United Kingdom: Government targets slower fiscal consolidation
December 19, 2016
In his first post-referendum budget statement on 23 November, British Finance Minister Philip Hammond indicated that the government will aim for a slower-than-expected fiscal consolidation against a backdrop of escalating economic uncertainty. The government will need to increase its borrowing by an extra GBP 122 billion over the next five years compared to pre-referendum projections. Britain is expected to run a deficit of approximately GBP 22 billion in fiscal year 2019/2020, which contrasts the previous target of a small budget surplus in the same year. The budget presentation followed the release of updated economic forecasts by the Office for Budget Responsibility (OBR)—an independent budget watchdog that is closely followed by the markets.
Among other announced measures, Hammond emphasized that the government will launch an investment plan worth GBP 23 billion, which will be used to improve rail, telecoms and housing infrastructure. Low earners and pensioners will benefit from the new budget. The personal allowance (threshold above which income tax is levied) will be raised to GBP 12,500 and the current system of guaranteed annual pension increases for retirees will remain in place until at least 2020. Moreover, the National Living Wage will increase from GBP 7.20 per hour to GBP 7.50 per hour from April 2017 and this will be accompanied by stronger enforcement measures to ensure that citizens are paid the minimum wage. Insurance premium tax will increase by two percentage points to 12% from June 2017 and new restrictions on tax relief for corporate interest expenses will be introduced from April next year.
Six months after the referendum, the British economy continues to perform better than expected by the markets. This is partly due to the fact that Brexit negotiations have not yet started, which makes it difficult to assess the consequences for activity and employment. The smooth political transition following former Prime Minister David Cameron’s resignation and the accommodative stance of the Central Bank have also helped to maintain business and consumer confidence at reasonable levels. That said, downside risks will persist going forward as pressure on the pound escalates and uncertainty grows about whether the Supreme Court will uphold the High Court’s ruling that the government cannot trigger Article 50 of the Lisbon Treaty without parliamentary consent. James Knightley, Senior Economist at ING believes that a slowdown is in store for the British economy:
“We still think that a slowdown is coming. Business investment and hiring surveys have weakened substantially, while rising inflation is unlikely to be matched by wage hikes. The British Food and Drinks Federation has talked of food prices rising by 5-8% due to currency effects, while wholesale energy price increases are set to feed through into higher utility bills. This means we are looking at a squeeze on household spending power, which is bad news for consumer spending.”
Author: Dirina Mançellari, Senior Economist