U.K. Election Campaigners Brace for Fiscal Reality Check

(Bloomberg) --

U.K. budget officials are set to deliver a warning shot to politicians on Thursday amid fears that the campaign for the Dec. 12 general election could turn into an arms race of tax and spending promises.

The Office for Budget Responsibility may add as much as 20 billion pounds ($26 billion) to its budget-deficit forecast for next year when it unveils projections updated to reflect the impact of recently introduced methodological changes.

With borrowing in 2020-21 expected to be restated at close to 40 billion pounds, the fiscal watchdog will in effect set a baseline for any fiscal pledges made by the main political parties during the election campaign.

The actual outturn for government borrowing is almost certain to be much worse. The OBR forecast will not include the extra 13.4 billion pounds of day-to-day spending pledged by Chancellor Sajid Javid in September or the effect of weaker growth and stronger spending than predicted back in March.

And further giveaways can be expected, whoever wins the election, as leaders make good on vows to end a decade of austerity. Jeremy Corbyn’s opposition Labour Party has said it will borrow to fund its 250 billion-pound investment program, while Boris Johnson’s Conservatives have held out the prospect of significant income-tax cuts and a major boost for infrastructure.

There is now little chance that Britain will meet fiscal rules requiring the structural budget deficit to be below 2% of GDP in 2020-21, the equivalent of around 45 billion pounds. According to Capital Economics, a post-election stimulus could see borrowing soar to around 70 billion pounds even if Britain avoids a no-deal Brexit.

New Rules

“It’s unsurprising that both parties have signaled that they would change the fiscal rules,” said Ruth Gregory, senior U.K. economist at the London-based research firm. “And given that both parties seem aligned in their desire to increase investment spending, we suspect that they will couch their new fiscal rules in terms of the cyclically adjusted current budget deficit, which excludes investment spending, accompanied by some form of debt guidance.”

The OBR is issuing the new forecasts to comply with reporting requirements after Javid canceled plans to hold a full Budget on Nov. 6. The changes largely relate to the treatment of student loans, as debt that will never be repaid is now added to government spending.

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