U.K. Fiscal Rules Under Pressure as Billions Added to Deficit

(Bloomberg) -- The challenge facing U.K. Prime Minister Boris Johnson to keep to his new fiscal rules was highlighted by new figures published Monday.

The Office for Budget Responsibility issued a restatement of its March forecasts to reflect changes incorporated into the public finances in September, primarily a new treatment of student loans. On this basis, total government borrowing is around 20 billion pounds ($27 billion) a year higher than previously stated.

Johnson, who led his Conservative Party to election victory last week, has pledged to keep revenue and day-to-day spending in balance within three years and borrow only for capital spending. The current-budget surplus, which excludes investment, in 2022-23 is now stated at a sharply reduced 18.6 billion pounds.

However, around 12 billion pounds of that margin will be erased by new commitments made by Chancellor Sajid Javid in September. In addition, spending has risen much faster than projected so far this fiscal year, suggesting subsequent years could be revised higher when the OBR produces full forecasts early next year.

In its election manifesto, the Conservatives predicted the current budget would be in surplus by just 5.2 billion in 2023-24 after taking account of modest new tax and spending plans. Such a small margin could easily be erased, forcing the government to borrow more or raise taxes.

At Risk

“Even a small deterioration to the economic outlook, or plans to cut taxes, would see the chancellor at serious risk of breaking his brand new fiscal rules,” said Jack Leslie, an economist at the Resolution Foundation think tank. “Looking ahead, tax rises rather than tax cuts will be needed if those fiscal rules are to be combined with rolling back the impact of austerity over the course of the new parliament.”

It suggests the focus of the next budget, slated for February, will be less on ending austerity for public services and more on investment, with the new rules allowing for an extra 20 billion pounds a year of capital spending.

The OBR highlighted a range of factors that might affect its baseline forecasts, noting that world economic prospects had deteriorated, U.K. growth had been more uneven than predicted and wage growth had continued to pick up. The government had also set an ambition to raise the National Minimum Wage to match two thirds of median earnings by 2024.

On Brexit, the fiscal watchdog said the departure deal that Johnson had agreed with the European Union had few “material quantitative effects” on the fiscal outlook.

“The new Withdrawal Agreement retains the key elements of the old one that were assumed in our March forecast, namely the transition period to December 2020 and the financial settlement,” it said. “The new Political Declaration sets different objectives for the future U.K.-EU trading relationship and the extent of regulatory alignment, but these remain the subject of future negotiations.”

The revisions mean that borrowing is on track to break the fiscal rule set by Philip Hammond when he was chancellor to keep structural borrowing below 2% of GDP in 2020-21. There is now just 7.5 billion pounds of headroom against that ceiling, the OBR judged, an amount that is more than absorbed by the additional departmental spending commitments announced in September.

Net government debt is lower than previously stated throughout the forecast period as result of changes relating to funded public-sector pension schemes.

To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, David Goodman

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