(Bloomberg) -- U.K. Chancellor of the Exchequer Philip Hammond is set to receive a much-needed boost when his fiscal watchdog updates its economic forecasts on Tuesday.
The Office for Budget Responsibility is expected to predict faster growth and lower borrowing than it did in November, when a sharp downgrade to the productivity outlook cast serious doubt over Hammond’s target to balance the books by the mid-2020s.
The budget deficit in the current fiscal year alone may come in as much as 10 billion pounds lower than what the OBR predicted four months ago, which would leave it the narrowest in a decade.
One reason for the upgrade is that Britain is enjoying the fruits of a broad-based global upswing and an inflationary squeeze on households is probably past the worst. Economists surveyed by Bloomberg last month forecast 0.4 percent growth in every quarter of 2018 -- more than the OBR predicted in November.
“The economic picture has started to brighten and we should expect a slightly sunnier outlook next week,” said Matthew Whittaker, chief economist at the Resolution Foundation, a London-based think tank.
The projections will be welcomed by Hammond, though any hopes he might ease austerity are almost certain to be dashed. His “Spring Statement” to Parliament on March 13 will be limited to a brief update, with major tax and spending measures reserved for the Autumn Budget.
What Our Economists Say:“With mounting pressure to ease the squeeze on public spending, the windfall will raise speculation that the chancellor will spend at least some of the improvement in the country’s finances in his autumn budget. We expect the central bank to raise interest rates in the summer before turning relatively dormant in late 2018 and early 2019 as it waits for the fog of Brexit negotiations to clear. But a spending spree could change that. Expect the BOE to be watching Hammond like a hawk.”
--Dan Hanson and Jamie Murray, Bloomberg Economics
Stronger-than-forecast revenue has left the budget deficit on course to significantly undershoot the 49.9 billion pounds forecast by the OBR in November. Some, including Resolution and PwC, see the figure coming in at around 40 billion pounds. On the current budget, which excludes capital investment, Britain is now running a small surplus for the first time since 2002.
Productivity posted the strongest consecutive increases since the financial crisis in the last two quarters, and the OBR could declare itself slightly less pessimistic about the economy’s growth potential. However, Hammond has warned there’s “absolutely no scope for any complacency,” with output per hour still growing at a fraction of the pace seen before the crisis. At the Bank of England, Deputy Governor Ben Broadbent has called the quarterly figures “noisy.”
After more than seven years of austerity, there is no shortage of claims on the public purse. The cash-strapped National Health Service has again struggled to cope with a spike in winter illnesses; local social-care services are at breaking point; and there is pressure to ease the squeeze on public-sector pay in place since 2010.
While those hoping for concessions next week are likely to be disappointed, the improved outlook could provide scope for Hammond to loosen the reins in the budget.
One negative for government coffers is an increase in market interest rates since November, which Capital Economics estimates could add about 2 billion pounds a year to government debt costs. Investors are pricing in three BOE interest-rate hikes over the next three years -- more than the OBR assumed -- and yields on gilts of all maturities have risen.
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