Fiscal Balance in United Kingdom

United Kingdom Fiscal Balance | Economic News & Forecasts

United Kingdom - Fiscal Balance

2021 budget promises sizable near-term stimulus, but modest fiscal tightening further ahead

On 3 March, Chancellor Rishi Sunak outlined the government’s 2021 budget, which extended a host of Covid-19 support measures in order to provide the economy with a short-term boost. However, the chancellor also announced tax rises from 2023, which are expected to rein in the deficit to below 3% of GDP by 2025.

The government prolonged policies which were due to expire in March or April until later this year, such as the furlough scheme, reduced VAT for the hospitality sector, a stamp duty holiday on home purchases and more generous unemployment benefits. The budget also introduced a 130% tax deduction on business investment, which is likely to spur capital spending. In total the OBR—the government’s official fiscal watchdog—estimated that the measures will be worth roughly GBP 60 billion in FY 2021–2022 (close to 3% of GDP). However, the government also announced a corporation tax hike from 19% to 25% from 2023, as well as the freezing of income tax thresholds and cuts to departmental spending. Taken together, these measures are expected to act as a slight drag on economic activity later in the forecast horizon, but they should also cut the fiscal deficit and stabilize the public debt.

On the near-term economic impact of the budget, Kallum Pickering, senior economist at Berenberg, commented:

“The announced measures tilt the risks to our call that real GDP will return to its pre-pandemic level by Q2 2022 to the upside. […] While the UK is not following the U.S. example with a mega-stimulus to supercharge the recovery, the near-term fiscal outlook remains very accommodative.”

Regarding the fiscal outlook, analysts at Nomura commented:

“More may yet need to be done in forthcoming fiscal events in order to put the public finances back on an even keel. It’s worth noting that the tightening announced today does not begin until 2023–24, it’s less aggressive than what was announced in the aftermath of the global financial crisis and it’s pretty much entirely focused on tax rises rather than spending cuts.”

FocusEconomics panelists expect a fiscal deficit of 9.2% of GDP in 2021 and 5.6% in 2022.

United Kingdom - Fiscal Balance Data

2015   2016   2017   2018   2019  
Fiscal Balance (% of GDP)-4.6  -3.3  -2.5  -2.2  -2.1  

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United Kingdom Facts

Value Change Date
Bond Yield0.83-3.04 %Jan 01
Exchange Rate1.33-0.35 %Jan 01

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