Commenting on the Chancellor's Spending Round, PwC Chief Economist John Hawksworth said:
"The Chancellor today announced a significant increase in planned public spending next year, funded by higher borrowing. He argued that this was still consistent with the government's current fiscal rules. However, this is based on the OBR's last set of economic and fiscal forecasts in March and it may not hold true after the OBR updates its projections later this year to allow for recent slower than expected economic growth and higher than expected public borrowing.
"The Chancellor announced a £13.4 billion increase in total public spending in 2020/21 as compared to indicative spending plans for that year at the time of the March 2019 Spring Statement. The implied increase would still just about fall within the fiscal headroom of around £15 billion implied by the OBR's March forecasts after adjusting for subsequent changes in the accounting treatment of student loans. On this basis, the Chancellor would still maintain a small amount of fiscal headroom of around £1.6 billion in meeting the current 2% of GDP structural budget deficit target for 2020/21.
"However, the economy has slowed since March, with the latest purchasing managers' surveys this week showing a broadly flat profile for private sector output in July and August after a small decline in GDP in the second quarter. At the same time, public borrowing was around £6 billion higher in the first four months of 2019/20 than in the same period a year earlier, running some way ahead of OBR forecasts due primarily to higher than expected government spending.
"Given this new data, but still assuming a reasonably smooth Brexit as the OBR did in March, we estimate that this might reduce the potential fiscal headroom in 2020/21 by around £5 billion to around £10 billion (before today's new spending plans). There are many uncertainties around this estimate, not least in relation to Brexit, but it suggests that the Chancellor may have more than used up his fiscal headroom for next year based on the current deficit target. However, the Chancellor also said that he intended to review the fiscal rules later this year.
"The Chancellor argued with some force that there was a pressing case for additional spending on key public services such as health, education, police, social care and prisons after a long period of austerity, while also helping to support the economy through a period of heightened uncertainty due to Brexit. But it will only be possible to assess the fiscal prudence of this package once we see the full picture on economic growth, tax, spending and borrowing at the Budget later this year."
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