Industry commentators are questioning how Chancellor George Osborne will achieve the £10.4bn surplus forecast for 2019/20, an increase on the £10.1bn previously predicted.
In today’s Budget, the projected UK GDP growth for 2016 was slashed from 2.4 per cent to 2 per cent, with the projected growth for 2017 falling to 2.2 per cent and a rate of 2.1 per cent for the following three years. This meant the forecast debt as a share of GDP has been revised up over the next five years, from 82.6 per cent in 2016/17 falling to 74.7 per cent in 2020/21.
Borrowing forecasts have therefore been revised upwards, from £49.9bn to £55.5bn in 2016/17 and from £24.8bn to £38.8bn in 2017/18. Spending as a share of GDP is expected to fall to 36.9 per cent by 2020 to fund the £10.4bn surplus in 2019/20.
Ian Kernohan, economist at Royal London Asset Management, says that despite expecting extra fiscal tightening, there has been more rhetoric on tax cuts than tax rises, with the revised surplus for 2019/20 requiring “quite a sudden drop in the deficit compared with the previous year”.
“The devil of the fiscal tightening has been left for the rest of us to find in the detail, however it looks as if the burden of tax rises will fall on the corporate sector towards the end of the forecast period, hence the projected rapid turnaround in the deficit by 2020,” Kernohan says.
Vicky Redwood, chief UK economist at Capital Economics, says the Chancellor had to significantly increase the extra fiscal tightening pencilled in for 2019/20 to achieve the budget surplus that year.
“This was achieved through a combination of additional, many unspecified, spending cuts and tax rises.
“There is clearly a big question mark over whether the scale of cuts the Chancellor is pencilling in can be achieved, but Osborne is presumably hoping that by the time many of them arrive, he won’t actually need to implement them.”
Neil Williams, group chief economist at Hermes Investment Management, says the Chancellor was never going to deviate from his aim of getting the deficit “to the black” by 2019/20 with the EU referendum on the horizon, but this is punishing growth.
Williams says: “This target he has preserved. But, to do so, he has had to take leeway in the intervening years, as the ‘cocktail of risks’ he has been flagging takes its toll on the OBR’s growth and tax revenue assumptions. This means the cost of preserving the 2019/20 target date is an even steeper glide-path to surplus before then.”
Williams adds that the deficit is still too high considering where the recovery is, noting that the net-debt-to-GDP ratio of 84 per cent in 2015/16 is more than twice that of Japan’s during its wilderness days of the 1990s. He warns that a Brexit scenario could exacerbate this.
“Financing this debt may become more troublesome if the UK has to deal with the effects of a ‘Brexit’. Should it occur, conventional gilts may benefit initially from the perceived hit to growth. But this could be short lived, given about one third of the £1.3trn gilts outstanding is backed by international investors who will be sensitive to both currency and ratings risk.
“In which case, it’s possible that dealing with a ‘Brexit’ and a hit to growth may need the Bank of England to reactivate its quantitative easing. And, with the main rating agencies already twitchy, an ever bigger fiscal loosening today would have added to the chance of a ratings downgrade in the event of a Brexit.”
Daniel Mahoney, head of economic research at the Centre for Policy Studies, also voices his concerns about what will come to bear in 2019/20.
“It is concerning that the fiscal impact of this Budget is almost exclusively in the year 2019-20 – the year when George Osborne needs to achieve a budget surplus. Part of this is accounted for by the £3.5bn of additional unspecified spending cuts, and it will be important to scrutinise the details of these cuts.”
Shilen Shah, bond strategist at Investec Wealth & Investment, says the Chancellor is “largely counting on higher tax receipts and lower interest costs due to depressed government bond yields” to achieve the fiscal target.
However, Christopher Mahon, director of asset allocation research at Baring Asset Management, says there is trouble ahead: “Government debt appears to be back in fashion.”
“Big increases in the deficit are planned. While the headlines about sugar taxes or Lifetime Isas will abound, the UK cannot have its cake and eat it. The big issues will catch up, but for now expect the country to continue its economic trajectory regardless.”
Following the Chancellor’s announcement of the revised UK growth figures sterling fell to a two-week low against the dollar at $1.4.