Public borrowing could be around £7bn higher than OBR forecast by 2021/22

Nov 10, 2017

  • Short term public borrowing estimated to be around £10bn less than OBR forecast
  • Medium term deficit likely to be higher due to slower productivity growth
  • Still room for Chancellor to ease austerity, but any giveaways in the Budget might need to be largely offset by takebacks
  • Longer term target of eliminating the budget deficit by mid-2020s looks challenging

Public borrowing could undershoot the Office for Budget Responsibility’s March forecasts in the short term due to a combination of higher than expected tax revenue growth and lower than expected spending, according to projections from PwC’s forthcoming UK Economic Outlook report. PwC estimates public borrowing to be around £48bn in 2017/18, around £10bn less than the OBR forecast.

But in the medium term, borrowing may be higher due to lower productivity growth, more than offsetting the effects of a better starting point and stronger future jobs growth. PwC projects public borrowing of around £24bn in 2021/22, compared to the OBR’s March forecast of £17bn.

John Hawksworth, chief economist at PwC, commented:

“We don’t think the medium term public finance outlook is that bad, because there are some positives both from the recent data and the UK economy’s ongoing success in creating jobs. We still think the Chancellor should have some room for manoeuvre in the Budget to boost spending on priority areas like housing and health, and to ease public sector pay constraints selectively, while meeting his medium term target of a structural budget deficit below 2% of GDP with a reasonable margin.

“But both the OBR and the Bank of England have faced up recently to the reality of sluggish UK productivity growth continuing for some years to come. This will also dampen future real wage and tax revenue growth and so make it harder to meet the Chancellor’s longer term objective of balancing the budget by the mid-2020s, which already looked challenging given the upward pressures on state pension and healthcare spending from an ageing population.”

Andrew Sentance, senior economic adviser at PwC, added:

“The government should respond to this productivity challenge in the Budget and beyond with measures to boost skills, infrastructure development and innovation. But this has to be a long term industrial strategy - there are no quick or easy fixes to increasing productivity growth.”

Detailed public finance projections

Further details of PwC medium term economic growth and public finance projections, assuming no change in fiscal policy in the Budget, are summarised in the table below, including comparisons with the OBR’s March 2017 forecasts. The main differences between the two sets of projections  are that:

  • The latest PwC projections see real GDP growth being around 0.3% lower than the OBR forecasts  in 2017/18 and 0.2% per annum lower after that due to the negative effect of slower productivity growth outweighing the positive effect of faster jobs growth.

  • PwC’s projections envisage a cyclically-adjusted budget deficit of around 1.1% of GDP in 2020/21, which would still be 0.9% of GDP (around £21bn) below the Chancellor’s target of a budget deficit no higher than 2% of GDP in that year. The Chancellor would still have some room to ease austerity in the Budget, but around £3 billion less than the OBR estimated back  in March.

  • The structural budget deficit would remain largely unchanged at around 1% of GDP in 2021/22 on the PwC projections, rather than falling further in that year as the OBR forecast in March. This would put the already challenging longer term target of balancing the budget by the mid-2020s a little further out of reach.

  • PwC projections would still see public sector net debt falling over time as a share of GDP in line with the Chancellor’s secondary medium-term fiscal target, but this debt ratio would still remain relatively high at around 80% of GDP in 2021/22, roughly double the levels seen before the financial crisis.

 

Comparison of PwC and previous OBR public finance projections

 

 

2017/18

2018/19

2019/20

2020/21

2021/22

Real GDP growth (%)

 

 

 

 

 

OBR (March 2017)

1.8

1.6

1.8

1.9

2.0

PwC main scenario

1.5

1.4

1.6

1.7

1.8

Public sector net borrowing (£ billion)

 

 

 

 

 

OBR (March 2017)

58

41

21

21

17

PwC main scenario

48

44

27

24

24

Cyclically-adjusted budget deficit (% of GDP)

 

 

 

 

 

OBR (March 2017)

2.9

1.9

0.9

0.9

0.7

PwC main scenario

2.4

2.1

1.3

1.1

1.0

Public sector net debt (% of GDP)

 

 

 

 

 

OBR (March 2017)

88.8

88.5

86.9

83.0

79.8

PwC main scenario

87.6

87.6

86.4

82.9

80.1

Source: OBR Economic and Fiscal Outlook (March 2017), latest PwC main scenario assuming no tax and spending policy changes

Ends.

Notes to editors:

This is an advance release based on PwC’s latest UK Economic Outlook report, which will be available online from 14 November 2017. The full report will include more detailed economic projections and special focus articles on the potential economic impact of lower EU net migration to the UK after Brexit, and the reasons for the ‘twin puzzles’ of the UK’s relatively poor performance on productivity growth and exports since the financial crisis. For more information please contact Tilly Parke at tilly.parke@pwc.com

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