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United Kingdom Fiscal November 2021

United Kingdom: Expansionary 2021 budget raises taxes and government spending

In late October, Chancellor Rishi Sunak outlined the government’s autumn budget and spending review, which announced a large increase in public spending, partially offset by a higher tax burden. Despite higher spending, the Office for Budget Responsibility (OBR)—the independent fiscal watchdog—revised down its forecasts for the fiscal deficit and public debt markedly relative to the projections made in March. The upshot is a budget which should stimulate the economy to an extent going forward, without endangering fiscal sustainability.

The chancellor announced a roughly GBP 30 billion (USD 40 billion) increase in annual departmental spending, taking public spending as a percentage of the economy to the highest sustained level since the 1970s. Health and social care will be the key beneficiaries of the extra cash. Moreover, this budget reiterated the government’s plans to raise capital spending substantially relative to recent trends, with the OBR stating that gross public investment over the forecast horizon is set to be at the highest sustained level in 40 years. That said, overall public expenditure is seen remaining steady in FY 2022 as pandemic-related measures disappear.

On the flipside, a new health and social care levy—first announced a few weeks before the budget presentation—will raise around GBP 17 billion per year on average, partially covering the cost of the new spending measures. In addition, the fiscal performance of the economy since the OBR’s March projections has been markedly better than anticipated, with underspending and a higher tax take, providing the chancellor with more room for maneuver. As such, despite the extra stimulus, the OBR still sees the fiscal deficit narrowing markedly to 3.3% in FY 2022 from 7.9% in the current fiscal year, with the public debt-to-GDP ratio expected to fall from FY 2022 onwards.

Azad Zangana, senior European economist at Schroders, said:

“The chancellor skillfully offered a buffet of spending increases, but avoided talking about some big tax increases which partially offset the fiscal benefits. However, the aggregate of policies announced are mildly stimulative, and are estimated to be worth 1.0% of GDP in 2022–23 and another 1.7% of GDP in subsequent years. Assuming the recovery goes as planned, the chancellor is on track to lower borrowing and debt levels, just in time for the next pre-election fiscal binge.”

Analysts at Goldman Sachs see a smaller impact:

“The announced policy decisions and additional departmental spending pledges result in a significant fiscal loosening. We estimate that the additional spending and tax incentives will likely boost GDP growth by 0.3pp in 2022 and 0.4pp in 2023. There is some offset to this growth boost next year from the recent tightening in financial market conditions, but we see upside risk to our 2023 growth forecast.”

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