Lower public borrowing could give Chancellor Budget wriggle-room

  • 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 (OBR) 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 in PwC’s forthcoming UK Economic Outlook.

PwC estimates public borrowing to be around £48bn in 2017/18, around £10bn less than the OBR forecast. The firm says that could give the Chancellor some room for manoeuvre in the forthcoming Budget on 22 November. He could use this flexibility to boost spending on priority areas like housing and health, and to ease public sector pay. But tackling lacklustre productivity should be a Budget priority, PwC says. However, PwC warns that 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, said that the medium term public finance outlook isn’t particularly bad as there are some positives - both from the recent data and the UK economy’s ongoing success in creating jobs:

 

“We 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.”

 

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.

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.

 

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.

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