UK Budget Review: Better Short-Term News then Fades
Chancellor Hunt’s second fiscal event in the March 15 Budget was very much a politically driven affair at least in terms of its parliamentary presentation. It included some tax cuts that aggregate to some 1% of GDP and as they are more short-term may have some implications for the BoE next week, this stemming from the Chancellor speeding two-thirds of the improvement in the fiscal outlook on such measures according to the Office of Budget Responsibility (OBR). The economic and fiscal outlook has brightened somewhat since November with upgraded forecast for this and next FY, albeit offset by downgrades out to 2028 (Figure 1).
Risks Ahead Still Very Clear
The near-term downturn seen by the OBR is set to be shallower; medium-term output to be higher; and the budget deficit to be lower and with an official recession avoided albeit on the heroic assumption that the 0.4% q/q drop GDP seen this quarter will not be followed by another despite the added public holiday in May. As the OBR insist, persistent supply-side challenges remain, albeit with no sign that the OBR have followed the recent BoE decision to revise down potential growth estimates materially. The overall result is that even with assumed lower rates of annual borrowing, debt is seen falling by only the narrowest of margins in five years’ time (Figure 2)
Figure 1: Growth Revisions Offsetting
Source: OBR, Index level of GDP
Debt Trend Sideways
Mainly due to the net but modest improvement in growth outlook (Figure 1), even if does peter out beyond 2024 and is dependent on what may be optimistic assumption about potential output, the forecast for public debt has improved somewhat since November.However, it is still materially higher than envisaged even a year ago. The headline measure of public sector net debt peaks next year at 103.1% of GDP, then falls steadily to reach 96.9% in 2027-28. Underlying debt – which excludes the Bank of England and is the measure targeted by the Chancellor – does not peak until 2026-27 (a year later than assumed in November) at 94.8% and then falls only marginally (by 0.2 per cent of GDP) in the final year of the forecast and this based on very little room for error, highlighting clear upside risks.
Figure 2: Public sector net debt excluding the Bank of England (% of GDP)
Source: OBR
The result is that in 2027-28, underlying debt stands at 94.6%. That is 2.6 ppt of GDP lower than in the November forecast, thanks to both lower cumulative borrowing and higher nominal GDP. But this downward revision reverses only one-seventh of the upward revision to debt between ther March and November forecasts last year (Figure 2). And the tripling of interest rates since this time last year means the share of revenues consumed by servicing that debt rises doubles to 6.2 per cent in 2021-22, and then to 7.8 per cent by the end of the forecast period.