U.K. Budget Deficit Offers Worrying Hints for Next Government
U.K. June Budget Deficit Widens Sharply Amid Spending Surge
(Bloomberg) -- Britain posted its largest June budget deficit in four years as spending surged and taxes failed to grow, underscoring the fiscal risks facing the next prime minister.
The increase means the gap in the second quarter is a third higher than a year earlier. That’s a wake-up call for Conservative leadership candidates Boris Johnson and Jeremy Hunt, whose proposed spending plans have already been criticized.
While part of the widening was driven by higher interest payments on inflation linked debt, Samuel Tombs at Pantheon Macroeconomics said it’s a “tentative sign that the economy is flagging.” The economy may have stagnated this quarter, payback for a strong start to the year.
After years of post-crisis austerity that narrowed Britain’s budget deficit, both candidates to be prime minister are seeking a change of tack, promising tens of billions of pounds of tax cuts and spending increases. Chancellor Philip Hammond, who oversaw part of that austerity drive, has been among those critical of the plans. The outlook for the public finances is additionally uncertain because of the threat of a no-deal Brexit hanging over the economy.
On Thursday, the Office for Budget Responsibility warned the leadership hopefuls that there is no “free lunch” when it comes to funding their commitments. The independent watchdog also said that a no-deal Brexit could add 30 billion pounds ($38 billion) a year to the deficit, dashing any hopes of balancing the books by the mid-2020s.
“A no-deal Brexit would hit both government revenue, through lower tax receipts, and expenditure, through the need for fiscal stimulus,” said Mike Jakeman, an economist at PwC. “But even if a no-deal Brexit is avoided, a new chancellor is likely to bring new priorities and, with a spending review on the horizon, could sanction a period of looser fiscal policy.”
The latest public-finance figures show the June shortfall more than doubled from a year earlier to 7.2 billion pounds. That left the deficit in the first three months of the fiscal year at 17.9 billion pounds, 33% more than in the same period of 2018.
Higher spending and weak tax growth contributed to the widening. Spending was boosted by debt interest costs -- higher RPI pushed up payments on inflation-linked bonds -- and government outlays on goods and services.
The government’s fiscal mandate is for structural borrowing to be below 2% of GDP in 2020-21. The OBR estimates it can hit that in a no-deal Brexit scenario, but it will be decisively missed if commitments made by Johnson and Hunt are implemented.
The new government “looks highly likely to tear up the existing rules, setting the stage for a giveaway budget in the autumn,” said Tombs. The Conservatives are desperate to improve their poll rating and public support for austerity has crumbled, so a fiscal boost is coming.
--With assistance from Zoe Schneeweiss and Mark Evans.
To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson, Brian Swint
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