulatory constraints to supplying goods or services."